While the international avoidance of royalty income is an attractive mechanism to reduce the taxation of a company paying those receivables to a related foreign entity, the same use of licence receivables mechanisms constitutes one the most effective types of transfer of passive profits. This method is highly safe from a tax perspective, of course if the value of the royalties paid between two undertakings do not deviate from their market value and potential tax risks should be seen.
A trademark as a mechanism for international income avoidance offers the greatest opportunities, proportional to the degree of business development in which it is used. The essence of the trade mark is to subject it to legal protection resulting from an appropriate registration at the patent office.
International tax avoidance methods for royalties require the use of at least 2 companies in different countries, where the recipient company should be located in a jurisdiction allowing tax-neutral payment of these claims to it (i.e. without withholding tax) and to tax as low as possible. The use of royalties as an international tax planning method is normally based on a trade mark owned by the licensor. Polish civil law, like tax law, does not have a definition of the legal concept of ‘licensing dues’, therefore it is necessary to refer to the relevant rules of international law. The definition of the concept of ‘licensability’ contained in double taxation agreements shall in principle cover payments for:
- • the use or use of copyright, patent, design or model, plan, technology secret or production process, trade mark or other similar property or right,
- • use or use of any industrial, commercial or scientific device,
- • making scientific, technical, industrial or commercial knowledge or information available,
- • the provision of any assistance of an auxiliary and auxiliary nature serving as a means of making use or exercise of any of the assets or rights, equipment, knowledge or information mentioned above,
- • use or use of films, radio and television tapes.
A trademark as a mechanism for international income avoidance offers the greatest opportunities, proportional to the degree of business development in which it is used. The essence of the trade mark is to subject it to legal protection resulting from an appropriate registration at the patent office.
In the event of the commencement of an entity's business activity, one may refer to a logo which, together with its use, becomes a work (a word-graphic sign within the meaning of copyright).
Only the application for registration of this mark as a trade mark at the relevant Polish or European Patent Office extends to that mark legal protection from the date of the application, of course on the basis of its subsequent registration.
It is only from the moment the application for registration of a trade mark has been lodged with the patent office that it is possible to collect royalties, the level of which should be fully marketable not only for the mark itself, but also for the industry in which the mark is used.
The valuation of a trade mark by an expert expert is therefore a fundamental element in the use of it as a mechanism for reducing income taxation, as it allows a fair determination of the market value of that mark.
The annual value of the licence receivables will be a certain percentage of the market value of the mark which will be typical of the particular industry in which the mark is used.
It needs to be stressed that these sizes will vary significantly for different industries and that each case should be considered individually.
Due to the lack of regulation of tax law and Polish law in general as to how to carry out the valuation of the trade mark, the tax authority in principle does not have the possibility to contest the valuation properly if it has been prepared in a reliable manner.
Valuation of a trade mark is all the more important because on the ground Directive 2003/49 where the shareholder criteria laid down in that Directive are met, payment of royalties between companies with 2 The various EU Member States will be tax-free at source.
Directive 2003/49 excludes the provisions of double taxation agreements concluded by Poland which provide for the need to collect withholding tax of not less than, in principle, 5%.
The Directive also has its own definition of ‘licensing dues’, which should be understood for the purposes of applying the Directive as remuneration for the use or use of any copyright in literary, artistic or scientific works, including films for cinemas and software, any patent, trademark, design or model, plan, technology secret or production process, or information on industrial, commercial or scientific experience, payment for the use or right to use an industrial, commercial or scientific device.
From 1 July 2013 do not apply as specified in Directive 2003/49 transitional periods, for which, in accordance with its provisions, implemented to Article 21(3-4) adop if:
- the payment of royalties is a company which is a taxable person of income tax established or managed in the territory of the Republic of Poland or located in the territory of the Republic of Poland an foreign establishment of a company subject in an EU Member State to tax on all of its income, irrespective of where they are achieved, where the foreign licence receivables paid by that foreign establishment are credited with the cost of obtaining revenue when determining taxable income in the Republic;
- A company which obtains revenue from royalties is a company which is subject to an income tax on its entire income in a Member State other than the Republic of Poland of the EU or in another EEA State , irrespective of where it is achieved ;
- the company paying the licence receivables holds no less than 25% the shares in the capital of the company which derives revenue from royalties or the company which derives revenue from royalties holds directly no less than 25% shares in the capital of the company paying the royalties ;
- the recipient of the licence receivables is the company referred to in point 2, or the foreign establishment of the company referred to in point 2, if the income generated by these receivables is taxable in the EU Member State in which the foreign establishment is situated;
- The continuous holding period (shares) referred to in point 3, is not shorter than 2 years and ownership is due to ownership
Payment of royalties is free of withholding tax. Of course, the obligation to prove that a company from another EU or EEA Member State is a tax resident of that State, i.e. it is subject to taxation on all of its income regardless of where it is achieved, rests with the company that is the payer of the royalty.
