Low-tax options for company with US royalties income?

[bbb77]

Hi

Am new here, but trying to figure out legal tax reduction options for our online business which I'll summarise below.

We are a UK Ltd company publishing on YouTube earning a lowish six figure GBP amount a year.
Recent YouTube changes mean that any ad revenue from viewers in the US is classified as royalties subject to potential withholding taxes. Currently as a UK company this is 0% thanks to the US-UK tax treaty, but if we relocated to a tax haven such as the Isle of Man which has no tax treaty with the US, we would have 30% of the US earnings from YouTube withheld. 60-65% of our revenue comes from the US portion of our viewers so even though Isle of Man's corporate tax is 0% we would basically lose any tax advantage as far as I understand.
Looking to relocate our corporate residence to a country with a good tax treaty with the USA and lower coporate taxes than the UK.
UK corporation tax is currently 19%, set to increase to 25% in 2023.
As UK residents we can take a tax-free salary of around £12750, and dividends from the company are taxable at 7.5% up to around £50000, more beyond that but we don't pay it out to avoid the higher rate.
The effective total tax rate I guess is somewhere around the 25% mark, but that is only achieved by leaving excess profits in the company.
The UK Ltd company is owned by 2 British shareholders, resident in the UK, who at some point in the near or medium-term future are looking to live abroad, with preference for Europe at this point in time. The timing of this may shift depending on personal family situation in the UK.
Willing to consider using nominee directors and occasional visits to a country if this helps with substance issues but would need to understand if this is absolutely necessary.
Have researched options in Cyprus, Ireland, Madeira (& Portugal NHR), Canary Islands, Malta and Estonia but am unsure how well any of these jursidictions will handle avoiding US withholding tax on what is around two-thirds of our corporate income.
If it helps, we can hold funds inside any company and not remit to our place of residence. If we do this, a nice bonus would be if the company can invest the excess funds either in the stockmarket or any other type of investment without losing any tax advantages.

Suggestions and recommendations appreciated!

 

[Mr Gus]

What you are trying to achieve is not possible (anymore), atleast if I think if this is what you are trying to do;

Staying resident in the UK and having a company in a low tax jurisdiction, back in the day this used to work by using trusts and nominee's etc.. But secrecy is gone and the UBO registry will come into effect. So your "offshore" company will be viewed as a UK company because day to day operations and effective place of management is done from the UK, there is no way of getting around it anymore. Your only option is to leave the UK.

I was in the same situation as you, also having a YouTube business. You have a couple of options within Europe and the EU.

Europe: Georgia (0% withholding tax, and 5% corporate tax I believe don't quote me on this, didn't bother researching because didn't want to live there anyways)
Best option in the EU: Malta (5% corporate tax, and 10% withholding tax, which can be partially offset against the corporate tax) and Cyprus (12,5 corporate tax and 0% withholding tax)
Alternatives: Bulgaria (10% corporate, 5% withholding) and Hungary (9% corporate, 0% withholding) and maybe Switzerland (11-22 corporate tax, 0% withholding tax)

Cyprus and Malta are hands down your best options tax wise because of the non-dom program. In Bulgaria, Hungary and Switzerland you will be subject to capital gains taxes and higher pit rates etc.

 

[bbb77]

What you are trying to achieve is not possible (anymore), atleast if I think if this is what you are trying to do;

Staying resident in the UK and having a company in a low tax jurisdiction, back in the day this used to work by using trusts and nominee's etc.. But secrecy is gone and the UBO registry will come into effect. So your "offshore" company will be viewed as a UK company because day to day operations and effective place of management is done from the UK, there is no way of getting around it anymore. Your only option is to leave the UK.

I was in the same situation as you, also having a YouTube business. You have a couple of options within Europe and the EU.

Europe: Georgia (0% withholding tax, and 5% corporate tax I believe don't quote me on this, didn't bother researching because didn't want to live there anyways)
Best option in the EU: Malta (5% corporate tax, and 10% withholding tax, which can be partially offset against the corporate tax) and Cyprus (12,5 corporate tax and 0% withholding tax)
Alternatives: Bulgaria (10% corporate, 5% withholding) and Hungary (9% corporate, 0% withholding) and maybe Switzerland (11-22 corporate tax, 0% withholding tax)

Cyprus and Malta are hands down your best options tax wise because of the non-dom program. In Bulgaria, Hungary and Switzerland you will be subject to capital gains taxes and higher pit rates etc.

Thanks that's interesting. Most appealing to us are Malta and Cyprus, however wouldn't YouTube royalties also qualify for the Cyprus IP Box scheme and potentially reduce the effective tax rate down to 2.5%?

 

[JustAnotherNomad]

You'll want to check limitation of benefits clauses in the tax treaty. It probably won't be enough for the company to be tax resident where it is incorporated.
And that's only the US side: There's still the risk of the company being considered tax resident in the UK, or at least having permanent establishment in the UK.

I have no idea if this could work, but just from the top of my head: Have you considered opening a US corporation? That might eliminate the withholding tax, and then you could shift profits from the US corporation through invoices, so the US corp. would be paying you for producing YouTube content. But there would of course still be the risk of the US corp. being considered tax resident or having a PE wherever you are located.
You should also have a US CPA check if branch office tax could be an issue.

I probably wouldn't want to set this up myself, but rather try to find someone who has experience setting up companies for this purpose, you can't be the only one looking for a solution. I bet there are some accountants in the US who have helped someone in the same situation before.

 

[bbb77]

You'll want to check limitation of benefits clauses in the tax treaty. It probably won't be enough for the company to be tax resident where it is incorporated.
And that's only the US side: There's still the risk of the company being considered tax resident in the UK, or at least having permanent establishment in the UK.

