Release-Tax Incentives to individuals to invest in innovative SME enterprises and startups
The Cyprus Income Tax Law has been amended to introduce more detailed rules regarding the exemption provided for Investors to Innovative businesses that are in line with the European Acquis especially concerning state aid rules. Innovative SMEs shall be receiving approval by a designated authority on the basis of the SME’s R&D expenses. The rules explicitly refer to accounting standards that will be used to determine R&D expenses moving away from the restrictive concept of scientific research.
What is the incentive provided?
The incentive is available to Cyprus tax resident individuals that are independent private investors that proceed with risk finance investments, either directly or through an investment fund (in the manner defined in the Cyprus Income Tax Law), or through an alternative trading platform, to innovative SMEs.
The investment shall be deducted from the individual’s taxable income subject to the following limitations:
(i) The amount deducted shall not exceed 50% of the individual's taxable income in the tax year in which the risk finance investment was made prior to the deduction of allowable insurance premiums and other contributions. The amount deducted cannot exceed EUR150.000 per year.
(ii) Any surplus shall be carried forward for a period of 5 years subject to the 50% limitation.
A person that incurs expenses in respect of risk finance investments is a
“independent private investor” if s/he is not already a shareholder of the
innovative SME in which s/he invests. In the case of a new company, private investors, including the founders are considered to be independent from the company.
What is an Innovative SME?
(a) That carries out a business activity in Cyprus and
(b) At the time of the investment constituted an unlisted SME that at the time of the investment has drawn up a business plan for risk finance investment and additional fulfills at least one of the following conditions:
(i) It has not been operating in any market; or
(ii) It has not been operating in any market for less than 7 years following their first commercial sale; or
(iii) It requires an initial risk finance investment which, based on a business plan prepared in view of entering a new product or geographical market, is higher than 50% of their average annual turnover in the preceding 5 years.
(c) The enterprise shall need to submit an application to the Ministry of Finance accompanied by a certification to be provided by an external auditor in accordance to which the research and development costs (that may also include capitalized costs) of which represent at least 10 % of its total operating costs
With regard to start-ups, the MoF approval may be provided on the basis of a business plan.
What types of investments are eligible?
The incentive is provided in respect of risk-finance investments.
‘Risk finance investment’ means equity and quasi-equity investments, loans including leases, guarantees or a mix thereof, to eligible undertakings for the purposes of making new investments and includes follow-on investments.
For the purposes of defining risk finance investments the following definitions are provided in the law:
(i) “equity investment” means the provision of capital to an undertaking, invested directly or indirectly in return for the ownership of a corresponding share of that undertaking;
(ii) “quasi-equity investment” means a type of financing that ranks between equity and debt, having a higher risk than senior debt and a lower risk than common equity and whose return for the holder is predominantly based on the profits or losses of the underlying target undertaking and which are unsecured in the event of default. Quasi-equity investments can be structured as debt, unsecured and subordinated, including mezzanine debt, and in some cases convertible into equity, or as preferred equity;
(iii) “loan” means an agreement which obliges the lender to make available to the borrower an agreed amount of money for an agreed period of time and under which the borrower is obliged to repay the amount within the agreed period. It may take the form of a loan, or another funding instrument, including a lease, which provides the lender with a predominant component of minimum yield. The refinancing of existing loans shall not be an eligible loan.
(iv) “follow-on investment” means additional risk finance investment in a company subsequent to one or more previous risk finance investment rounds
What is the duration of the incentive?
The provisions granting the incentive shall enter into force on January 1, 2017 and shall be valid for a period of 3 years unless otherwise decided by law.
If you wish to take advantage of Cyprus’ Tax incentives for SME’s and startup’s please contact our director, Savvas Shiatis at SShiatis@oneworldweb.net for a complimentary consultation.