The Cyprus government has approved of new tax incentives in order to enhance investment in the entrepreneurial and start up business sector, by adopting practices and strategies in line with other countries. It will open up doors of opportunity to entrepreneurs where, as stated by the Undersecretary to the President, Mr.Constantinos Petrides, will“greatly assist entrepreneurship and innovation in Cyprus”.
Tax incentives were approved in July 2016 and put into force as from January 2017, and are available to “qualifying investors”, under the new provisions of Article 9A of the ITL, enabling an “innovative small and medium sized enterprise (SME), making a “risk- finance investment”, to deduct costs of the investment from their income according to certain criteria.
Such a qualifying investor must be an independent individual, unrelated to the enterprise and must not be an existing shareholder of the enterprise, unless they were one of the original founders of the enterprise upon initial incorporation.
The risk-finance investment eligible, is defined as an “equity investment”, or a “loan” or “quasi-equity investment”, or a combination of any of these, including guarantees or financial leases. The risk-finance investment eligible may be a “follow-on investment” or an initial investment to the enterprise, as explicitly defined by the law.
The investor may invest either directly or via an “investment fund” or “alternative trading platform”, as set out in the law. The investment must be held for a minimum period of three years, otherwise the investment may be refused by the Commissioner of Taxation, or in cases where actions have abused the defined Laws.
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The below tax deductions are in line with EU rules on state aid, as outlined in the EU Regulations 651/2014:
- Percentage Limit: Tax deduction is limited to 50% of the investor’s taxable income, in the year that the investment is made, further to allowable deductions for life insurance premium and provident fund and other approved fund deductions as stated under Article 14 of the ITL.
- Annual limit: Deductible costs are limited to a maximum of EUR 150,000 per year.
- Carry forward: Any remaining investment costs not claimed may be carried forward and claimed as deductions of taxable income from a further five subsequent years, subject to restrictions as defined by the Laws.
An innovative and qualifying SME is defined pursuant to Article 9A,and is no longer limited to research & development sectors, provided it meets the following requirements:
- Must operate in the Republic of Cyprus and
- Must be approved by the Ministry of Finance or other qualifying authority as an innovative SME.
- Must be an unlisted SME at time the investment is made (unless listed as an alternative trading platform), defined by its risk-finance business plan and must fulfill at least one of the following criteria:
- Does not operate in any market,
- Has been in operation for less than seven years from its first commercial sale, or
- When entering a new geographical market, where the investment is higher than 50% of its average annual turnover in the following five years, where the initial risk-free investment has a business plan, prepared in advance.
The risk-finance investment must not exceed EUR 15 million at any time, otherwise the business will automatically lose its innovative SME status.
The tax incentives mentioned above are granted to qualifying investors and qualifying expenditure incurred by an innovative SME, deductible on taxable income in the year the investment is incurred and five years preceding the investment as stated in the carry forward provision above.