When it comes to doing business in Cyprus, one of the key decisions entrepreneurs and professionals face is choosing between self-employment and forming a company. Both options have their own advantages and challenges, and the right choice depends on various factors, such as the scale of planned activities, tax obligations, level of responsibility, and growth objectives.
Cyprus attracts businesspeople from around the world due to its favorable tax climate, straightforward registration procedures, and high living standards. However, before deciding whether to register as self-employed or to create a company, it is crucial to carefully consider the different aspects of each option.
Self-employment may be an ideal choice for individual professionals who want to work independently, avoiding the complex registration and administrative procedures. On the other hand, forming a company can offer more opportunities for growth, attracting investors, and managing risks, but it also comes with more complex tax and administrative obligations.
In this section, we will examine the main factors to consider when choosing between these two forms of business in Cyprus. We will discuss how each option affects taxation, administrative responsibilities, risks, and opportunities for scaling the business. This information will help you make an informed decision that aligns with your long-term business goals and personal preferences.
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Self-Employment in Cyprus
Self-employment in Cyprus is a popular choice for individual entrepreneurs, consultants, freelancers, and specialists who wish to work for themselves while maintaining maximum flexibility and minimizing bureaucratic procedures. This path is particularly attractive to those who seek independence and do not plan to create a complex corporate structure.
Registration Process for Self-Employment
Registering as self-employed in Cyprus is relatively simple and involves the following steps:
Registration with the Social Insurance Service (SIS)
The first step is to register with the local branch of the Social Insurance Service, where you will be assigned a social insurance number. This number is required for paying social contributions.
Obtaining an Individual Tax Identification Code (TIC)
After registering with SIS, you must obtain an individual tax identification code from the tax office. This number is used for all tax operations related to your activities.
Registration for VAT
If your annual income exceeds €15,600, you are required to register as a VAT payer. VAT returns are submitted quarterly.
Taxes and Contributions for the Self-Employed
Self-employed individuals in Cyprus are required to pay income tax and social contributions. The tax system in Cyprus is progressive:
- Income up to €19,500 is not taxed.
Income from €19,501 to €28,000 is taxed at 20%.
Income from €28,001 to €36,300 is taxed at 25%.
Income from €36,301 to €60,000 is taxed at 30%.
Income over €60,000 is taxed at 35%.
Social contributions amount to 16.6% of income and are paid quarterly. Additionally, self-employed individuals must contribute to the National Health System (GESY) at a rate of 4% for EU citizens and 2.65% for non-EU citizens.
Legal and Administrative Aspects
Not all residents of Cyprus can obtain self-employed status. Only EU citizens, family members of EU citizens, holders of a Long-Term Residence Permit or their spouses, and Ukrainian citizens under temporary protection are eligible.
Moreover, self-employed individuals with an annual turnover exceeding €70,000 are required to submit audited financial statements. These reports must be prepared by a licensed auditor in accordance with international standards and submitted along with the tax return. This requirement aims to enhance transparency and compliance with financial regulations.
Advantages and Disadvantages of Self-Employment
Advantages
Ease of Registration and Administration
The process of registering as self-employed in Cyprus is relatively simple, with minimal administrative obligations.
Flexibility
You manage your own time and work, giving you greater freedom in choosing projects and clients.
Low Maintenance Costs
Unlike companies, self-employed individuals do not need to bear the costs associated with maintaining a corporate structure and fulfilling complex accounting requirements.
Disadvantages
Personal Liability
Unlike a company, a self-employed individual bears full personal responsibility for their obligations. This means your personal assets could be at risk in case of debts or lawsuits.
Limited Growth Opportunities
Scaling a business as a self-employed individual can be challenging due to limited opportunities for attracting investment and resources.
Audit Requirement with High Turnover
If your income exceeds €70,000 per year, you are required to conduct an audit, which incurs additional costs.
Thus, self-employment in Cyprus is an excellent choice for those seeking simplicity and flexibility, but it also comes with certain risks and limitations that must be considered before starting.
Establishing a Company in Cyprus
Setting up a company in Cyprus is an attractive option for entrepreneurs seeking a structured approach to business, with opportunities for scaling and attracting investment. This is particularly relevant for third-country nationals who can serve as shareholders and directors of companies in Cyprus but are not permitted to work as self-employed individuals without a special work permit.
Key Steps to Setting Up a Company
The process of establishing a company in Cyprus includes the following steps:
Choosing the Type of Company
The most common type is a limited liability company (Ltd), which limits the personal liability of the founders to their contributions to the company’s capital. This form is also the most flexible and suitable for various types of activities.
Company Registration
To register a company, you must apply to the Cyprus Registrar of Companies. The registration process includes:
- Approval of a unique company name.
Preparation and submission of incorporation documents, such as the Articles of Association and Memorandum.
Payment for the services of a licensed lawyer for company formation, which typically costs from €1,200 plus VAT. It is not possible to open a company in Cyprus independently.
