Tax Incentives for investing in Cypriot Innovative Businesses
Individuals investing in registered innovative businesses through Crowdbase are eligible for the tax deduction.
The Deputy Ministry of Research, Innovation and Digital Policy has renewed the tax incentives scheme for investing in registered innovative businesses. It aims to promote the development of entrepreneurial ventures in Cyprus through the support of local investors.
The policy was an amendment of the Income Tax Law, approved by the House of Representatives and entered into force in January 2017. After recognising its importance and successful track record in assisting local businesses, the scheme was extended until 30 June 2024.
Who is eligible for tax deductions?
To be eligible for the tax deductions, one must satisfy ALL of the following conditions:
- An individual who is currently taxed in Cyprus.
- An independent investor in that you are not already invested in the business. An exception applies to founders and private investors when starting a new business.
- Invest directly or through an investment fund/alternative trading platform (like Crowdbase) in an innovative business.
- Securities are not purchased from other investors (or on a secondary market like Crowdbase’s bulletin board).
What is the tax incentive for investors?
Investors can deduct the invested amount from their taxable income, subject to the following provisions:
- The deduction may not exceed 50% of the total taxable income of that person in the tax year in which the investment is made.
- The amount deductible may not exceed €150,000 a year.
- Deductions not claimed due to the above conditions may be carried forward for up to five (5) years.
In practice, the tax savings can be as high as 35% of the investment in an innovative business, depending on your personal income tax bracket. This represents a significant portion of the investment and can be claimed regardless of the company’s performance. Therefore, the tax deduction can be considered a minimum guaranteed return for your investment, even in the worst-case scenario.
Tax relief calculator
Calculating taxes and deductions is a complicated and lengthy process that nobody wants to do.
Therefore, we created a simple tax relief calculator so you can easily see how much you could save from an investment in an innovative business.
Simply input your annual taxable income and the proposed investment amount to see how much you can save.
In which cases may the tax incentive not be granted?
Before investing and claiming your tax deductions, you may also want to consider the circumstances in which the tax relief may not be granted:
- If you do not hold the investment in the innovative SME for a minimum of 3 years.
- If you claim a deduction that exceeds the allowance set by the legislation. We suggest using our calculator above to verify your own calculations to avoid mistakes.
How do investors know that a business is innovative?
For each innovative company, a relevant certificate will be issued, which will have a duration of 3 years.
For investments made through Crowdbase, innovative businesses will be clearly marked on the crowdfunding campaign page as qualified innovative businesses.
Alternatively, the State Department maintains a list of all the certified innovative businesses here, which you can use to verify a company’s status.
How is an innovative SME defined?
According to the legislation, an SME can be registered as innovative if it meets the following criteria:
- It operates in Cyprus; and
- Has drawn up a business plan for the venture capital investment and, in addition, meets at least one of the following conditions:
- Is not currently active in any market, or
- Operates in any market for less than 7 years after its first commercial sale, or
- Requires an initial business risk financing investment based on a business plan drawn up for a new product or penetration into a new geographic market, which is higher than 50% of its average annual turnover over the past 5 years; and
- The company must not be listed on the Cypriot or any other stock exchange; and
- A company stops being innovative if it receives more than €15 million in investments.
How do I apply to become an innovative business in Cyprus?
If your business satisfies the criteria set above, then you can submit an application to the Deputy Ministry at [email protected]. However, before sending your application, you should read through all available information on the dedicated page.
Below we provide a summary of the evaluation process depending on whether your company has an existing financial history, no financial history or is eligible for a certificate without an evaluation.
For existing companies with a financial history
Companies with an existing financial history will need to provide a certificate from their external auditors verifying that they have invested more than 10% of their operating expenses in research and development in at least 1 of the previous 3 years.
This certificate must be consistent with the company’s audited financial statements. Additionally, the expenditure on research and development must be clearly stated in the financial statements.
If the company satisfies this condition and is verified by the Deputy Ministry, then the company is eligible for a certificate.
For new ventures and startups without financial history
If you are a newly founded startup without any financial history, then you will need to submit a business plan as per Annex 3.
The business plan must be in English, in PDF format and should be between 10 and 15 pages. The plan should describe the ability to develop new or clearly improved products, services or processes with high technological or industrial risk, which are characterised as innovative in their sector.
In addition, the business plan must cover the following topics:
- Value proposition: Describe the business in a single sentence, including what it does, how it does it, and why.
- Problem: Outline what the problem is today and why the current solutions are inadequate.
- Solution: Demonstrate your company’s value proposition to solve the problem described above and why now is the right time.
- Market Opportunity: Provide evidence and research of the potential market and steps you have taken to validate it.
- Competition: List all competitors currently in the market and how you will differentiate from them.
- Proprietary Technology: Describe any proprietary technologies or intellectual property you have developed.
- Monetisation Strategy: Describe the top source of revenue, pricing model, break-even point and other business metrics/KPIs.
- Marketing Plan: Describe the channels through which you will find and engage with your customers.
- Team and Key Stakeholders: Highlight key team members, including the skills, expertise and prior experience which make them suitable for their positions.
- Financial Projections: Provide a three-year financial forecast, including cash flow analysis and unit economics.
Two independent evaluators will then evaluate the business plan based on the criteria described above. If the business plan secures a score greater than 11 (out of 15) from both evaluators, then the company is eligible for a certificate.
In the rare case that the business plan scores 11 (or higher) out of 15 from only one evaluator, it is scored by a third evaluator. If the third evaluator gives a score greater than 11, the company is eligible for certification.
Eligible companies that receive a certificate without evaluation
Companies that have previously participated in various local and European programs may be eligible for a certificate without further evaluation. If your company satisfied any of the following conditions in the last three years, then it is eligible for certification:
- The company has secured funding from one of the SME Instrument Programs, EIC Pathfinder and EIC Accelerator of the EU Horizon 2020 Financing Program or Horizon Europe 2021-27.
- The company has received a Seal of Excellence in the Programs mentioned above.
- The company has secured funding from the PRE-SEED, SEED, or INNOVATE Innovation Programs or other innovation programs of the Research and Innovation Foundation.
- The company has secured a Startup Visa.
Qualifying companies can submit proof that they meet at least one of the above criteria. Upon confirmation of the receipt by the Deputy Ministry, the company is eligible for a certificate.
Approval or rejection of an application
The State Department approves or rejects the designation of the company as an innovative small and medium enterprise (SME) within one month from receiving a completed application. In addition, the State Department may request additional information and clarifications about the company before issuing the certificate.
Procedure for renewal of an innovative company certificate
To renew the Innovative Business Certificate, the company submits an External Auditor Certificate, certifying that research and development costs represent at least 10% of its total operating costs in at least one of the previous 3 tax years.
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