Cyprus company formation: Tax and Accounting Regulations

Company Formation Cyprus: Tax and Accounting Regulations

A coherent offshore tax planning strategy is essential to maximize the effectiveness of offshore companies. ETC can assist by structuring the most tax efficient strategy to satisfy your requirements. ETC will guide you as to which jurisdictions offer the best tax structure by identifying the types of tax payable as well as applicable exemptions and incentives. ETC will provide tax planning advice that will identify which is the most favourable tax efficient jurisdiction in which to incorporate.

Income in Cyprus is administered under a number of directives. Specific incomes are taxable only under one directive, depending on how they were derived.

The Tax Categories (directives) are as follows:

• Corporate Income Tax
• Personal Income Tax
• Value Added Tax (V.A.T.)
• Special Defence Contribution Tax
• Capital Gains Tax
• Immovable Property Ownership Tax
• Inheritance Tax
• Stamp Duty Tax

Company Formation Cyprus: Corporate Income Tax

Corporate Incomes for all companies are liable for 10% annual Corporate Income Tax, this is the lowest rate in the EU. An Exemption to this rule are ship management Companies, who are liable to 4.25% annual Income Tax.

Corporate expenses are tax deductible (Tax is levied on Net Income) with the exemption of entertainment expenses (hotels, restaurants, bars etc) for which there is an annual ceiling. Expenses that surpass the ceiling are not tax deductible.

Corporate losses can be brought forward for a number of years, and thus reducing the tax burden of the following year. Please also note that corporate profits fall under double taxation – taxed at the corporate level when the company earns them, and taxed again in the personal level (Personal Income Tax) when the corporation distributes its profits as dividends (Under Special Defence Contribution).

Personal Income Tax:

Salary income earned in the republic is taxed with brackets as follows:

The first 19,500 EUR are exempt from taxation. Contributions to the Social Insurance fund of the republic are exempted (tax deductible). Donations (to authorised institutions) are also exempt, but the individual has to provide the suitable receipts. (150 EUR can be claimed as Donations without submitting receipts). Subscriptions to recognised professional bodies are also exempt. Premiums paid for Life insurance are exempt. Contributions to recognised Provident / retirement funds could be exempt.

• How it is paid:

It is the responsibility of the employer to calculate, deduct, and pay the appropriate personal income tax of his employees on a monthly basis (Pay as You Earn – P.A.Y.E. tax). Which is payable for the current month, but can be delayed for one month, companies usually pay for the previous month, example, by the end of September they will pay for August.

• Compliance:

Individuals who are liable for Personal Income Tax are obligated to complete and submit a form to Inland Revenue once a year. Corporations have to Submit Inland Revenue 7 (I.R.7) form, where they state the amounts declared / paid as salaries, once a year.

Deemed Dividends:

The government assumes that 70% of corporate after tax profits will be distributed to shareholders within two years. Dividends paid to Shareholders who reside within the republic are taxed under Special Defence Contribution with 15% Burden. Thus, whether a company chooses to distribute its profits as dividends, or to re-invest them, 70% of profits are taxed as dividends anyhow. This effectively brings the effective corporate tax rate for profitable Cyprus companies to about 13% as opposed to the nominal rate of 10%.

• How it is paid:

Cyprus tax is based on the principle of Self – Assessment, where individuals and corporations have to calculate their Tax liabilities themselves. Companies have to estimate their annual income for the current year, estimate the tax payable, and pay it to the government in three instalments within the year, under the temporary income tax provision. (First instalment 1st of August, second instalment 30th of September, third instalment 31st of December). When submitting Audited Final Accounts, the audited taxable income / tax liability, should be about 70% of the estimated income declared (and paid) under provisional Income tax, otherwise the company is liable to some penalties.

• Compliance:

Corporations have to complete and submit Inland Revenue 4 (I.R.4) form to Inland Revenue Authorities, along with Audited Financial Statements to the Company House.

Value Added Tax (VAT):

Value added Tax (V.A.T.) is a pan European indirect tax on purchases, payable by consumers (end users). Businesses (V.A.T. registered companies) are required to act as government agents, i.e. collect V.A.T. from their customers and pass it (Pay) to the government, even though Businesses are not V.A.T. taxable themselves. Moreover, it is the legal responsibility of the agent to maintain accurate transaction records and provide V.A.T. data to the government.

