Corporate TaxPersonal Tax

Tax exemptions and incentives for Startup investors.

Cyprus government in the last few years has launched programs to enhance the local business ecosystem by giving an attractive package of incentives to local and international startups willing to base their operations in Cyprus.

One of the most important programs of this plan has been designed by the Ministry of Finance together with the Unit for Administrative Reform aiming to create attractive incentives, offering some tax exemptions to individuals investing in innovative startups or businesses directly or via an investment fund.

This legal framework is effective as from 1st of January 2017.

Read below the basic provisions of the plan as announced in the official guide of the republic.

Investment Scheme.

Eligible are individual investors that are independent from the enterprise. An investor is deemed to be independent, if he/she is not an existing shareholder of the enterprise, unless he/she was one of the founders of the enterprise upon its establishment. Individuals can carry out their investment either directly or indirectly through an investment fund or through an alternative trading platform for venture capital investment in an innovative small and medium sized enterprise (SME).

 

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Innovative enterprises.

Definition of an innovative SME

A small and medium-sized enterprise (SME) qualifies as ‘innovative SME’ if:

(a) Its operations are carried out in the Republic of Cyprus and

(b) At the time of the investment it is an unlisted SME having a business plan (prerequisite only if it has no financial records) for its risk finance investment and fulfils at least one of the following conditions:

(i) It does not operate in any market; or

(ii) It has not been operating in any market for more than 7 years (this restriction does not, under certain conditions, apply for follow-on investments) 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.

 

To qualify as innovative, an enterprise should:

(a) acquire a statement provided by an independent auditor confirming that the research and development expenditure (that may also include capitalized costs) represent at least 10% of its total operating costs-

(i) In at least one of the three (3) years preceding the granting of the aid or,

(ii) In the case of a startup enterprise without any financial history, in the audit of its current fiscal period. In the absence of audited financial statement, with regard to startups, the MoF approval may be provided on the basis of a business plan.

 

Other provisions:

a. A business will automatically cease to be considered an innovative SME if at any time, the total amount of risk finance exceeds EUR15 million (Commission Regulation (EU) No.651/2014 of 17 June 2014).

b. The innovative SME should not be listed on the Cyprus Stock Exchange or another

Innovative companies can be exercised not only by legal but from natural persons (as private enterprises), or partnerships.

Reference to the state aid rules may provide for the exclusion of the business as an innovative SME

 

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What types of investments are eligible?

The incentive is provided for 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 also follow-on investments. According to the new provisions of the Income Tax Law, “qualifying investor” that makes a “risk-finance investment” in an “innovative small and medium-sized enterprise (SME)” may deduct the costs of the investment from his/her taxable income, subject to the following limitations:

Percentage Limit: The tax deduction is limited to 50% of the investor’s taxable income in the year in which the investment is made, as calculated before allowing for this deduction but after allowing deductions for life insurance premiums and contributions to provident and other approved funds (as per Article 14 of the ITL).

Annual Limit: The total deductible amount may not exceed EUR 150,000 per year.

Carryforward: The remaining investment cost not claimed as tax deductible may be carried forward and deducted from the taxable income of the subsequent five years, subject to the aforementioned restrictions.

Please find the relevant guide here for download.

Read more about investment programs and startups in Cyprus at the page of Unit for Administrative Reform.