How to use royalties as a tax planning tool for digital nomads & online entrepreneurs

How to do it right and why it’s stupid not to!

This article is for you who have a company (or want one) and want to learn how to significantly reduce your taxes on what you sell and make money from.

This is for you who are selling anything online

It doesn’t matter what you sell – as long as you have a website or an online shop from which you promote and sell your fabulous digital products or services.

Do you already have or expect a yearly profit of €10,000 or more?

Why is this a requirement? Because there are special profit opportunities for entrepreneurs and companies operating an online business that meets this requirement.

This is a tremendous opportunity for entrepreneurs who want to learn international tax planning.

International tax planning sounds complicated, but it’s not!

International tax planning simply means that you take advantage of existing tax agreements that make it possible for you to achieve a significant reduction in taxation on your profits, which most entrepreneurs simply don’t know how to do!

As an expert helping digital entrepreneurs, I think this is somewhat sad, because it means that you have to sell more, earn more, and work much harder than you actually need to.

Let me make four things absolutely clear:

This is how you can be covered by international tax agreements

I want you to know what international tax planning and royalties are all about, what these tax agreements mean for you, and how you can save mucho money.

You might wonder why an expert in digital entrepreneurship is giving tax advice.

International tax planning is part of what I help entrepreneurs with.

While I’m not an accountant or auditor, I’m very creative minded and have partnered up with one of the most esteemed audit firms, with some of the best international tax experts.

My job is to help entrepreneurs build their online businesses in the easiest and most profitable way possible.

I know how you should ingeniously promote yourself and your business. I know how you can ingeniously sell what you offer. I know how you should ingeniously outsource your tasks – and what you should be outsourcing immediately – as in today!

I also know how you should organise your life and your business platform regarding company formation and taxation so that you make the most of your hard-earned money.

That’s why I also include international tax planning as part of my educational activities.

Does this sound like something worth learning more about? If so, then listen up.

If you’re just about to start your online business, then don’t hold back.

You might as well learn how to organise your business in the smartest way possible – from the very start.

What do I mean by international taxation?

This is a legal way to use existing approved tax rules and agreements signed between two countries. It’s as simple as that.

What is the difference between tax planning and tax evasion?

Tax evasion: Illegal
(also known as tax fraud)

Tax planning: Legal optimisation or minimising of one’s taxes
(tax optimisation, tax minimisation, tax reduction)

So what is international tax planning?

It’s done to avoid or reduce the following:

What is the optimal solution for an online entrepreneur?

It’s a corporate company setup which is the most tax-efficient, flexible and cheap as possible.

In most cases, you should have a limited company for your activities. So what is a limited company you might ask?

It is a type of company where you are not personally financially liable if everything goes bad. They are often named Limited, Inc, Corp, AS, GmbH, etc.

And it’s a company structure that is not relying on where you physically live right now and might live in the future like a sole proprietorship.

Let’s start with being tax efficient. You need to get yourself a royalty concept!

What’s a royalty concept?

It’s a payment for the right to use the copyright of a literary, artistic or scientific work.

You might already have heard of Amazon, Microsoft and Apple.

They’re also using royalty concepts. I have transformed the concepts the big corporations are using into a simpler and more entrepreneurial-friendly concept.

What are royalties for exactly?

For example, a film, a book, software, a patent, a trademark, a design or model plan, a secret formula or process, information concerning industrial, commercial or scientific experience, and most importantly, for online entrepreneurs this also includes the use of software.

Payments for the use of or the right to use industrial, commercial or scientific equipment can be made as a royalty concept. All the terms are specified in a royalty agreement.

What makes up a royalty agreement?

Let’s take a quick example:

  • Company A has ownership of a concept.
  • Company B would like to (re)sell the concept that Company A has.
  • A royalty agreement is signed between Company A and Company B.
  • Company B pays Company A for using the concept (the royalties) by paying a percentage of the profits or turnover.

In other words, and to give you a more hands-on example:

Your company – let’s say in Cyprus – owns the concept of a website selling online courses (just an example).

Another company of yours – let’s say in Spain – also wants to sell the online courses to the entire global market.

A royalty agreement is signed between your company in Cyprus owning the concept and the other company in Spain.

The company in Spain pays 60% of all sales as royalties sent to your Cyprus company (who owns the concept).

Can I have two companies in my home country signing a royalty agreement?

