Incentives for Investing in Innovative SMEs – Extension of Application

22/03/2022

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:

• Limit related to Taxable Income: The deduction is limited to 50% of the investor’s taxable income in the year in which the investment is made, after allowing for life insurance premiums and contributions to provident and other approved funds as per the relevant provisions of the Income Tax Law.
• Annual limit: The deduction may not exceed €150,000 per year.
• Carry forward: Any excess investment following the application of the above limitations can be carried forward and deducted from the taxable income of the subsequent five years, always subject to the said limits.

Qualifying Investor

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.

Risk-finance investment

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.

Innovative SME

As per the Income Tax Law an SME will qualify as innovative if it meets the following requirements:

• it operates in the Republic of Cyprus; and
• at the time of the investment, it is not listed (unless it is listed on an alternative trading platform); and
• it has a business plan for its risk-finance investment in a new product or in entering a new geographical market; and
• it meets at least one of the following conditions:

• it has not been operating in any market; or
• it has been operating in a market for less than seven years following its first commercial sale; or
• it requires an initial risk-finance investment which, based on its business plan, is higher than 50% of its average annual turnover in the preceding five years; and

• it has been approved by the Cyprus Ministry of Finance or other authority as a qualifying innovative SME.

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.