I have no idea if this could work, but just from the top of my head: Have you considered opening a US corporation? That might eliminate the withholding tax, and then you could shift profits from the US corporation through invoices, so the US corp. would be paying you for producing YouTube content. But there would of course still be the risk of the US corp. being considered tax resident or having a PE wherever you are located.
You should also have a US CPA check if branch office tax could be an issue.

I probably wouldn't want to set this up myself, but rather try to find someone who has experience setting up companies for this purpose, you can't be the only one looking for a solution. I bet there are some accountants in the US who have helped someone in the same situation before.

Thanks for that, the US corp had occured to me briefly at one point, however I've gotten so paranoid about anything US based as everytime I open a bank account for myself or our business, I'm constantly asked if I'm a US citizen or earn any income there! However I'm willing to consider if it can be structured well like you suggest

 

[JustAnotherNomad]

That's due to FATCA reporting requirements that banks don't like. But I don't think that will be an issue, as long as you don't try to get a bank account for the US corp outside the US.
But you should definitely speak to a professional.

 

[CyprusBusiness]

Thanks that's interesting. Most appealing to us are Malta and Cyprus, however wouldn't YouTube royalties also qualify for the Cyprus IP Box scheme and potentially reduce the effective tax rate down to 2.5%?

Hello

Royalties received in Cyprus from USA attract no withholding tax.

Please refer to article 14 here: (https://www.irs.gov/pub/irs-trty/cyprus.pdf)

Just a clarification on the IP box regime. The IP box involves only qualifying assets which explicitly excludes business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services. Thus i dont see any prospects of your company’s activities falling under the regime.

Qualifying assets comprise the following:

• patents, as defined in the Patents Law
• computer software
• other IP assets which are legally protected and fall within one of the following categories:
  • utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents
  • non-obvious, useful and novel, where the person utilizing them in furtherance of a business does not generate annual gross revenues in excess of €7,500,000 from all intangible assets (€50,000,000 in case of a group of companies), which are certified as such by an appropriate authority, in Cyprus or abroad.
    Hope this helps!

 

[Mr Gus]

Thanks that's interesting. Most appealing to us are Malta and Cyprus, however wouldn't YouTube royalties also qualify for the Cyprus IP Box scheme and potentially reduce the effective tax rate down to 2.5%?

It used too back in the days, but not anymore. Yeah both Malta and Cyprus are most appealing in terms of taxation, climate and the mediterranean lifestyle (this can be a pro and con )

 

[Mr Gus]

Banking is a challenge for both Malta and Cyprus, getting a local bank account in Cyprus is a lot easier then in Malta though.

 

[bbb77]

Hello

Royalties received in Cyprus from USA attract no withholding tax.

Please refer to article 14 here: (https://www.irs.gov/pub/irs-trty/cyprus.pdf)

Just a clarification on the IP box regime. The IP box involves only qualifying assets which explicitly excludes business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services. Thus i dont see any prospects of your company’s activities falling under the regime.

Qualifying assets comprise the following:

• patents, as defined in the Patents Law
• computer software
• other IP assets which are legally protected and fall within one of the following categories:
  • utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents
  • non-obvious, useful and novel, where the person utilizing them in furtherance of a business does not generate annual gross revenues in excess of €7,500,000 from all intangible assets (€50,000,000 in case of a group of companies), which are certified as such by an appropriate authority, in Cyprus or abroad.
    Hope this helps!

Thanks for clarifying about the withholding tax. It doesn't sound like the IP Box regime would work, however what occurs to me is that the phrase "non-obvious, useful and novel, where the person utilizing them in furtherance of a business" seems rather vague and could apply to all sorts of things, although perhaps I'm mistaken and video copyrights couldn't be assessed in this way.

 

[bbb77]

It used too back in the days, but not anymore. Yeah both Malta and Cyprus are most appealing in terms of taxation, climate and the mediterranean lifestyle (this can be a pro and con )

That's a shame about the IP Box. I did come across a page on Sovereign Group's website about the Cyprus IP regime (I don't think I can post links as I'm too new here) which said the following

IP can take several forms:

• Copyrights, which can include literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes
• Patented inventions

I was hoping when I saw that page that online videos would be considered "artistic works" but perhaps that information is old.

 

[uplana]

Royalties received in Cyprus from USA attract no withholding tax.

does it apply only for the USA - I think it is for Europe in general or not ?

 

[CyprusBusiness]

does it apply only for the USA - I think it is for Europe in general or not ?

Cyprus has a vast network of 62 (approx.) double tax treaties in place with countries both in EU and outside the EU.

Please refer to the last pages of the PWC tax guide below:

https://www.pwc.com.cy/en/publications/assets/tff-eng-2021.pdf

 

[Mr Gus]

That's a shame about the IP Box. I did come across a page on Sovereign Group's website about the Cyprus IP regime (I don't think I can post links as I'm too new here) which said the following

I was hoping when I saw that page that online videos would be considered "artistic works" but perhaps that information is old.

Yeah but the problem was almost anyone could use, all they had to do was restructure their payments and it could be seen as "royalties", so it was abused and then they obviously cracked down on it.

I looked into other IP boxes as well, there a quite a few countries within the EU that offer such incentives, but our business model does not suite those incentives.

Your best options tax wise are Cyprus, Malta and Georgia, but you must be willing to move there.

 

[uplana]

Cyprus has a vast network of 62 (approx.) double tax treaties in place with countries both in EU and outside the EU.

Please refer to the last pages of the PWC tax guide below:

https://www.pwc.com.cy/en/publications/assets/tff-eng-2021.pdf

I know that but you wrote specific to the USA!