Yes, but then it will be within the normal national company tax rate.

And you would for sure like to pay as little company tax as possible. So, that’s not the way to go.

You need to have a company in the country where you actually sell your products or services – (this usually being the country in which you live) – and then another company in another country where the taxes on royalties are significantly less.

What’s a tax treaty?

Before looking at which country you should use; you need to know how it can legally be done in order to reduce the taxes on your company taxes and in the end, your royalties.

A tax treaty between two countries is a tax agreement specifying how taxes should be handled when there are cross-border activities.

The agreement also clearly specifies how taxation on royalties shall be handled between associated cross-border companies (your two companies).

What does a tax treaty say about taxation on royalties?

The country sending the royalties may not tax them if the country receiving them will tax the royalties.

This means that if you set up a company owning the royalties in one of the many tax havens like the British Virgin Islands, Bahamas, Isle of Man, etc. that have no taxation at all – then most countries where the profit is made will tax the royalties in full.

Also, with all the internationally negative focus on zero tax offshore tax havens, my advice for most entrepreneurs is not to use this, and go with the approved solution recommended here.

Does this mean that I cannot entirely avoid taxes on royalties?

The important element is that the royalty receiver country in their tax law tax royalties.

If the royalty tax is 0% in the country receiving the royalties then the country sending them will have to tax them.

But you can reduce the royalty tax to a minimum by using the country with the lowest royalty tax rate.

How much in taxes do I then have to pay on my royalties?

Each country in the world decides by themselves how to tax company profits and royalties.

Most countries use the same tax rate on royalties as they do on regular company profits.

But there are a few exceptions. First, let’s have a look at the most popular countries and their company tax rate from which most entrepreneurs operate their business.

Armenia: 35%
Austria: 25%
Belarus: 18%
Belgium: 33.99%
Bulgaria: 10%
Canada: 26.5%
China: 25%
Czech Republic: 19%
Denmark: 22%
Egypt: 22.5%
Estonia: 20%
Finland: 20%
France: 33.33%
Georgia: 15%
Germany: 29.72%
Greece: 29%
Hungary: 19%
Iceland: 20%
India: 34.61%
Ireland: 12.5%
Italy: 31.4%
Latvia: 15%
Lithuania: 15%
Malta: 35%
Norway: 25%
Poland: 19%
Portugal: 21%
Romania: 16%
Russia: 20%
Serbia: 15%
Singapore: 17%
Slovakia: 22%
Slovenia: 17%
South Africa: 28%
Spain: 25%
Sweden: 22%
Switzerland: 17.92%
Thailand: 20%
Ukraine: 18%
U. A. Emirates: 55%
United Kingdom: 19%
USA: 40%

If your country isn’t on the list, please be sure to contact your national tax authorities to get the corporate (not personal) tax rate.

Please be aware that the above rates are the standard rates and each country has various initiatives reducing the tax amount (but often not as good as using a royalty concept).

What countries have a special tax rate on royalties?

The countries that have a special tax rate on royalties are:

Luxemburg: 5.75%
The Netherlands: 5%
Lichtenstein: 2.5%
Cyprus: 2.5% (80% of royalty income is tax-exempt)

As we want both the lowest royalty rate and also the lowest operational cost, Cyprus is the country to choose.

Operating a company and getting everything set up in Lichtenstein has almost double the cost compared to Cyprus.

Also, for various other tax advantage reasons, Cyprus is the recommended choice as the country is a full member of the European Union and Lichtenstein is not.

What makes Cyprus even more interesting?

In Cyprus, the cost to operate and maintain one or many of your royalty concepts can be deducted in full. 80% of the income from royalties on software is exempt from tax.

Therefore, your total tax will often be lower than the overall 2.5% royalty tax, and for some entrepreneurs, it will be zero.

Should you then move to Cyprus?

That would be wonderful but you don’t have to – unless you want to!

If you choose to do so, you can make use of the attractive tax-exemption schemes that can make your personal income completely tax free!

Let’s make a calculation

Let’s use our previous example of the webshop selling your great online courses.

Please note: In the calculation we use Euros. If your business is based in a country with a different currency simply replace the Euro with your currency. It works for everyone.

