What is a Royalty Company?
A royalty company is a company whose main purpose is to centralize and
facilitate the worldwide licensing of intellectual property rights.
Typically, a royalty company will conclude a license agreement with the
original owner (licensor) of intellectual property (e.g., trademark, patent
or copyright) ('IP'), and a (sub-) license agreement with the actual user(s)
of that IP (sub-licensee).
Why should my company consider incorporating a royalty company?
The main purpose of incorporating a royalty company is to lower a licensor's
liability to global taxation on the receipt of royalties derived from the
licensing of its IP by structuring all its global licensing via a royalty
company and taking advantage of relevant tax treaty and domestic tax
benefits available to royalty companies generally.
Tax deferral and/or tax savings often form an important objective to
incorporate a royalty company. But there are valid commercial reasons for
doing so, such as, for instance, the consolidation and centralization of a
group's international licensing operations and management.
Curaçao Domestic Tax Benefits
The domestic corporate tax laws of the royalty company in Curaçao only
impose corporate income tax on a small margin of the royalty company's
income.
Typically, royalty companies acquire IP under license from a non-resident
owner and sub-license these rights to users in third countries. If Curaçao
royalty company operates as a licensor/licensee, royalty and license fees
paid will be deductible for tax purposes, provided the payments are at arm's
length. To the extent that the payments are made to a related party, the
arm's length nature of the transaction will be assumed if a certain minimum
spread is reported as taxable income. This spread will be determined by an
advance tax ruling to be concluded with Curaçao tax authorities.
If a Curaçao royalty company is the owner of the IP, the amortization of the
cost of the IP is, in principle, not deductible for tax purposes. However,
through an advance tax ruling, deduction of depreciation can be agreed
beforehand. The company will be required to report a certain minimum income.
International Withholding Tax
Curaçao imposes no domestic withholding tax on royalties paid by the royalty
company to the licensor.
Curaçao Royalty Company using intermediary
A royalty company residing in Curaçao typically uses an intermediary company
as (sub) licensee in a country that has concluded double tax treaties, for
example the Netherlands.
The major advantage of using a Netherlands company as a centre for
intermediate licensing is that the Netherlands does not levy withholding tax
on royalties paid and that, under the comprehensive Dutch treaty network,
withholding taxes levied in end-user countries on royalties paid to Dutch
residents are significantly reduced, in many cases to nil.
Another significant advantage of the Netherlands is that it does not levy
withholding taxes on outbound royalty payments.
The combination of low domestic taxation in both the Netherlands and
Curaçao, together with the significant reductions of withholding tax at
source through the Dutch tax treaty network, makes the royalty structure
extremely tax efficient. There are, of course, other low-tax jurisdictions,
which can be used in place of the Curaçao NV. However, no other low tax
jurisdiction offers the same international IP protection as Curaçao, which
signed the Madrid Protocol.
Advance tax ruling
Standardized tax rulings are available in Curaçao in at least two licensing
situations.
Under a royalty conduit ruling, the royalty right is for an amount
contingent on the company's income. A margin of 2% of the net royalty income
(i.e. after deducting foreign withholding tax) is allowed and the royalties
to be paid must be accounted for as profit.
Another ruling is available when Curaçao royalty company purchases IP in
consideration for a fixed payment. In this case the ruling will establish
the market value of the purchase price and the annual depreciation that may
be deducted from any royalty income.
Transitional provisions - existing royalty companies
Under the transitional provisions of the NFR (New Fiscal Regime, in force as
of January 1, 2002), existing offshore companies formed before July 1, 1999
continue to be tax exempt for capital gains realized on the sale of an
intellectual property. Capital losses are not deductible. General expenses
are deductible.
Income from IP remains taxed at a rate of 2.4 - 3%. However with the help of
a royalty ruling a reduced tax rate is possible. This ruling will allow a
reduction of 66.6% of received royalties resulting in an effective tax rate
of 1%.
In case taxation under the NFR proves to be more beneficial the existing
company may at any time opt to be taxed under the NFR.
Contact PMP (Curaçao) N.V.
If you are interested in establishing a Curaçao royalty company, or would
like further information, please contact our offices via email
(info@pmpgroup.biz) or call us at (+599) 9 737 0754.
Disclaimer:
The information contained in this memorandum is of a general nature only and
should not be construed as legal or tax advice. Readers should obtain
appropriate professional advice before setting up any structure. If
required, PMP can refer readers to a panel of reputable tax- and legal
advisory firms.
Royalty Company