Otherwise, a company paying royalties should collect withholding tax on such payment, which in the case of a Polish company is 20%, according to Article 21(1)(1) Updop.
Although the amount of the withholding tax is reduced by the rules of individual double taxation agreements, their application requires, as in the case of Directive 2003/49, holding a certificate of residence of the company to which the licence is payable.
The company's tax residence certificate, which is the recipient of the royalties, should be held by the company paying these claims in the event of a check by the tax authorities, which means that it does not need to have that document at the time of payment, provided that the certificate issued at a later date indicates that the company was a tax resident of the country concerned at the time of payment of the royalties, which is equivalent to the need to indicate in the content of the residence certificate its period of validity.
Although the residence certificate is normally issued automatically for companies from EU or EEA Member States upon request, in some cases it may be conditional or may not be possible to issue this document at all.
International tax avoidance based on royalties implies the transfer of an aport to a foreign company, resident in an EU or EEA Member State, of a word-graphic mark within the meaning of copyright, which will then be registered by that company with the European Patent Office in Alicante.
This claim should be supported by the valuation of the trade mark, since a significant part of the value of the mark contributed by the aport should be transferred to the capital (agio) in order to reduce the revenue that will be incurred by the importer in respect of the nominal value of the shares (shares) covered in exchange for that non-monetary contribution.
The next step is to fetch at least 25% shares in a Polish company to a foreign company which owns a trademark, so that the equity criteria of Directive 2003/49. A licence agreement may then be concluded under which the Polish company will pay royalties to a foreign company free of tax at source in Poland.
one the most important elements of the above tax avoidance structure are the level of taxation of royalties on the part of the recipient. Most EU countries tax royalties on a standard basis, i.e.
as profits of the company from its business, of course if the level of corporate taxation in the recipient country is significantly lower than in the country of their payer, this is a tax-effective tax reduction mechanism for the whole group.
However, multi-level solutions and the use of Cyprus or Malta, and sometimes Belgium or Luxembourg, are particularly attractive.
Under Cyprus national law, in the event of receipt of royalties by the companies there, they benefit from the exemption from taxation in 80%, while the others 20% is taxable according to a linear corporate tax rate of 12.5%.
Of course, taxable 20% licence receivables may be reduced by income costs, which will, however, be deducted in the same proportion as profits from royalties are taxed and therefore only 20% the tax costs will be taken into account as revenue costs, unless these costs are directly related to royalty income.
In this case, all costs will be taken into account for tax purposes. In Malta, however, in principle, all proceeds from royalties will be tax free. In Belgian law, the same arrangements to Cyprus apply to royalties, i.e.
profits from royalties benefit from tax exemption in 80%, while the others 20% is taxable according to a linear corporate tax rate of 33.99%, which is equivalent to their effective taxation at 6% i.e. without the cost of obtaining revenue.
The similar regulations provide for the taxation of royalty income also under Luxembourg legislation.
In case of use of multi-level structures, it is possible that the trademark is owned by a company from offshore jurisdiction which grants a licence to a company from an EU Member State (e.g. Cyprus, Malta) and that company sub-licenss a Polish entity.
As a result, the licence receivables will eventually go to offshore, where they will be entirely free of income tax, and at the level of the intermediate company, at the most, its margin will be taxed (the difference between the receivables received from the Polish company and the company owning the trademark).
The application of this structure is subject to the absence of a withholding tax on the payment of royalties from the intermediate company to their target beneficiary, regardless of the absence of a double taxation agreement between the States of the headquarters of those companies.
These requirements are fully met by the national law of the Republic of Cyprus and Malta, which constitute the best intra-EU locations for so-called licensing companies.
In continental Europe, the Luxembourg and Belgian solutions deserve particular attention in this respect, particularly in the case of investment in the local market in conjunction with tax avoidance only at corporate level.