From Tax to Breakthroughs: Stimulating Innovation in Cyprus

Governments have been using tax policies to stimulate innovation which is a major driver of growth in the long-run. Tax policies drive up the levels of investment in innovation, attract highly-skilled talent and result in more effective and productive research activities thus enhancing the quality of innovation outputs.

Across OECD countries, reducing the cost of R&D by 10% leads to a 1% increase in R&D in the short run and an almost 10% increase in the long run (1). Similar findings are reported for the UK where, every pound of tax revenue foregone led to ￡1.3 of R&D (2). And in the USA, 10% reduction in cost led to 19.8% short-run increase in the research intensity-ratio, measured as the ratio of R&D spending to sales (3)

Even more, mobility-friendly policies can help attract and retain high-quality talent and foster the development of innovation clusters; especially if such schemes are targeted in specific including sectors in need of innovation, such as for example Green Technologies. In fact, there’s a very interesting finding that those with the most and highest-cited patents since 1977 make location choices that are also based on tax rates (4).

Building upon its pro-business environment and excellent geostrategic location, Cyprus has been progressively building a pro-innovation policy mix too; one that sees its ecosystem thrive and has established itself as a regional hub for innovation and technology. And this is no chance occurrence but rather the result of long-term strategy and careful design, delivered through various tax incentives and innovative funding schemes.

Beyond the array of funding schemes offered by RIF, companies investing in R&D can benefit from a 120% discount on R&D expenses – that is, 120% of actual eligible R&D expenses can be deducted from taxable income. Companies can also benefit from as little as 2.5% on qualified IP profits.

Cyprus also offers a favourable startup visa scheme, for startups with high growth potential looking to set up or relocate here, and a scientific visa scheme, attracting global talent to the country. ? At the same time, investors looking to invest in companies in Cyprus, can benefit from a 50% tax reduction for investments in certified innovative enterprises.

What’s more, investments can be de-risked through blended finance schemes, offered by RIF, combining public and private funding. For instance, the DISRUPT programme pulls together VC investments of at least €1M with equity-free grants of up to €1.5M in support of innovative companies with cutting-edge technologies that can disrupt global markets. In the coming weeks, BOOST, a new blended finance programme will be announced by the RIF. BOOST offers an equity-free grant of up to 50% of the equity investment secured by an innovative company, capped at €300K.

Tax incentives and blended finance schemes are in place and working in tandem to address the full spectrum of needs when it comes to R&I investments both by companies themselves and investors. They are designed to maximize investment returns and drive innovation forward and the results are already speaking for themselves: The country hosts a number of startups, scaleups and technology companies but also investors investing in R&I. In recent years, Cyprus has witnessed several local startups leveraging scalable technologies and managing to expand their market reach having secured the necessary funds; the country’s innovation performance in world indices has significantly improved. This makes Cyprus standout for tech companies and investors worldwide.

Talking of ROIs and growth is one thing but putting in place the mechanisms and schemes that deliver actual results is another. In this regard, Cyprus does not just talk the talk, it walks the walk; and it’s a promising walk too!

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(1)???? Bloom et al. (2002) “Do R&D Tax Credits Work? Evidence from a Panel of Countries 1979-1997” Journal of Public Economics

(2)???? Guceri and Liu (2019) “Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence” American Economic Journal, Economic Policy. ?

(3)???? Rao (2016) “Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade” Journal of Public Economics

(4)???? Akcigit et al. (2020) “Taxation and Innovation: What Do We Know?” National Bureau of Economic Research