Currently the Standard V.A.T. rate in the republic is 15%. Companies invoicing (Selling) to individuals or other companies within the republic are required to inflate their products / Services by 15%. Some transactions have a 0% V.A.T. rate, for example basic food staff, or payments for rent. Other transactions, such as restaurants have a reduced rate (8%).

For EU Sales (Sales from a company based in one EU member to a customer based in another EU member state) the standard rate of the supplier applies if the customer is an individual. If the customer is a V.A.T. registered company then the V.A.T. rate is zero.

Sales to Customers whom reside in a non-member state (foreign Sales) are exempt from V.A.T. (usually applies for services, not for physical goods).

• How is it paid:

Every three months the difference between V.A.T. charged on Sales, and the V.A.T. incurred on purchases within the republic is payable to the government.

• Compliance:

Vat declaration form is submitted quarterly.

VAT Information Exchange System (VIES) was introduced by the E.U. in order to prevent and deter the abuse of the 0% V.A.T. rate on intra-community transactions (sales from a company based in one EU member state to a company based in another EU member state).

Any V.A.T. registered entity who sells goods or services to a V.A.T. registered entity in another member state is required to declare all the intra-community sales made during a calendar month. It is therefore the responsibility of the agent to maintain records of V.A.T. registered customers’ V.A.T. numbers.

Capital Gains Tax:

In Cyprus there is no capital gains tax for securities / financial instruments, making the Island Ideal to set up Financial Services Entities.

Exemption – There is a 20% capital gains tax on real estate. Also the sale of shares of a company that owns real estate are subject to capital gains tax.

If an individual sells his first property, or the property in which he resides, he is liable to an exemption from capital gains tax (but there is a ceiling to the amount that can be claimed as exempt).

Special Defence Tax:

Rent Income, Dividends, and interest Earned are all taxable under Special Defence Contribution.

Dividends Earned by Cyprus Residents (note: they don’t have to be Cypriot Nationals) are taxed at 15%. Dividends paid from one company to another are not taxed. Dividends paid to non residents are not taxed.

Interest Earned on Deposits is taxed at 10%

Exemptions: Interest Earned from Government Bonds, deposits with semi-government entities etc (example housing Finance Organization) is taxed at 3%. Physical Persons who’s Income is less than 7,000 EUR per annum are exempt.

Note: Interest earned from the normal Operations of a business, example late payment interest on invoices, is not considered interest.

Rent Income is taxed at 3%.

Special Category – if Company Directors have balances with their companies (borrowed money from the company) the government assumes that the company earns 9% interest on these loans, and this interest is taxed at 10%.

• How it is paid

Companies that pay interest / Dividends are obligated to estimate the tax playable and pay it (SDC is always paid at source).

• Compliance

Individuals that earn dividends, Rent Income, should include them in their annual income declaration form. Companies should prepare and declare dividends payment form.

International Aspects of Cyprus Taxation:

• Anti-avoidance regulations are enforced. Cyprus Tax Code follows OECD Recommendations.

• Transfer Pricing – There is no specific legislation in Cyprus tax code. However, arm’s length test will apply to related party transactions.
• Double Taxation Agreements – see below

Annual Reporting Requirements:

Cyprus International Companies are required to comply with the following:

• Financial Statements:

Every company must prepare a full set of financial statements in accordance with International Financial Reporting Standards

• Annual Return:

Annual return must be submittedn to the Registrar accompanied by the full set of financial returns

• Audit

• Every Cyprus Company is obliged to appoint a local qualified auditor to audit the financial records and submit an annual financial report to the authorities.
• A copy of the audited financial statements together with the Annual Report must be submitted to the Registrar of Companies. The Financial Statements are required to be prepared and submitted by 31st December the year following the year of company registration.

• Nominee director: An attorney in the formation country will act as nominee director of the company (to the outside) and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust). The director does not have any account authority.
• Nominee shareholder: a tax office in the formation country will act as nominee shareholder (to the outside) of the company and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust).
• Domicile of the company in the formation country: deliverable postal address, availability by telephone, telephone and fax, mail forwarding service
• Account opening: bank account for the company at a renowned major bank in the formation country, internet banking, VisaCard and cheques. Only the founder of the company is authorized to have access to the account.
• General power of attorney to the founder: Only the founder receives a notarially certified general power of attorney for the company.
• Recommendation of a renowned tax office in the formation country, for book-keeping and accounting
• Internet-homepage of the company hosted on a server in the formation country: 5 pages for presentation of services/products, feedback form, imprint, e-mail address. May be extended at any time.

