New tax incentives granted for investment in innovative SMEs

The Cyprus’ House of Representatives has recently approved the introduction of revised tax incentives for investment in innovative businesses.

The new incentives are effective from 1 January 2017 for a three-year period and aims to support start-ups in developing innovative products.

According to the amendments, an innovative enterprise is defined as a small and medium enterprise (SME), named innovative SME.  Certain qualifications that apply, at the time of the investment, are set out below:

1. the operations of such enterprise are situated in the Republic of Cyprus and
2. the enterprise is an unlisted SME and has a business plan for its risk finance investment.

 Also at least one of the following conditions must be fulfilled:

1. The SME has not been operating in any market or
2.  The SME has been operating in any market for no more than seven (7) years following its first commercial sale or
3. The SME requires an initial risk finance investment which, following a business plan bases on the penetration of a new market or product, is higher than 50% of its average annual turnover in the preceding 5 years, and it has been approved by the Ministry of Finance or other official authority as being a qualifying innovative SME.

According to the new provisions a qualified investment into such enterprises may take the following forms:

• direct or indirect equity investment,
• quasi-equity investment,
• loans and finance leases
• guarantees,
• any of the above mixed together
  

According to the new provisions, private investors who are natural person which finance such innovative programmes directly or indirectly through multilateral trading facilities or investment funds, may benefit from tax deductions as explained below:

• The tax deduction is limited to 50% of the investor’s taxable income in the year in which the
• investment is made
• The total deductible amount may not exceed EUR 150,000 per year
• the deduction can be carried forward and claimed in the following five (5) years, subject to the 50% cap.
• the investment must be held for at least 3 years for the deductions to be granted by the Commissioner.

Qualified expenditure includes scientific research including for research and development (R&D), as recognized by International Accounting Standards (IAS), that has been incurred by the person conducting the qualified SME and which are not eligible for capital allowances as per Article 10 of the ITL.

Published on Monday 30th January 2017