The Cyprus Association of Research and Innovation Enterprises (CARIE) has put forward a number of proposals for enhanced tax incentives and relief measures for innovative businesses.
These proposals were submitted to Finance Minister Makis Keravnos and Deputy Minister of Research, Innovation and Digital Policy Nicodemos Damianou.
These proposals, the association explained, seek amendments to the income tax law for innovative enterprises, and are accompanied by various recommendations for consideration in the upcoming tax reform.
The deadline for submitting recommendations under the tax reform framework expires on Friday, March 21.
Following the collection of proposals, an evaluation process will determine their feasibility for implementation.
In a letter signed by CARIE president Tasos Kounoudes and addressed to House President Annita Demetriou, as well as the leaders of all parliamentary parties, CARIE outlined key concerns regarding the income tax law.
The letter, also sent to the presidents and members of the house committees on finance, commerce, and agriculture, highlighted contradictions within the law that necessitate modifications for innovative businesses.
A key issue raised concerns discrepancies in the definition of an innovative small and medium-sized enterprise (SME).
CARIE noted inconsistencies between the legal definition of an innovative SME under the income tax law and the criteria for obtaining a relevant certification from the Deputy Ministry of Research, Innovation and Digital Policy.
Regarding certified innovative SMEs, CARIE said that most of its member companies are well-established businesses that have been operating in the market for over 20 years and have obtained certification from the Deputy Ministry.
These companies have submitted audited financial statements or relevant confirmations from external auditors demonstrating that they allocate at least ten per cent of their operating expenses to research and development in at least one of the last three tax years.
Kounoudis highlighted that article 9A of the income tax law restricts the definition of an innovative SME solely to start-ups, thereby excluding certified innovative SMEs and those recognised as innovative based on the Deputy Ministry’s certification criteria.
The article stipulates that an SME must be less than ten years old from its founding date or seven years from its first commercial sale.
CARIE proposes abolishing this provision, arguing that “this restriction creates unfavourable discrimination against existing SMEs, which form the backbone of the economy and invest significantly in research and innovation, employing more than 1,000 highly qualified scientists and engineers.”
Furthermore, CARIE raised concerns over the “unequal treatment of investors”. The association said that Cypriot investors are subject to a 17 per cent special defence contribution on dividends, whereas foreign investors are exempt, “leading to a two-tier investment system”.
To address this, CARIE proposes tax relief for investors affiliated with an SME’s founder and the retrospective application of the law from February 2022.
The association pointed out that under annex 33 of the income tax law, tax relief applies to independent investors but not to those connected to the founder.
“Given that the founder themselves can benefit from tax exemption, there is no reasonable basis for excluding affiliated parties,” CARIE stated, noting that such a provision did not exist before the law was amended on 14 February 2022.
CARIE also called for enhanced tax incentives for investments in innovative SMEs.
Specifically, it suggested that to encourage investments from independent investors, the existing tax exemption should apply to 100 per cent of the investment amount, with a maximum investment cap of €150,000, instead of the current rate of 20 to 50 per cent, which it argues is insufficient motivation.
Additionally, CARIE proposed that grants received by SMEs for research and development through European or local programmes should be exempt from taxation, as they constitute capital support for innovation rather than commercial revenue.
The association further recommended additional tax incentives for scientists, engineering graduates, and highly qualified professionals employed by innovative SMEs.
One suggestion includes implementing a tax exemption of 20 to 50 per cent on their income, similar to the existing tax relief for Cypriots returning from abroad.
What is more, CARIE stressed that the recommended tax relief measures for research and innovation represent the most effective way to support these high-risk activities.
It also said that the proposed legislative amendments “aim to create a more flexible and competitive tax framework“.
In turn, it explained that this can “strengthen research and innovation within SMEs, attracting investment to innovative enterprises, and ensuring the retention of specialised human capital in Cyprus“.
