Cyprus offers a very useful IP tax regime. The law provides for a certain tax exemption for income derived from intellectual property. More specifically, 80% of the worldwide royalty income generated from IP owned by a Cyprus tax-resident company (net of direct expenses) is exempt from income tax. In addition, 80% of profits generated from the disposal of IP owned by Cyprus-resident companies (net of direct expenses) is also exempt from income tax, and any expenditure of a capital nature for the acquisition or development of IP is tax-deductible in the year in which it was incurred and the four subsequent consecutive years.

Cyprus' IP tax regime
The Republic of Cyprus provides the following tax regime for intellectual property royalty structures based on Cyprus-resident legal vehicles.

80% of worldwide royalty income generated by IP owned by Cyprus-resident companies (net of direct expenses) is exempt from income tax.
80% of profits derived from the disposal of IP owned by Cypriot companies (net of direct expenses) is exempt from income tax.
The cost to a Cyprus-based company of acquiring or developing an IP right may be capitalised and written off on a straight-line basis over five years, giving an annual writing down allowance of 20%.
Thus, the effective tax rate for a Cyprus-registered royalty company is 2.5% or less, taking capital allowances and expenses into account.
What you need to consider when structuring a Cyprus IP holding company
A Cyprus company registration demands a number of things to be considered.

VAT registration
Bear in mind that the acquisition of intellectual property rights from anywhere in the world by a Cyprus-based company is treated as a service rendered to that company, which will create an obligation for it to register and account for VAT in accordance with the reverse charge mechanism. If the company charges royalty fees to taxable persons within the European Union area it will also have to register for the EU's VAT Information Exchange System.

Fees for supplying the right to use the IP (i.e. license fees) are taxable for VAT purposes.

To this end, the IP company will be obliged to register with the VAT authorities in Cyprus and to apply Cypriot VAT to the value of any license fee charged to Cyprus-based entities when the revenue from the supply of the right to use the IP (i.e. license fees) to such entities exceeds EUR 15,600 in the preceding 12 months.

Registration with the relevant VAT authorities in Cyprus is compulsory when a legal person receives services from abroad, either from EU countries or from outside the EU, worth over EUR 15,600.00, at which point the reverse charge principle comes into play.

If the IP company licenses the IP to EU entities, there is an obligation to register for VAT purposes and submit VIES returns on a monthly basis (there is no threshold for intra-community services).

Doing so will grant the IP company the right to fully recover any input VAT incurred on local expenses.