Extension of tax incentives for investments in innovative SMEs

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Extension of tax incentives for investments in innovative SMEs

The Cyprus Parliament decided on March 10, 2022, to extend the tax incentives for investing in innovative small and medium-sized firms (SMEs) until June 30, 2024. On March 18, 2022, the legislation was amended in the Official Gazette.

It should be noted that these tax incentives were first implemented in Article 9A of the Cyprus Income Tax Law (“the Law”) on  January 1,  2017 for a three-year period (up to December 31, 2020), and were then extended until June 30, 2021. Their goal is to boost entrepreneurship and innovation, assist start-ups in producing innovative goods and services, and build the entrepreneurial environment in Cyprus.

In summary, the said tax incentives provide that “qualifying investors” who make “risk-finance investments” in “innovative SMEs” may deduct the costs of such investments from their taxable income, subject to the following conditions/limitations:

  • The allowable tax deduction cannot exceed 50% of the investor’s taxable income in the year in which the investment is made, as calculated before the deduction, but after allowing deductions for life insurance premiums;
  • Any remaining investment cost not claimed as tax deductible can be carried forward and claimed in the following five years, subject to the aforementioned 50% restriction;
  • The total deductible amount cannot exceed €150,000 per year.

There is a minimum holding period of three years; otherwise, the Commissioner of Taxation may disallow the tax deduction. Furthermore, the Commissioner may decline the deduction if activities are conducted with the goal of obtaining the applicable deductions and avoiding any provisions of Article 9A of the Law.

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