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The tax relief for investors in qualifying small and medium-sized innovative enterprises was approved by the Parliament on 2 December 2016 and entered into force on 1 January 2017.

The provisions are included in the new section 9A of the Income Tax Law and aim to foster investments in start-up companies and innovative companies in Cyprus. The tax benefits include a deduction of the cost of a qualifying investment from the investor's taxable income of up to a maximum amount of 50% of the taxable income or €150,000, whichever is lower.

The benefit may be allocated and distributed in a five-year period; thus, any cost above the 50% limit may be carried forward for deduction against the taxable income of subsequent years, subject to the above limitation.

For an investment to be deemed qualifying, the investee must be a small or medium-sized innovative enterprise doing business in Cyprus which meets the conditions set out in article 21(5) of Commission Regulation (EU) 651/ 2014 of 17 June 2014, as follows:

• It must be an unlisted company not operating in any market.
• If operational, it has been operating in any market for less than seven years.
• It is a "follow-on investment," 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 five years.

Designation as a small or medium-sized innovative enterprise requires the approval of the Ministry of Finance.

To be considered innovative, a company must have spent 10% of its operating capital on research and development in at least one of the last three years, as verified by an external auditor. For start-up companies with no financial history, the assessment will be made on the basis of a business plan.