Cyprus Tax Incentives- Companies benefit from increased tax deduction for Research and Development expenses

On July 7th, the Cyprus Parliament voted for an extension of tax incentives (an action plan that was voted on in October 2021) in an attempt to attract new investments, boost entrepreneurship and support start-ups. This regards an incorporation of tax deduction on research and development expenses into Article 9(1)(d) of the Income Tax Law (ITL) and is effective as of July 20th 2022 when it was published in the Cyprus Gazette.

The existing article 9(1)(d) of the Income Tax Law states that:

3. Any expenditure for scientific research incurred by a person carrying on any business, as well as R&D expenses as recognised by international accounting standards carried out by small and medium-sized innovative companies as defined in Article 9A of the ITL, shall be deducted from taxable income if they were wholly and exclusively incurred for the production of income, so long as the Commissioner is satisfied that such expenditure has been incurred for the use and benefit of the business.
   
   
4. No deduction shall be granted for such expenses incurred for the acquisition of plant and machinery or buildings, including staff accommodation, in respect of which a deduction may be granted according to Article 10 of the ITL. 
5. Any such expenditure of a capital nature, in respect of which deductions may not be granted under Article 10, shall be distributed equally between the tax year in which it was incurred and the five immediately following years.

According to the aforementioned amendments,

• An additional tax deduction of 20% is granted for R&D expenses that have incurred or will incur during 2022,2023 or 2024, including expenses of capital nature, for which deduction is granted under the provisions of article 9(1)(d) of ITL. Hence, 120% of the actual eligible R&D expenses are to be deducted from taxable income.

It is imperative to note that the additional deduction cannot be claimed in conjunction with the deduction provided under the Cyprus IP regime (article 9(1)(k) of the ITL).

• Provisions include individuals carrying on a business who do have the economic ownership of the intangible asset that arises or is likely to arise from incurring such expenses.
• Should the relevant expenses are of capital nature, the deduction is regulated by the provisions of Section 9(1)(l) of the ITL, which states that the expense is distributed over the expected life duration of the intangible asset, with a maximum period of 20 years, according to accepted accounting principles.

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