At the crossroads of three continents, Cyprus, with its favorable tax and legal environment, has emerged as major European business hub. In this special feature, we summarize the rules and regulations governing the formation and operation of a company in Cyprus, corporate tax obligations for companies registered in the jurisdiction as well as the island’s anti-money laundering requirements.
The island of Cyprus is situated at the eastern end of the Mediterranean Sea, between the three continents of Europe, Asia and Africa. Of its population of just under 1.2 million, nearly 900,000 of whom are ethnically Greek and overwhelmingly live in the southern part of the island, known officially as the Republic of Cyprus. The remainder of almost 300,000 are Turkish Cypriots and Turkish immigrants, who live in the northern part of the island, claimed by them to be the Turkish Republic of Northern Cyprus, though this is not recognized internationally. The two zones are separated by a UN-supervised buffer zone.
The official languages in the two zones are Greek and Turkish, but most Cypriots speak English, which is extensively used in business and commerce. The main cities are Nicosia, the capital and business centre, Limassol, Paphos and Larnaca, these last three being coastal cities around which the important tourist industry is concentrated.
The island’s location has ensured that it has played a full part in Mediterranean history. Its essentially Greek culture is leavened by many other influences, the most important of which has probably been that of the British, whose stay has substantially contributed to the island’s Western business environment.
Cyprus has an excellent business infrastructure with good telecommunications; this coupled with the widespread use of the English language and a legal system largely based on English law makes the island a very convenient and effective business base.
Cyprus has a market economy dominated by the service sector, which accounts for more than four-fifths of GDP. Tourism, financial services, shipping, and property have traditionally been the most important sectors. Cyprus has been a member of the EU since May 2004 and adopted the euro as its national currency in January 2008.
Cypriot Company Law
Companies in Cyprus are formed under the Companies Law (Cap. 113) which is largely based on the English Companies Act 1948. However, this law underwent a major revision in 2003 and in subsequent years to bring Cypriot company law into line with European directives in preparation for Cyprus’s accession to the EU, which took place in 2004.
The Companies Law provides for the formation of five company formats, as follows:
- Private and public limited liability companies (Cypriot companies can also be limited by guarantee)
- General and limited partnerships
- Sole proprietorships
- European companies (societas Europeas)
- Branches of a foreign company
The overwhelming majority of business registrations in Cyprus are in the limited company form.
The limited liability partnership(LLP) format was introduced in Cyprus by Law 144(I)/2015, which amended the Partnerships and Business Names Law, Cap. 116. The new Cyprus LLP has similar characteristics to a Luxembourg Special Limited Partnership, or SCSp, and is expected to appeal to collective investment funds in particular.
In addition to law changes made by the Cypriot government, there are those made in order to comply with EU directives and regulations. The most recent of these was Law N. 51 (I)/2017, which came into force on 1 January 2018 in compliance with EU directives 2014/95/EU and 2013/34/EU. The new law requires ‘large undertakings’ such as banks and insurance companies to provide policy information relating to social, environmental and human rights issues.
Characteristics of a Cyprus Company
A private limited company requires at least one director and a company secretary. Directors and company secretaries can be physical or legal persons and of any nationality. In certain cases, a director may also act as a company secretary.
The Companies Law stipulates that there must be at least one shareholder, and while nominee shareholders are permitted they must be licensed. Shareholders are legally required to hold an annual general meeting, but other shareholder meetings may be held via a resolution in writing. The registered office of the company must be in Cyprus.
The 2016 law changes also introduced the categorization of companies according to size-based criteria.
To be deemed small, a company must fulfill at least two of the following three criteria:
- Total gross assets:4 million or less
- Net turnover: 8 million or less
- Average number of employees: less than 50.
To be deemed medium-sized, a company must fulfill at least two of the following three criteria:
- Total gross assets: 20 million or less
- Net turnover: 40 million or less
- Average number of employees: less than 250.
If a company exceeds at least two of the above criteria, it is deemed large.
As another result of the 2016 law change, small companies must now submit to a statutory audit (see ‘Company Audits’ below).
Any physical or legal person, whether of EU origin or not, is permitted to form a company in Cyprus. The process begins with the registration of a company name with the registrar of companies either directly by the applicant or by engaging the services of a lawyer or corporate services provider. The registrar’s website contains a search facility to establish whether the intended company name is already in use.
However, under Cypriot legislation, only a lawyer licensed by the Cyprus Bar Association is allowed to prepare the memorandum and articles of association, and the declaration form that must be submitted to the registrar of companies. While corporate service providers regulated under Cypriot legislation (“regulated firms”) can form a Cyprus-based company on behalf of an applicant, they do so in cooperation with lawyers in order to fulfill the regulatory requirement concerning the lawyer’s role.
