The Income Tax (Amendment) (No. 2) Law of 2016 (Law 135(I) of 2016) introduces new tax relief for investors in qualifying small and medium sized innovative enterprises. It adds a new section 9A to the Income Tax Law of 2002 allowing independent investors in such enterprises to deduct the cost of the investment from their taxable income for the year in which the investment is made. The deduction is limited to 50 per cent of taxable income for the year or €150,000, whichever is less. Any cost above the 50 per cent limit may be carried forward for deduction against taxable income of subsequent years, subject to a 50 per cent limit, for a maximum of five years. In order to qualify for relief, the investor must retain the investment for at least three years.
An independent investor in an existing company is one who is not already a shareholder of the company concerned. In a newly-incorporated company all the founding investors are treated as independent. Investments may be made direct or via an investment fund or a venture capital investment platform, and may include loans, subject to specified conditions. In the case of follow-on investments, the conditions set out in paragraph 6 of article 21 of Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market must be satisfied. Relief may be withheld if the tax authorities consider that transactions have been carried out for the purpose of obtaining relief and circumventing any limits set out in the law.
In order to be a qualifying investment, the investee company must be a small or medium-sized innovative enterprise doing business in Cyprus which meets the conditions set out in paragraph 5 of article 21 of Regulation (EU) No 651/2014 (an unlisted company not operating in any market or, if operational, having operated for less than seven years, requiring 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 its average annual turnover for the preceding 5 years). The seven-year limit will not apply to follow-on investments subject to certain conditions. Designation as a small or medium-sized innovative enterprise requires the approval of the Ministry of Finance. In order to obtain approval the company must provide confirmation by an external auditor that research and development costs, as recognized by international accounting standards, account for at least 10 per cent of total operating costs.
A small or medium sized enterprise is one that satisfies the criteria set out in Annex 1 of Regulation (EU) No 651/2014 (fewer than 250 employees, annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.
The new provisions will take effect from 1 January 2017 and will expire on 1 January 2020 unless they are extended before then