The tax incentives for investing in innovative enterprises, which were introduced in 2017, were extended until 30 June 2024 by a decision of the Cyprus Parliament on 10 March 2022. The relevant amendment in the Income Tax legislation was published in the Official Gazette of the Republic of Cyprus on 18 March 2022.
The incentives aim to support start-up entities in developing innovative products and services, as well as to enhance entrepreneurship and strengthen the entrepreneurial ecosystem of Cyprus.
The incentives provide that a qualifying investor who makes a risk-finance investment in an innovative small and medium-sized enterprise (SME) can deduct the cost of that investment from his/her taxable income. The deduction is subject to the following requirements:
A qualifying investor is an individual who is independent from the innovative enterprise. An investor is deemed to be independent if he/she is not an existing shareholder of the enterprise unless he/she was one of the founders of the enterprise upon its establishment.
The investment can be made either directly by the investor to the innovative enterprise or indirectly through an investment fund or an alternative venture capital trading platform focusing on innovative small and medium-sized enterprises.
A risk-finance investment is an equity investment or a quasi-equity investment or a loan, or a combination of these options. It includes finance leases and guarantees. Both an initial and a follow-on investment, as defined in the Income Tax legislation, can qualify as risk-finance investment.
Minimum holding period
A qualifying investor needs to hold the investment for a minimum period of three years, in order to avoid the risk of having his investment disallowed.
As per the Income Tax Law an SME will qualify as innovative if it meets the following requirements:
A business will automatically lose its innovative SME status if, at any time, the total amount of risk-finance investment received exceeds €15 million.
To be approved as an innovative SME, the entity must submit an application to the authorities, together with a statement from an independent auditor confirming that the Research and Development (R&D) expenses (including those capitalised) represent 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. In case of a start-up enterprise without any financial history, the assessment will be made in accordance with a business plan that the enterprise may be requested to submit to the authorities.