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.
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.
(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.
The 7 year restriction provided in paragraph (ii) above does not apply in the case of financing of follow-on investments when the total amount of risk finance does not exceed EUR15 million and the initial business plan submitted for approval to the Ministry of Finance (MoF) in accordance with paragraph (c) below, provided for follow-on investments.
(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
(i) in at least one of the three years preceding the granting of the aid or,
(ii) in the case of a start-up enterprise without any financial history, in the audit of its current fiscal period.
With regard to start-ups, the MoF approval may be provided on the basis of a business plan.
A business will automatically cease to be considered an innovative SME if at any time, the total amount of risk finance exceeds EUR15 million.
Reference to the state aid rules may provide for the exclusion of the business as an innovative SME.
A circular to be issued by the MoF shall regulate the practical implementation of the approval process.
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;
There are special conditions applicable in respect of follow-on investments made in eligible undertakings, including investments made after the 7 year period outlined above in accordance to which, follow-o investments may be eligible if the following cumulative conditions are fulfilled:
(a) the total amount of risk finance mentioned in paragraph 9 is not exceeded;
(b) the possibility of follow-on investments was foreseen in the original business plan;
(c) the undertaking receiving follow-on investments has not become linked, with another undertaking other than the financial intermediary or the independent private investor providing risk finance under the measure, unless the new entity fulfils the conditions of the SME definition.
The rules provide for anti-avoidance measures that may restrict the deductibility of the expense if:
(i) the investor does not maintain the investment for a minimum period of 3 years; or
(ii) in the event where the tax authorities consider that actions have taken place that aim to the relevant deduction and exceed the maximum ceilings set by the rules.
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.
Due to the significant reliance placed in the introduction of this incentive, on the state –aid rules, it would be advised that the following material are always consulted prior to applying the incentive:
(i) The text of the Cyprus Income Tax Law as amended
(ii) The Circulars and/or Regulations that may be issued by the Ministry of Finance with regard to the approval procedure
(iii) Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible
with the internal market in application of Articles 107 and 108 of the TFEU
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