Use of leasing and royalties in offshore schemes

Use of leasing and royalties in offshore schemes

Foreign corporate instruments are successfully used in MNE – international tax planning, which is why offshore companies are so often mentioned in case of purchasing equipment abroad or registering and using intellectual property rights. In the name of an offshore company, it is beneficial to register any movable property and register intellectual property. As for real estate, you should not forget – in this case, the offshore company will be obliged to register with the tax authorities at the location of the property and pay taxes on it and on the income received from it.

Leasing Abroad

All over the world, which has long honored private property, the right to use intellectual property – a powerful incentive for investment and a means to increase capital. Since intellectual property is absolutely not tied to its owner geographically, this type of property itself provides for the possibility of moving abroad, of course, with the benefit of the owner and observance of his rights. Therefore, its involvement in circulation is of such great interest not in Ukraine, but in those jurisdictions where the receipt of royalties - royalties for the commercial use of copyrights, patents, trademarks – entails the least possible loss in the payment of taxes. In the case of registering property for an offshore company and transferring it to the use of a Ukrainian company, the latter is not obliged to pay property tax, but does not lose the opportunity to use this property for profit.

Royalty taxation

The term itself comes from the English word - royalty — "royal privileges" - periodic payments to the licensor for the right to use the subject matter of the license agreement. The licensor - a person who has the exclusive right to authorize the use of an object of intellectual property rights - may provide any other person - the licensee - with a written authorization (license) for the right to use this object in a certain limited area (Article 1108 of the Civil Code of Ukraine).

An offshore company in this tax optimization scheme must act as the founder of a resident company – for example, somewhere in Cyprus, which, in turn, establishes a company in Ukraine. The acquisition of fixed assets in the form of leasing will allow you to reduce the tax burden on the enterprise, since payments under leasing agreements, being expenses, reduce the taxable base for income tax. Accelerated depreciation will allow the balance holder to reduce the basis for calculating property tax and income tax. The Ukrainian company, as a lessee, will simply have to pay the owner, i.e. offshore company, funds for the use of property.

Royalties under a license agreement

Our company will receive income from the use of property or intellectual property, and minus expenses from them, incl. lease payments or royalties, - pay dividends to the founder - a resident company in Cyprus. The Cypriot transit company will be able to pay dividends to its founder – offshore company - the owner of property or intellectual property rights.

However, in order to attribute royalties to expenses, it is necessary to prove that the intellectual property object is used in the business activities of the company (clause 140.1.2 clause 140.1 article 140 of the TCU). The use of a royalty object is not always obvious unless the licensee manufactures a trademarked product, and then any evidence must be collected.

Payments paid to a non-resident as royalties refer to the income of a non-resident with a source of origin in Ukraine. As a general rule, an enterprise paying royalties to a non-resident must withhold non-resident income tax (repatriation tax) from them to the budget at a rate of 15%. However, if an international treaty of Ukraine establishes rules that differ from those established by an act of legislation of Ukraine, the norm of the international treaty shall be applied (Article 19 of the Law of Ukraine "On International Treaties"). And today, international treaties of Ukraine provide for the exemption (full or partial) of income with their source of origin in Ukraine from taxation in accordance with Ukrainian legislation. For example, the norms of the Conventions for the avoidance of double taxation between Ukraine and the Netherlands, Greece, Luxembourg exempt from repatriation tax if the non-resident - recipient of royalties - is its actual owner.

To obtain tax exemption, you only need to provide a certificate from a non-resident confirming his status as a resident of the country with which the relevant international treaty has been signed. Precisely because most offshore zones did not sign exclusion agreements.In order to prevent double taxation, in schemes with the payment of royalties and interest through the issuance of a license and sublicenses, countries that have such agreements are used as an intermediate link (transit company).

As for the registration of a license for the right to use an intellectual property object and a license agreement conducted by the State Department of Intellectual Property, it should be emphasized that this process requires deep knowledge of copyright and international documents to ensure the protection of intellectual property rights (Article 15 of the Law of Ukraine "On copyright and related rights", Article 16 of the Law of Ukraine "On the Protection of Rights to Marks for Goods and Services", Article 28 of the Law of Ukraine "On the Protection of Rights to Inventions and Utility Models".

Therefore, in order to avoid possible disputes regarding the payment of royalties and the use of the object of the license agreement in exactly the ways indicated in it, please contact our specialists. The effectiveness and success of your investment as a whole will largely depend on the level of professionalism in preparing a license agreement.