Cyprus offers a very attractive base for setting up a company. With a tax rate on corporate profits of only 12.5%, one of the lowest in the European Union, the Mediterranean island is increasingly attractive to international business people who look for better alternatives for their corporate matters. Moreover, Cyprus has secured double tax agreements with more than 60 countries, ensuring protection against the risk of double taxation for the same income in two states and providing assurance of an aligned treatment for cross-border trade.
Setting up and leading a business in Cyprus is beneficial as the island has a modern, free-market, service-based economy giving both international investors and domestic businesses the confidence to invest, grow and prosper.
Generally, the procedure of establishing a company in Cyprus is a straight forward one, for both EU and non-EU citizens. Moreover, foreign investors in Cyprus are also given the unique opportunity to obtain a Permanent Residence Permit and even Cyprus citizenship. It’s important to note that there are no specific requirements for foreigners wishing to establish a business presence in the country.
The Procedure for Company Formation
The majority of companies incorporated in Cyprus are private limited liability where the liability of the shareholders is limited to the amount unpaid on their shares. The law regulating this procedure is Cyprus Companies Law, CAP 113 which is based on the Companies Act 1948 of the United Kingdom and applies both to Private and Public companies.
Legal Forms of Corporate Entities in Cyprus:
– Cyprus Company
– Branch of a Foreign Company
– Sole Proprietor
– Cyprus International Trust
First step: finding a service provider in Cyprus
Cyprus company formation and company registration require a licensed service provider to undergo thorough due diligence and compliance, based on rules of the EU.
The starting point of the procedure, for both residents and non-residents, is to appoint a lawyer/service provider who would also act as a registering agent and proceed with the preparation of all the necessary documents for the registration of the Cyprus Company.
An essential point to be noted is that, according to the Cyprus law, only lawyers licensed by the Cyprus Bar Association are allowed to prepare and sign the Memorandum, Articles of Association of the company and the HE1 form. As such, the legislation does not make any distinction between residents and non-residents, as both have to appoint a service provider. Our team is specialized to help you with this process.
Approval of the company name
The procedure of a Cyprus Company registration begins with an application for registering a company which is to be submitted to the Registrar of Companies. Formal approval to use the name is required from the Registrar before the name can be used. It is essential to be noted that as a matter of good practice, legal advisors in Cyprus usually maintain a number of company names which are already approved by the Registrar and are offered to clients for whom speed is of the essence. Moreover, the Registrar is allowed to object names and a name would not be accepted if it is misleading. Those who have decided to acquire a ready-made (shelf) company can later apply for a name change.
Memorandum of Articles and Association
Upon approval of the Company name, the applicant shall submit in detail information such as the activities of the company, the amount of the share capital, the internal regulations etc., to their lawyer to prepare the Memorandum of Articles and Association.
Cyprus companies usually have authorized and issued share capital of €1,000. However, there is no minimum share capital requirement for the incorporation of a Private Limited Company. Each subscriber to the Memorandum must subscribe for at least one share. For a Public Limited Company, the minimum share capital is € 25,629.
Surely, a paid capital which reflects the actual business is advisable for the financial standing of the company in Cyprus.
According to the law, each company should appoint at least one Shareholder, who can respectively be either a physical person or a legal entity. Except for the Shareholder, Cyprus Limited Companies also have to appoint at least one Director and one Secretary. If there is only one member, they may act as both the director and the secretary. Although there are no nationality requirements imposed on Directors, in order for the company not to lose its tax advantage of a low tax rate of 12,5%, it is recommended that the majority of Directors are of Cypriot Residence or foreigners living permanently in Cyprus.
It must be noted that the Registered Office of the Cyprus Company must be any address located in Cyprus and the address can be appointed at the service provider’s office as well.
Submission of documents at the Department of Registrar of Companies and Official Receiver
Once the company name has been approved by the Registrar, the following documents must be submitted for the registration of a Cyprus Company:
1. Declaration Form (HE1)
2. Declaration Form concerning the registered office address (HE2)
3. A form containing details on the Company Directors and Secretary (HE3)
4. Original Memorandum and Articles of Association which have to be signed by:
(a) the subscribers to the Memorandum whose signatures must be attested by at least one witness; and
(b) the lawyer who has drawn up the same.
Once the Certificate of Incorporation is obtained, all companies must register with the Tax Department in order to secure a tax identification number and a VAT registration number, as well as with the Social Insurance Services. The last step in incorporating a company in Cyprus is registering at the Ministry of Labor for the Social Contribution.
Substance in Cyprus
The concept of economic substance in tax planning is a continuously evolving and increasingly significant topic area in the global economy. The term “substance” is usually used to demonstrate real/physical presence of legal entities in their country of tax residence. The substance is commonly considered together with the tax residency test, and it is linked with the effective management and control of a corporation.
Due to the tax regulations, the business environment is becoming more challenging, and companies must adopt an appropriate structure to comply with the requirements concerning tax residency. As a consequence, adequate measures have to be taken in order to prove that the company is managed and controlled in Cyprus and that the substantive business operations are genuinely carried out in Cyprus. In order to support the tax residency position of the company, appropriate corporate governance procedures and indicators of substance should be in place.
Effective management and control mean that the:
· Registered office address is in Cyprus
· The majority of the Board of Directors are Cyprus residents
· Board Meetings are held in Cyprus
· Board Decisions are taken in Cyprus
Companies registered in Cyprus should also possess a real physical substance in the country in order to avoid further tax obligations in other jurisdictions.
Physical substance in Cyprus means that the company has:
- Its own physical office space
- Employment of staff to carry out the administrative management of the company
- Business activities are mainly undertaken from Cyprus
- Documentation of the decision-making process and administration of the company taking place in Cyprus
A trading company which implements all or some of the above will not only enhance its ‘substance’ but will also strengthen its Cyprus tax residency claim beyond any doubt.
Our law firm provides registered address services, Director’s and secretary’s services and serviced offices.
Who needs substance and why?
A Cyprus company demanding Double Tax Treaty benefits and having access to EU Directives needs to have sufficient substance in order to be able to benefit from those.
The main aim of a tax treaty is the avoidance of double taxation on the earned income.
Apart from the tax advantages and risk mitigation benefits, investors can also benefit from the significant incentives the Cypriot government has implemented in recent years for the attraction of foreign investors, such as the acquisition of citizenship on a fast track basis and the enactment of the non-domicile regime where individuals can obtain income from dividends, rent and interest completely tac free. Therefore, in order to minimize the risk of denial of Double tax treaty benefits, it is essential to create a sufficient substance in Cyprus.
The global trend in relation to commercial companies, involving the establishment of an entirely operational commercial set-up with offices, employees and qualified managers doing real work clearly seems to be gaining ground in Cyprus too.
How can we help?
As the information is general, and the legislation is subject to change we strongly encourage you to contact our office to obtain detailed and updated advice specific to your own circumstances.
Our law firm can assist you from A to Z to establish your presence in Cyprus.