Obtaining a Tax Identification Number and VAT Registration
After company registration, it is necessary to obtain a Tax Identification Number (TIN) and register for VAT (obtain a VAT number) if the company’s annual income exceeds €15,600.
Opening a Bank Account
To manage the company’s financial operations, it is recommended to open a corporate bank account, which will allow you to clearly separate personal and business assets.
Taxation and Other Financial Obligations for Companies
Companies in Cyprus may benefit from favorable tax regimes (such as the IP-Box regime), making the country an attractive place to do business. Additionally:
Corporate Tax
Cyprus has one of the lowest corporate tax rates in Europe—12.5% on company profits, making it advantageous for entrepreneurs.
Dividend Tax
Dividends paid to shareholders with non-domicile status are exempt from taxation for non-residents, which is a significant advantage for international investors. However, there is a contribution to the GESY fund at a rate of 2.65%.
Audit Reporting
All companies in Cyprus are required to submit an annual audit report, even if they are small businesses. The cost of audit services typically starts at €1,000 plus VAT and can increase depending on the complexity and volume of the company’s activities.
Advantages and Disadvantages of Establishing a Company
Advantages
Protection of Personal Assets
A company is a separate legal entity, which limits the personal liability of the founders for the company’s obligations.
Opportunities for Growth and Scaling
A company can attract investors, take out loans, and issue shares, which simplifies the process of scaling the business.
Favorable Taxation
Low corporate tax rates and the absence of dividend tax for non-residents make Cyprus an attractive destination for international business.
Disadvantages
More Complex Administrative Requirements
Running a company requires strict compliance with legal regulations, regular reporting, and maintaining proper accounting records.
Costs of Establishing and Maintaining a Company
In addition to registration fees, companies are required to pay for annual audit services and other administrative expenses, which increases the overall cost of doing business.
Comparison: Self-Employment VS Companies in Cyprus
Deciding whether to register as self-employed or to establish a company in Cyprus requires careful analysis of multiple factors. In this section, we will compare key aspects such as taxes, administrative duties, growth opportunities, and risks associated with each of these options.
Financial Aspects: Taxes, Contributions, Maintenance Costs
Taxes
Self-Employment
Self-employed individuals in Cyprus are taxed on a progressive scale: income up to €19,500 is tax-free, while income above €60,000 is taxed at a rate of up to 35%. Social insurance contributions amount to 16.6% of income, plus 4% (or 2.65% depending on the individual’s nationality) contributions to GESY. If self-employed individuals are registered for VAT (for income over €15,600), they are also required to submit quarterly VAT reports.
Company
Companies in Cyprus pay a fixed corporate tax rate of 12.5% on profits. Dividends paid to non-residents and individuals with “non-domicile” status are exempt from dividend tax; however, such individuals must contribute 2.65% of the dividend amount to GESY. Companies registered for VAT are also required to submit quarterly reports.
Maintenance Costs
Self-Employment
Self-employed individuals who register as VAT payers are advised to use an accountant to manage their records and file returns. The cost of VAT accounting services starts at €100 per quarter and may increase depending on the volume of work. If the annual turnover of a self-employed individual exceeds €70,000, an audit report is required, which incurs additional expenses.
Company
Establishing and maintaining a company in Cyprus involves higher costs. Company registration starts at €1,200, and the annual audit report costs €1,000 or more. As with self-employed individuals, companies that are VAT payers must regularly submit quarterly reports, and it is also recommended to hire an accountant for this purpose. Often, the auditor also provides accounting services.
Administrative Duties and Management Complexity
Self-Employment
Managing as a self-employed individual requires less administrative effort compared to running a company. However, the self-employed person is fully responsible for all aspects of running the business, including paying taxes, maintaining accounting records, and, if necessary, submitting audit reports.
Company
Companies in Cyprus are subject to stricter administrative requirements, including mandatory accounting, tax return submission, and annual audits. Running a company requires a higher level of management and generally involves additional expenses for legal and accounting services.
Growth and Business Scaling Opportunities
Self-Employment
Self-employed individuals have limited opportunities for scaling their business. It may be more challenging for them to attract investments and expand their operations, as they operate in a personal capacity without the ability to issue shares or secure large loans.
Company
Companies in Cyprus have greater opportunities for growth and scaling. They can attract external investments, issue shares, take out loans, and expand into international markets. The corporate structure allows for easier management of resources and the attraction of capital for business development.
Risks and Liability
Self-Employment
Self-employed individuals bear full personal responsibility for all obligations of their business. In the event of debts or financial problems, the personal assets of the self-employed individual may be used to cover liabilities.
Company
In the case of a company, the personal assets of the founders are protected, as the company is a separate legal entity. The founders are only liable to the extent of their contributions to the company’s capital, which significantly reduces personal risks.
Choosing between self-employment and establishing a company in Cyprus depends on your business goals, the scale of your activities, and your willingness to take on administrative and financial obligations. Self-employment offers more flexibility and simplicity, whereas establishing a company provides access to greater growth opportunities and asset protection. Regardless of the path chosen, it is important to carefully assess your needs and resources to ensure successful business operations in Cyprus.
