On 10th March 2022, the Cyprus parliament voted for the purpose of extending the tax incentives of Cyprus with regards to investing in rising and creative small and medium enterprises (SMEs) until the date of 30th June 2024. It was on 18th March 2022 when the amendment to the legislation got published in the Official Gazette.

It is important to note that it was on the 1st of January 2017 when these tax incentives were initially introduced for the period of around three years  (up to the 31st of December 2020) and were later extended up to the 30th of June 2021. Their main purpose is to increase entrepreneurship as well as innovation, assist start-ups to create innovative services and products, along with improving the Cyprus entrepreneurial ecosystem.

In brief:

As per the tax incentives, those "qualifying investors" who indulge themselves in making "risk-finance investments", especially in innovative SMEs, are to deduct the cost of these investments from their income which is taxable, contingent on the below-mentioned conditions/limitations:

  • The amount which is deductible should not go over EUR 150,00 per year.
  • The tax deduction which has been allowed can not go over 50 per cent of the taxable income of the investor in the specific year when the investment is made, as computed prior to the deduction, but after permitting deductions for contributions and life insurance premiums to provident as well as the other approved funds.
  • Any of the remaining investment cost which has not been declared as the tax-deductible is allowed to be carried forward and claimed in the forthcoming 5 years, contingent on the above-mentioned 50 per cent restriction.

Three years is considered to be the minimum holding period; else the tax deduction may be disallowed by the Commissioner of Taxation. Moreover, there are cases where the Commissioner may not allow the deduction. These may include cases where the intention behind taking the action is to attain the relevant deductions as well as to circumvent any provisions of Article 9A of the Law.

Qualifying investors

Aiming to Article 9A of the law, "qualifying investors" are those people who are declared as independent from the specific business or enterprise where they are making investments. An investor is considered to be independent if they are not declared as the enterprise's existing shareholders, until and unless they are one of the enterprise's founders at the time of its establishment.

The investments can be carried out in two ways. Either by means of an alternative trading platform or directly through an investment fund.

Risk finance investment

In innovative SMEs, the risk finance investments are referred to as guarantees, loans (including finance leases), quasi-equity investments, equity investments, or a mix thereof. One can consider the risk-finance investment as a "follow-up" investment, or an initial investment in the enterprise.

Innovative SME

SME is defined as Innovative by the Article 9A of the Law provided that it meets the conditions mentioned below:

  • Its operations are located in Cyprus; and
  • It is an unlisted SME during the time of investment (until and unless it has been listed on an alternative trading platform) which has a solid business plan for the purpose of its risk-finance investment as well as fulfills minimum one of the conditions mentioned below:
    1. It has not been operational in any of the markets; or
    2. It has been operational and functioning in any of the markets for the period of fewer than 7 years following its first commercial sale; or
    3. It needs an initial risk-finance investment which, on the basis of a business plan made in view of entering a new geographical market or a new product offering, is more than 50 per cent of its average annual turnover in the foregoing 5 years; and
  • The Cyprus Ministry of finance or any other higher authority has approved it as a qualifying innovative SME.
  • It has been observed that an enterprise will stop being regarded as a qualifying innovative SME if, at any moment of time, the entire amount of risk-finance investment that had been received becomes 15 million EUR, which is considered to be the maximum amount permissible, adjusted in the suitable EU Commission Regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.