Cyprus has introduced amendments to the rules for the deduction of R&D expenses, including a temporary 20% increase in allowed deductions. The amendments are provided by the Income Tax (Amendment) (No. 5) Law of 2022, which amends Article 9 (Deductible Expenses) of the Income Tax Law to replace the provisions on the deduction of R&D expenses. The amendment law was published in the Official Gazette on 20 July 2022 and is generally effective from that date.
In particular, the new provisions provide for the deduction of R&D expenses, including R&D expenses recognized on the basis of international accounting standards, incurred by a person carrying on a business and having the economic ownership of the intangible asset arising or likely to arise from the making of such expenses. In case the aforementioned expenses are of a capital nature, the deduction is claimed in accordance with the provisions of paragraph 9(1)(l), which provides that the expense is distributed over the useful life of the intangible asset in a reasonable manner, according to accepted accounting principles, with a maximum period of 20 years. Further, it is provided that 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 Income Tax Law, which concerns removals and additions relating to fixed assets used in business.
Lastly, it is provided that for R&D expenses incurred during the years 2022, 2023, and 2024, including expenses of a capital nature, for which a deduction is granted in accordance with the provisions of paragraph 9(1)(l), an additional deduction equal to 20% is granted on the said expenses (120% total deduction). However, this additional deduction cannot be claimed alongside the deduction provided for in paragraph 9(k), which is the intellectual property (IP) regime.