Our Success in Slashing Software Company Tax by 97.5%

Two English partners created software for professionals being sold in the UK, Australia, and New Zealand. They had initially set up a structure in St Kitts and Nevis to avoid taxation in England. In their structure, most of the profits from the sales of the software were made from St Kitts and Nevis company which took advantage of the tax benefits offered.

However, the partners soon faced problems with banking and wished to take advantage of the Cyprus intellectual property tax regime and low administration costs. Cyprus, being a full member of the EU meant that banking would be more straightforward. Further, the effective taxation for intellectual property companies is 3% as 80% of sales are deducted as expenses for the creation of the intellectual property in question. The remaining 20% is charged at 15% tax, leaving an effective tax rate of 3%, out of which the remaining operation and administration expenses can also be deducted, thereby reducing the total amount of tax. In contrast, the English corporate tax rate was approximately 10 times higher.

As the software in question was created in the St Kitts and Nevis company, we proceeded to redomicile it to Cyprus in a process that took approximately 2 months as we had to prepare and lodge the necessary Court applications and Companies’ Registrar forms. When planning the process, we gave a strong emphasis on the substance of the redomiciled company to Cyprus in line with the OECD guidance to avoid the risk of challenges to the structure in the future.

After the redomicile of the company took place, we reviewed and amended where necessary the agreements in place of the structure.

While saving the corporate tax was a major benefit, in this case, we also transferred the shares of the newly created company in two Cyprus International Trusts and worked with the partners’ tax advisors in the UK to create a tax-saving structure on income and (future) inheritance tax in the UK. As a result, the Company’s auditor filed the company’s audited accounts and made tax payments for less than 3% overall and the English partners faced no further tax in the UK. The overall tax gain for the partners exceeded 60% of the total sales that they would have to pay in several taxes in the UK (corporate tax, income/dividends tax and inheritance tax) while the administration of the structure only cost a fraction of the savings.