The development of the entrepreneurial ecosystem of Cyprus has been a priority of the National Policy Statement. As a means to encourage investment, the Income Tax Law was amended to include tax relief provisions for natural persons who invest in innovative investments.
The scheme is enjoyed by natural persons who are independent investors either directly, through an investment fund, or an alternative trading platform, for a risk finance investment in an innovative small and medium-sized enterprise. The scheme applies to investments that concern a business risk financing investment in an innovative small and medium-sized enterprise and can cover a wide range of investment forms such as equity investments, loans, financial leases, guarantees, etc.
Innovative Small and Medium-sized Enterprise is defined as an enterprise that:
(a) carries out business within the Republic of Cyprus;
(b) and at the time of the investment, it is a non-listed SME and it has drawn up a business plan for its risk finance investment and in addition, meets at least one of the following conditions:
(i) does not operate in any market, or
(ii) carries on business in any market less than seven years after its first commercial sale, or;
(iii) needs an initial risk finance investment which, based on a business plan drawn up for a new product or the penetration of a new geographic market, is higher than 50% of its average annual turnover over the previous five years.
The enterprise will not fit the requirement for a small and medium-sized enterprise if:
(c) at any time, it receives a total risk finance investment that exceeds €15 million.
(d) is listed on the Cypriot or any other stock exchange.
The enterprises are divided into existing businesses with financial history, businesses in the start-up phase without financial history, and businesses that receive a certificate without assessment. Each category has different criteria for qualification. The Company will submit an application to be designated as innovative to the Deputy Ministry of Research, Innovation, and Digital Policy which will evaluate the application judging whether the enterprise meets the criteria of its business category. The deputy ministry will respond to the completed application within a month of receiving it. In order to renew its certificate, the company must submit a certificate from an external auditor to confirm that the research and development expenses represent at least 10% of the business’s total operating expenses in at least one of the 3 previous fiscal years.
The investor can declare in their tax return any investment made towards an innovative business after January 1, 2017, and before June 30, 2024, to reduce their taxable income from the year 2017 onwards. The investor may not be permitted to enjoy the tax relief in case they do not hold the investment in the small and medium-sized enterprise for a minimum period of 3 years or where actions have been taken that aim to grant a relevant discount but exceed the maximum limits established by the relevant legislation.
A qualifying investor may deduct the costs of their risk-finance investment from their taxable income, subject to the following limitations:
(a) the amount deducted from the taxable income cannot exceed 50% of the taxable income of that person in the tax year in which the investment is made;
(b) the deduction, to the extent not granted due to the above limitation, may be carried forward and granted during the next five (5) years, subject to the above percentage limitation and the amount deducted cannot exceed in total the one hundred and fifty thousand euros (€150,000) per year.
If you are considering investing in Cypriot enterprises you might be eligible for tax relief. With the appropriate legal guidance, the application process could be made easy. Christys & Co LLC has a very active and dynamic corporate team. Our lawyers tailor their approach to each client, delivering high-quality advice backed by cost transparency, business sense, clear reporting, and accessibility. Clients benefit from the strength of our in-house team dealing with tax, employment, pensions, competition, property, and commercial law, and ensure your deal is supported by the right experts. Contact us when considering taking the next step in your investment.
An Article by Chloe Tofarides.