• Two tax rates
  • Cyprus has a IP Box tax regime meaning that the portion of revenue (qualifying profit) that is driven by IP is taxed at a lower rate
  • The non-qualifying profit is taxed at 12.5%.
• A ruling request is done to determine what the tax rate is for “embedded royalty” (i.e. income driven by IP box regime)
• A transfer pricing study determines what percent of ExWo’s revenue is treated as “embedded royalty” (i.e. income driven by IP box regime)
  • Deloitte conducted a transfer pricing study that stated that based on benchmarks, 0.42% to 3.01% of ExWo’s revenue not being driven by IP

Non-CFC are often structured in jurisdictions with favorable local tax regimes, allowing the corporation to benefit from reduced or zero local taxes on certain types of income (e.g., capital gains, royalties). These advantages are further amplified when paired with tax treaties between the non-CFC's country of incorporation and other jurisdictions.

• You want to choose a jurisdiction that doesn’t have a withholding tax. | No withholding tax on:

• Dividends paid to non-residents (except in some very specific cases).

• Interest paid to non-residents (if it's not from a Cyprus-source business activity).

• Royalties paid for intellectual property (IP) used outside of Cyprus | | Favorable tax treaty | - A tax treaty is a deal between two countries to avoid taxing the same income twice.

• You want to choose a jurisdiction that has a tax treaty with the US. | Cyprus and the United States do have a tax treaty — officially called the "Convention Between the Government of the United States of America and the Government of the Republic of Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. | | Favorable GST (Goods and Services Tax) | - GST stands for Goods and Services Tax. It is a value-added tax levied on most goods and services sold for domestic consumption. The tax is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.

| | | VAT (Value Added Tax) | - In some places (like the EU), it is called VAT (Value-Added Tax), which functions similarly | • Using just one Cyprus company avoids VAT costs that would happen if you had two companies—one owning the IP invoicing the other running the business.

• There will be VAT leakage on invoices to the Bulgarian entity that is providing services |

IP Box Regime and Embedded Royalty

• An IP Box regime and embedded royalty are both tax-related concepts dealing with intellectual property (IP) and how income from IP is taxed.
• The purpose of the IP Box regime is to provide lower corporate tax rates on income derived from qualifying intellectual property—such as royalties, license fees, or embedded income from patents, software, or trademarks—in order to encourage local innovation and R&D.
• An embedded royalty refers to a situation where the value of intellectual property is built into the price of a product or service, but not explicitly broken out as a separate royalty payment.
  • Example: A company sells a high-tech device that includes proprietary software. The buyer pays for the device, but part of that price reflects the value of the software. That portion is the embedded royalty.
  • Tax Relevance: Tax authorities may argue that a portion of the sale represents royalty income (subject to withholding taxes, transfer pricing scrutiny, etc.) even though it's not separately state
• Notes from Deloitte
  • As emphasised during the call and in our previous correspondence, it is essential that the Cyprus company holds legal ownership of the “developed software”. This means it must own the asset and the associated rights to exploit it. The new software should be developed by in-house developers (i.e., employees of the Cyprus company) and/or third-party developers. Any development undertaken by a related party would not constitute qualifying development expenditure for the purposes of the Cyprus IP Box regime and would reduce the relevant nexus fraction.
  • That said, the Cyprus company may obtain access to the source code either by purchasing the source code (or a copy of it) or by licensing it from Betty. This, in itself, is not determinative of the Cyprus company’s eligibility to claim benefits under the Cyprus IP Box regime. What is important (regardless of whether the arrangement is structured as a license or a purchase) is that the agreement clearly states that any development undertaken by the Cyprus company will be the sole property of the Cyprus company.

VAT Leakage

There is a world where we can minimize the effects of the VAT leakage by demonstrating to the authorities that parts of the revenues are derived from non-gambling activities. We can claim pro-rata VAT credits on expenses this way. That being said if 80% of total revenues are non-gambling we can claim up to 80% of expenses VAT credit. Additionally for all suppliers invoices that we can prove are related solely to non-gambling activities we can claim full VAT credit.

Cyprus Structure

• The thesis of the Cyprus structure is that Excelsior Works Ltd is an IP-driven business. The IP is “embedded” within the services provided and so a certain percentage of income should be taxed as such.
• Ruling Request
  • A ruling request was also done to get POV from the Cyprus tax authorities; the purpose of the ruling is determine the tax rate for IP-driven revenue (i.e. the 2.5% vs the 12.5%)
• Transfer Pricing Study
  • A transfer pricing study was conducted to determine the "embedded royalty"—in other words, the percentage of income attributable to intellectual property (IP) driven activities versus non-IP driven activities.

Deloitte Analysis on Cyprus

Cyprus Structure (PW = Betty2024!).pdf

Password if doc is Betty2024!