Calculation without royalty setup: Spain
Turnover: €200,000
Costs: €-40,000
Profit: €160,000
Company tax: €40,000 (25% tax)
Final profit: €120,000

Calculation with royalty setup: Spain
Turnover: €200,000
Costs: €-40,000
Profit before royalties: €160,000
Royalty fee: €-156,800 (98% of the profit)
Profit after royalties: €3,200
Company tax: €800 (25% tax)
Final profit: €2,400

Calculation with royalty setup: Cyprus
Royalties: €156,800 (from Spain)
Costs: €-7,280
Profit: €149,520
Royalty tax: €-3,738 (2,5% tax)
Final profit: €145,782

So what is the difference?

Without a royalty setup:
Tax: €40,000
Profit: €120,000

With a royalty setup:
Tax: €4,538
Profit: €148,182

The difference
You’ll typically have a 15-20% larger profit depending on your level of costs and the company tax rate on where the profit originally came from. I just gave you an average example here.

The more you make the more you save. And then there are other great advantages on top of that, more on that later.

How much can be charged as royalties?

In most tax treaties it’s stated that a royalty scheme can only be used if the payment between the one paying and the owner of the royalties is done on regular market terms.

Normally, the royalty fee is set for 30-60% on the turnover.

A few requirements when using a royalty setup

For tax reasons, you need to have a real person living in Cyprus to be the director of your Cyprus company.

One option is that you will be the director yourself. This requires you to physically be in Cyprus for a minimum of 60 days in a calendar year.

If that doesn’t work for you, you must recruit the right person to be hired part-time at the company. This should be a real person signing your company’s contracts, etc. – not a stranger to you.

The last thing that is important is that your new Cyprus company will be operational with real activities.

Just having the company with only the royalty agreement in line is not enough, and will not be considered a real company with commercial activities made in Cyprus (in tax terms it’s called “substance”).

Salaries in Cyprus are low compared to other western European countries.

More flexible advantages with this business setup

Your profits in the Cyprus company (after paying the royalty corporate tax, if any) can be used tax-free for other projects, which include purchasing a property anywhere in the world.

You also have the opportunity to invest them tax-free on the stock markets and pension schemes because all returns from these types of investments are with zero tax in Cyprus.

Only a few countries within the European Union have this type of legislation.

You can of course also pay out an amount to you as the owner (either as dividends or salary), and that money will be taxed in the country in which you are a resident.

If you are a true digital nomad and will not be physically located in any country in the world for more than 183, then you can choose to have your personal tax residency in Cyprus.

Doing so will make you 100% tax-exempt on your personal income! Yep, you did read that just right.

If you wish to permanently relocate to Cyprus, then you can also choose to activate a special tax scheme that gives you tax-exempt dividends for 17 years.

What does it cost to set this all up?

I know all about spending your money the right way. I also believe that this knowledge should be affordable for you.

Some entrepreneurs choose to pay me for ongoing advice or mentorship, in combination with setting up their tax-efficient company structure, but this is totally optional.

Getting started
The start-up costs cover all expenses for all the legal work with a lawyer, the company formation of a limited Cyprus company (with no capital required), various payments to the local registrar, and all necessary registration costs. Also included is the set-up of an online business bank account with online banking, creation of the legal royalty agreement, obtaining a tax and VAT number, and assisting you to recruit a local director.

Yearly costs
The yearly costs cover all ongoing company maintenance fees, including paying your local director’s salary, address service and mail handling, the accounting, quarterly and yearly reporting to the tax and VAT authorities, and the software license to the accounting software.

Finally, you’ll have to pay the yearly government company fee and the required audit report done by an auditor.

Conclusion
The set up is around €3-6.000 and the yearly cost per ongoing year is around the same depending on your business set up and needs.

This cost covers everything and that is no matter how much profit you earn.

As I mentioned in the very beginning – this solution is financially attractive for entrepreneurs if you already have or expect a yearly profit of more than €10,000.

This is how you get started

I have prepared everything for you to get started in the simplest way possible.

I’ve partnered up with Antonis Diomidous from Sollers Trust Ltd – a registered accountant and audit firm in Limassol, Cyprus.

They focus on online entrepreneurs and digital nomads and can help you set up and manage everything in relation to a royalty concept.

Simply fill out the form below with your name and email address.

Antonis will then contact you to arrange a call to discuss and plan the company set up that’s just right for you and your business.

There are absolutely no obligations until you accept (in writing) to proceed with your chosen company setup.

He is already waiting to help you.

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