Company formation Cyprus: Our Services within the scope of the Formation Package “Cypriote Limited"

·    Please note that our formation package contains the tax identification number and the value added tax ID number, accounting, annual financial statement, as well as the preparation of the annual return and advance turnover tax returns. As such, the otherwise substantial fees associated with a Cypriote tax accountant do not apply (of course your collaboration is required: Presorting of the invoices, cash journal, bank statements etc…) In addition, our formation packages contain:

·    Account opening in Cyprus and Delivery and Shipping Service for letters / invoices!

·  Formation / Consulting by Tax Accountants and Attorneys at Law

·   No “Formation Director” or “Formation Shareholder” Moreover a Cypriot is the Director; the Director is registered and is reachable during the entire agreement term. Provision of Nominees via a Cypriote Law Firm, no “Figurehead Directors”.

·   No "Help with the opening of a bank account” on Cyprus (which as a rule means that an account is not opened) rather guaranteed account opening, incl. VisaCard and online banking. You do not have to travel to Cyprus.

·   Serviceable postal address, also for registered mail, no post office box

·   Upon request free within the scope of the total package: Swiss company and / or personal account at a major Swiss private bank. Our clients are not required to open a branch office in Switzerland, to open a company account in Switzerland, (otherwise a prerequisite). A Swiss account could, for example, be used to “securely park and multiply” Cypriote dividends. 

Stock Capital: The recommended authorized capital amount is CYP£ 1,000, unless you wish to commit a larger amount. The business of the company is not restricted to the amount of the authorized capital. The minimum amount of authorized stock capital for the registration of a Ltd. is CYP£ 1,000. In the event, however, the company opens an office in Cyprus (commercially structured organization), the minimum amount is CYP£ 10,000. We would like to point out the fact that this amount does NOT have to be blocked on Cyprus.

Company formation Cyprus: Configuration at the Formation of a Cypriote Limited

1.    Director on Cyprus

A production site, a site for the exploitation of mineral resources or construction works whose duration is greater than 9-12 months always constitutes the establishment of a place of business in Cyprus, irregardless of “the place of managerial supervision”.  Otherwise a taxable permanent establishment is defined analogous to Article 5 DBA (Double Taxation Agreement) according to the “place of managerial supervision”.   Either you - or an agent – relocate your ordinary residence to Cyprus and act as the Director of the Cypriote Limited OR you hire a Cypriote as a Director OR our Law Firm in Cyprus provides for a Nominee Director. By the way, we also provide the possibility to our clients, that a Cypriot acts as an “employed Director” of the Cypriote Limited, with an employment agreement between the Cypriote Limited and the Director, as well as the payment of payroll tax and social security contributions. 

Alternative: The non-Cypriote client / founder himself acts as the Director of the company and provides proof that he routinely travels to Cyprus to perform the required ordinary managerial duties (however, this is not feasible in the case of the necessary day-to-day decisions).

2.    Shareholder of the Cypriote Limited

The shareholder is due the profits after taxes (dividends). In addition, the shareholder is the owner of the company. Shareholders of a Cypriote Limited can be natural persons, or domestic or foreign companies.

In the event a Cypriote is a shareholder a 15% defense tax is due, when the dividends are distributed or if no dividends are distributed for a period of two years. For this reason we offer a „Nominee Shareholder“ within the scope of our services, more specifically our English Tax Accounting Firm acts as the Nominee Shareholder.

Cyprus provides the advantage, that dividend distributions to a non-Cypriote is not taxed. There are exceptions to this arrangement, which we would like to explain in more detail in a personal setting.

To the extent the client / founder or his company would like to act as the shareholder himself, the following factors are to be observed:

-Does your country have laws analogous to the „taxation of fictitious distributions“, comparable to those in Germany and the USA? Such laws result in the Cypriote dividends being taxed at the shareholder, even if they are not distributed. This is subject to the prerequisites, that the client / founder owns more than 50% of the shares (majority shareholder) and the Cypriote Limited located on Cyprus only generates passive income.  In the event such laws exist within the European Union, this is illegal, based on the findings of the European Court of Justice.

If this is the case, the client / founder should “officially” only hold a maximum of 50% of the shares, the other shares should be held on a trust basis.

