Tax incentives for investment in innovative SMEs have been extended until June 30, 2024
The Cyprus Parliament voted on March 10, 2022, to extend until June 30, 2024, the tax incentives for investing in innovative enterprises that were introduced in the Cyprus Income Tax Law (ITL) in 2017. On March 18, 2022, the amending ITL was published in the Gazette.
The tax breaks are intended to encourage entrepreneurship, assist new businesses in developing innovative products and services, and strengthen the Cypriot entrepreneurial ecosystem.
The most important provisions of Article 9A of the ITL, which governs tax incentives, are summarized below.
What is the tax incentive for qualifying investors?
A "qualifying investor" who makes a "risk-finance investment" in a "innovative small and medium-sized enterprise (SME)" may deduct the costs of the investment from his or her taxable income, according to Article 9A of the ITL, subject to the following limitations:
• Deduction is limited to 50% of the investor's taxable income in the year in which the investment is made, as calculated before allowing this deduction but after allowing deductions for life insurance premiums and contributions to provident and other approved funds (as per Article 14 of the ITL).
• Annual deductible limit: The total deductible amount per year cannot exceed EUR 150,000.
• Carry forward: Any investment costs that are not claimed as tax deductible may be carried forward and deducted from taxable income in the following five years, subject to the aforementioned restrictions.
Who is considered a qualifying investor?
A qualifying investor is a person who is not affiliated with the company. If an investor is not a current shareholder of the company, he or she is considered independent, unless he or she was one of the company's founders upon its incorporation.
Individuals can invest directly or indirectly in an innovative small and medium-sized enterprise through an investment fund or an alternative trading platform (SME).
What is the definition of a risk-finance investment?
An "equity investment," a "quasi-equity investment," a "loan," or a combination thereof, is a risk-finance investment, which includes finance leases and guarantees. A risk finance investment can be the company's initial investment or a "follow-on investment." In the ITL, these terms are defined explicitly.
Is there a time limit on how long I have to keep my investment?
A qualifying investor must hold his or her investment for a minimum of three years, or the tax deduction may be denied by the Commissioner of Taxation.
What is an innovative SME?
A SME will qualify as an innovative SME if it meets the following requirements, according to the definition in Article 9A of the ITL:
• Its operations are based in the Republic of Cyprus;
• It is an unlisted SME (unless it is listed on an alternative trading platform) that has a business plan for its risk-finance investment and meets at least one of the following conditions at the time of the investment:
- It has not been operating in any market; or
- It has been operating in any market for less than seven years following its first commercial sale; or
- It has not been operating in any market; or
• It has been approved as a qualifying innovative SME by the Cyprus Ministry of Finance or another authority.
If a company's total risk-finance investment exceeds EUR 15 million at any time, it will automatically lose its innovative SME status.
What is the procedure for becoming a qualified innovative small business?
To be approved as an innovative SME, the company must submit an application to the authorities, along with a statement from an independent auditor confirming that R&D expenses (which may also include any capitalised R&D expenses) account for at least 10% of the total operating expenses of the enterprise in at least one of the three tax years preceding the tax year in which the investment was made; or, in the case of a start-up enterprise with no financial history, based on the audited financial statements or in case of no financial statements, a business plan may be requested by the authorities.
How we can assist you?
We are always at your disposal to discuss any questions you may have and to assist you in respect to the aforementioned incentives and how they could affect your investment plans.
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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