Applicants are required to submit the following information to enable the company registration to be processed:
- A brief description of the main objects of the company, unless the standard memorandum and articles of association are to be used;
- The amount of nominal share capital and how it is divided (for a public company there is a minimum share capital of 25,629);
- The names, addresses and passport details of the proposed directors and secretary of the company;
- The proposed registered address of the company;
- Certified copies of the passports of the ultimate beneficial owners of the company;
- Bank or other references on the good standing of the ultimate beneficial owners;
- The chain of ownership behind the Cyprus company up to and including the ultimate beneficial owners; and
- Any other information necessary to satisfy the requirements of the ‘Know Your Customer’ rules in order to comply with the Anti-Money Laundering Law (see below).
Additionally, four documents are required by the registrar to complete company registration, as follows:
- Declaration Form (HE1)
- Declaration Form concerning the registered office address (HE2)
- Form containing details on the company directors and secretary (HE3)
- Original memorandum and articles of association which should 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.
Applicants are required to pay various fees to the registrar of companies, including: a fee of 105, plus subscription tax of 0.6 percent of nominal share capital; and fees of 60 for the submission of forms HE1, HE2 and HE3. A fee of 100 applies if the accelerated registration procedure is used.
The processing and approval of the company name by the registrar usually takes about 2-5 working days, with another 2-5 days required to process the application itself. However, a fast-track procedure is available, whereby an applicant can purchase a shelf company one which has already been registered by a Cypriot legal firm or service provider. Changes to the company’s particulars, such as directors or shareholders, can be made by submitting the relevant forms to the registrar, either at the time the shelf company is purchased or at a later date.
All companies must register with the Inland Revenue Department and obtain a tax identification number (see below for tax obligations and administration requirements). They may also need to register for value added tax (VAT), as well as with the employers’ register of the social insurance services. Registering for income tax, VAT and social insurance usually takes approximately 1-2 working days, so long as there are no errors or omissions in the information provided.
As from 2011 all limited companies registered in Cyprus are liable for an annual levy of 350 which must be paid by 30th June each year. A20,000 cap applies for groups of companies. Penalties are imposed for late or non-payment of this levy, starting at 10%for payments made up to two months after the deadline, and rising to 30% for those up to 5 months late. Companies refusing to pay the levy after five months will be struck off the companies register by the registrar of companies. They can be reinstated with a payment of 500 within two years or 750 after two years.
Company Audits: Statutory Obligations
From 2016, all Cyprus companies have been subjected to statutory audit with no exceptions (small companies were previously exempt.)A Cyprus company has the following two statutory obligations with respect to the audit of its financial statements:
- A company must submit its audited financial statements to the registrar of companies in Greek or English, by attaching them to the annual return of the corresponding year. These financial statements must be prepared on an annual basis, except for the first financial statements of a company which can cover a period of up to 18 months from the date of the company’s incorporation. Companies with subsidiaries are required to file consolidated financial statements with registrar of companies, unless specifically exempted under the Companies Law.
- A company must submit its annual tax return to the Inland Revenue authorities on a calendar year basis. Annual tax returns must be supported by the audited separate (non-consolidated) financial statements of the company.
Companies without subsidiaries may submit a single set of audited financial statements to satisfy both statutory obligations. However, where consolidation is required, a company should prepare a set of consolidated financial statements for the purposes of the registrar of companies and a set of separate (non-consolidated) financial statements for the purposes of the Inland Revenue.
One of the main reasons why foreign investors choose to locate a company in Cyprus is its favorable tax regime, at the centre of which is its low rate of corporation tax, which at 12.5% remains one of the lowest in the EU. There is also a special defence contribution (SDC), which is payable on passive interest income at a rate of 30% and on certain dividends at 17%.
Besides a low flat rate of corporation tax, Cypriot legislation provides tax exemptions on the trading and disposal of securities and on dividends (subject to certain conditions), tax-neutral group reorganizations, tax relief for group losses, tax credits for foreign tax, tax relief of 80% on intellectual property income and access to the EU parent/subsidiary directive. Unusually for a ‘low-tax’ jurisdiction, it also has an extensive network of double tax avoidance agreements.