- Does the EU-Parent-Subsidiary- Directive apply? In the event the shareholder is a company located in the EU and should the company hold at least 15% of the shares of the Cypriote Limited and both companies (Cypriote Limited and Shareholder) are active companies and the interest is evidently set up for at least one year, then the dividends are distributed tax free to the foreign shareholder  due to the EU Parent Subsidiary Directive.

Example:

A Danish corporation is the 100% shareholder of a Cypriote Limited. The Cypriote Limited is first taxed at a 10% rate. The dividends (earnings after taxes) distributed to the Danish corporation are tax free.  Such dividends are first taxed in the event they are distributed to the shareholder of the Danish corporation, provided such shareholder is an individual.

Please consider, that it is not mandate of a Cypriote Limited to distribute dividends. Moreover, the Cypriote Limited can make investments across the globe, for example: purchase a house in Spain.

Company Formation Cyprus: Comparative Overview of Services:

Service	ETC	Competitors
Lawyer’s office in Cyprus takes charge of setting up the company	YES	Not as a rule
Tax arrangements through tax consultants specialising in international tax law*	YES	Not as a rule
Proper registered office can be set up**	YES	Not as a rule
Essential "documentation" required to be presented in accordance with Cypriot law are provided free of charge (Draft contracts, free agreement, staff contract, accounting documentation etc...)	YES	Not as a rule
A trust director can be appointed who will sign contracts on behalf of the company***	YES	Not as a rule
Swiss deposit account  included in the package free of charge	YES	Not as a rule
If setting up an agency or a branch office outwith Cyprus and trust services: carried out by the director of the Cypriot limited company ****	YES	Not as a rule
Opening of an account in Cyprus guaranteed, client does not need to travel to Cyprus***	YES	NOT the case with many “agencies”
Certificate of residence from the Cypriot tax office in the case of trust services****	YES	NO
Setting up of an offshore company as a shareholder of theCypriot  limited company in order to conceal the true circumstances surrounding ownership (if a trust shareholder is not desired), at the same time "G20-proof"	YES	Not as a rule
Bookkeeping, VAT registration, annual accounts, tax consultants are English-speaking	YES	Frequently not the case
EU merger-directive measures, that is with regard to the merging of companies, for example	YES	Not as a rule

* In the case of most providers what is involved are agencies that simply set up companies, that is ones with no tax consultants specialising in international tax law.

**Proper registered office: merely having a registered office and/or "letter-box" is not a proper place of business in this sense.  ETC will set up a virtual office up to and including the provision of a reasonable office solution in Cyprus on request.

***Most providers only appoint a trust director who does not sign any contracts on behalf of the company outwith the statutory regulations. There is hereby a risk that must be assumed that the senior management of the company is not located in Cyprus (5 DTA: location of the senior management as the location of the business premises provided that there is no production facility in Cyprus, no construction work lasting longer than 6-9 months or a site for the exploitation of mineral resources in Cyprus).

**** ETC guarantees the opening of an account in Cyprus. The client does not need to travel to Cyprus in order to open the account.

**** The competent tax office for the client can demand a certificate of residence from the Cypriot tax office in order to guarantee that what is involved in the case of the Cypriot company is not just a sham company in this sense (an intermediary company in order to illegally get out of being subjected to domestic taxation).

Company Formation Cyprus: Offices - Nicosia Jacovides Tower

Jacovides Tower is a stylish modern building in the business district, five minutes from the centre of Nicosia, with many banks, government offices, ministries, clinics and embassies in the area. Nicosia is the largest city in Cyprus and part of the prosperous Greek Cypriot economy. Cyprus has an open, free-market, service-based economy with some light manufacturing. Its capital is a trade centre and manufactures textiles, leather, pottery, plastic, and other products, with copper mines nearby. The city is also the seat of the University of Cyprus and four other universities. Nicosia’s economic development focuses on services, tourism, and high-technology. The government is working to make Cyprus a regional hub of advanced telecommunication services. One project involved a submarine fibre-optic cable system through Cyprus connecting to Israel, Syria, Lebanon, Egypt, and Greece.

Location

• City/Town centre
• Major transport links

On Site

• 24 hour access
• Business Lounge
• Meeting Rooms
• Parking
• Lounge area
• Disabled facilities
• Elevator

Technical Facilities

• Videoconferencing studio
• Voicemail

People Services

• Vending Machines
• Smoking Areas