Incentives for Investment in Cypriot Innovative SMEs

The Cyprus Income Tax Law includes tax incentives for individuals who are tax residents of Cyprus and invest in innovative small and medium-sized enterprises (SMEs). The incentives, which were originally implemented in 2017 and have been extended multiple times, aim to encourage entrepreneurship and innovation, support start-ups in creating innovative products and services, and strengthen the entrepreneurial ecosystem in Cyprus. The incentives have been extended until June 2024.

Incentives:

“Qualifying investors” who make “risk-finance investments” in “innovative SMEs” can deduct the costs of those investments from their taxable income. There are several conditions and limitations on these deductions:

• The maximum tax deduction is 50% of the investor’s taxable income for the year in which the investment was made, calculated before the deduction but after certain other deductions.
• Any remaining investment costs that are not claimed as tax deductible can be carried forward and claimed in the following five years, subject to the 50% restriction.
• The total deductible amount cannot exceed €150,000 per year.

Investor Qualifications

To be considered a “qualifying investor” for the purposes of these incentives, an individual must be independent from the enterprise in which they are investing. An investor is considered independent if they are not already a shareholder of the enterprise, unless they were one of the founders of the enterprise at its establishment. Investments can be made directly or indirectly through an investment fund or alternative trading platform.

Definition of Risk-Finance Investment

A “risk-finance investment” is defined as equity investments, quasi-equity investments, loans (including finance leases), guarantees, or a combination of these. The investment can be the initial investment in the enterprise or a “follow-up” investment.

Definition of Innovative SME

An SME is considered “innovative” if it meets the following criteria:

• Its operations are located in Cyprus.
• At the time of the investment, it is an unlisted SME (unless it is listed on an alternative trading platform) that has a business plan for the risk-finance investment and meets at least one of the following conditions:
  • It has not been operating in any market.
  • It has been operating in any market for less than seven years following its first commercial sale.
  • It requires an initial risk-finance investment that is higher than 50% of its average annual turnover in the previous five years, based on a business plan for entering a new product offering or new geographical market.
• It has been approved by the Cyprus Ministry of Finance or other approved authority as a qualifying innovative SME. An SME will no longer be considered a qualifying innovative SME if it receives total risk-finance investments of more than €15 million at any point, as set by the relevant EU Commission Regulation.

To be eligible for the tax deduction, individuals must hold their investments for at least three years. If this requirement is not met, the Commissioner of Taxation may choose to disallow the deduction. Additionally, the Commissioner may decide to deny the deduction if it is determined that the individual is attempting to obtain the deduction through means that violate the provisions outlined in Article 9A of the Law.

Qualifying Investors

• Qualifying investors are individuals who are independent from the company they are investing in, unless they were founders of the company.
• Investments can be made directly or indirectly through an investment fund or alternative trading platform.

Risk-Finance Investment

• Risk-finance investments in innovative SMEs include equity investments, quasi-equity investments, loans, guarantees, or a combination of these.
• These investments may be initial investments in the company or follow-up investments.

Innovative SME

• An SME is considered “innovative” if it meets the following criteria:
  • Its operations are based in Cyprus.
  • At the time of the investment, it is an unlisted SME (unless it is listed on an alternative trading platform) with a business plan for the risk-finance investment and meets at least one of the following conditions:
    • It has not been operating in any market.
    • It has been operating in any market for less than seven years following its first commercial sale.
    • It requires an initial risk-finance investment that, based on a business plan for entering a new product offering or market, is more than 50% of its average annual turnover in the previous five years.
  • It has been approved by the Cyprus Ministry of Finance or another authority as a qualifying innovative SME.

It is worth noting that a company will no longer be considered a qualifying innovative SME if the total amount of risk-finance investment it receives reaches €15 million, which is the maximum amount set by the relevant EU Commission Regulation.