The Parliament on 07 July 2022 has voted a significant amendment on Income tax Law in an aim to increase the tax deduction granted on expenses incurred for research and development.
A. WHAT CHANGES
The amendment which is effective from the year 2022 onwards provides for a substitution of article 9(1)(d) which governed the deduction of R&D expenses incurred by small and medium-sized innovative entities as well as scientific expenditure incurred by person carrying on business activities.
The new article provides that the expenses incurred for scientific purposes as well as for research and development purposes by a person that:
will be considered as tax deductible expenses.
In case were the expenses mentioned above are of a capital nature, the deduction will be claimed according to the provisions of article 9(1)(l) which states that the expense is to be distributed over the life of the intangible asset in a reasonable way following international accounting standards with a maximum period of twenty (20) years.
Moreover, no deduction is granted based on this paragraph to expenses incurred for the acquisition of property plant and equipment or buildings, including accommodation of staff, for which a deduction may be granted in accordance with Article 10 of Income Tax Law.
Finally, expenses incurred during the years 2022-2024 (including those of capital nature) and for which a deduction is granted, an additional deduction equal to 20% of those expenses is granted. In this case, the effective deduction is 120% of the actual expense incurred for R&D purposes.
It should be noted that this deduction cannot be claimed together with the deduction provided under Article 9(1)(k) relating to Cyprus IP box regime.
The new article aims to provide tax incentives and attract new businesses in the Republic of Cyprus. This development forms part of the action plan of Cyprus that was announce in October 2021.