An improved tax deduction for Research & Development (R&D) expenses was added to Article 9(1)(d) of the Cyprus Income Tax law in an effort to entice new investments and businesses to Cyprus (ITL). One of the tax incentives in the Action Plan, which was unveiled in October 2021, is this development.
The Cyprus Parliament approved the amending ITL law on July 7, 2022, and has been into effect since July 20, 2022, the date it was published in the Gazette.
In accordance with the ITL's current Article 9(1)(d):
“Any expenditure for scientific research incurred by a person carrying on any business, as well as R&D expenses as recognised by international accounting standards carried out by small and medium-sized innovative companies as defined in article 9A of the ITL, shall be deducted from taxable income if they were wholly and exclusively incurred for the production of income, so long as the Commissioner is satisfied that such expenditure has been incurred for the use and benefit of the business.
No deduction shall be granted for such expenses incurred for the acquisition of plant and machinery or buildings, including staff accommodation, in respect of which a deduction may be granted according to Article 10 of the ITL.
Any such expenditure of a capital nature, in respect of which deductions may not be granted under Article 10, shall be distributed equally between the tax year in which it was incurred and the five immediately following years.”
The following is the most significant modification made by the amending law:
The following is the most significant modification made by the amending law: Effectively, taxable income will be reduced by 120% of the actual eligible R&D costs.
According to Article 9(1)(k) of the ITL, the additional deduction cannot be claimed in addition to the one permitted by the Cyprus IP regime.
In addition, the amending law states that:
- If the relevant expenses are of a capital nature, the deduction is claimed in accordance with Section 9(1)(l) of the ITL, which states that the expense is distributed over the life duration of the intangible asset in a reasonable manner;
- The person carrying on a business should have economic ownership of the intangible asset that results from or is likely to result from incurring such expenses.
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