Under Income Tax Law (Law No. 118(I) of 2002, as amended), companies resident in Cyprus are liable to income tax on their worldwide income. A company is considered tax resident in Cyprus if it demonstrates that it is managed and controlled in Cyprus. Although this requirement is not defined as such by the Companies Law, it is generally satisfied if the majority of the individuals who make up the board of directors are Cyprus residents and board meetings take place in Cyprus.
Companies deemed non-resident in Cyprus are liable for tax on their Cyprus-sourced income only. However, non-tax residents having a permanent establishment in Cyprus may elect, if it is to their benefit, to be taxed in accordance with the provisions applicable to tax residents. The income liable to income tax includes (but is not limited to) business profits, interest derived in the ordinary course of business, royalties, rent from property and any consideration for the trading of goodwill.
Dividend income received by a Cyprus company is exempt from tax under Cyprus law, regardless of whether it is received from another tax-resident company, or from a non-resident company. Dividends paid by a Cyprus company to any non-residents of Cyprus are also exempt from withholding tax, irrespective of whether the recipient is a company or an individual.
Business profits of a Cyprus resident company derived directly or indirectly from a permanent establishment outside Cyprus are exempt from both the SDC and income tax. However, this exemption does not apply when the activities of the paying company lead to investment income exceeding half of the total income or when the foreign corporation tax rate is less than half that of the Cypriot one, i.e. less than 6.25%.
Dividends received by a Cypriot resident company, if paid out of profits that are more than four years old, are also liable for the SDC at a rate of 17%. The SDC also applies to dividends paid to resident individuals at the same rate.
A dividend paid by an EU subsidiary is received by the Cyprus holding company without any withholding tax on the basis of the EU Parent-Subsidiary Directive, provided that the parent company holds at least 10% of the subsidiary’s shares and is located in an EU member state. Where these conditions are not met, withholding tax may be reduced under a double tax treaty. In any case, Cyprus generally grants a universal tax credit against foreign taxes paid, regardless of whether a tax treaty exists. However, treaty benefits will apply in circumstances where they are more beneficial that tax credits.
There is no withholding tax on interest payments to non-residents, but as mentioned above, interest paid to residents is subject to SDC at 30%.
Royalty payments between resident taxpayers are not subject to withholding tax. Meanwhile, royalty payments to non-resident taxpayers are subject to a withholding tax of 5% if the royalties derive from the use of film rights and 10% in all other cases. This tax may be reduced under the EU Interest and Royalties Directive or by means of a tax treaty. Fees paid to a non-resident for technical services are subject to withholding tax at 10%, unless reduced under a tax treaty.
Tax Filing and Payment
Company tax returns must be filed in respect of each financial (calendar) year by 31st December in the year following the financial year, together with balance sheet and profit and loss account, auditor’s report, income tax and SDC calculation and additional information report.
Self-assessment operates, and corporate income tax payments are due on 1 August for the previous year’s final tax. Fines apply to late or materially faulty self-assessments; from 1 January 2014, this fine was 5% of the unpaid tax plus interest, currently set at 4%.
All tax returns submitted by companies and sole proprietors with an annual turnover of more than 70,000 must(a) be submitted electronically and (b) be accompanied by a tax confirmation, prepared and signed by an independent tax advisor or auditor.
Anti-Money Laundering Laws
Cyprus has had anti-money laundering (AML) legislation in place for more than 20 years; this has been strengthened in recent years to bring it into line with EU directives. Cyprus has also ratified international AML conventions including the UN Convention Against Transnational Organized Crime, the UN Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention). Cyprus has been rated as ‘compliant’ with 17 and ‘largely compliant’ with 22 of the Financial Action Task Force’s 40+9 Recommendations.
The Prevention and Suppression of Money Laundering Activities Law (No. 61(I)/96) was enacted by Cyprus in May 1996; it criminalized money laundering from all serious crimes and provided for the confiscation of criminal proceeds. It also codified actions that banks and non-bank financial institutions had to take, including customer identification (drug-related money laundering was criminalized by previously enacted legislation). The 1996 law also established the Unit for Combating Money Laundering (MOKAS), which became operational in January 1997.
The law places additional administrative requirements on all institutions, including banks, engaged in financial and designated non-financial activities. It requires all persons engaged in relevant financial and other business (banks, financial institutions, lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones) to establish and maintain specific policies and procedures to guard against their business being used for the purposes of money laundering and financing terrorism.
Specifically, these persons are required to implement customer identification and record keeping procedures, appoint compliance officers and offer training and education to their employees. These procedures are designed to achieve two objectives: firstly, the recognition and reporting of suspicious transactions to MOKAS through strict implementation of KYC procedures; and the creation of an audit trail for law enforcement agencies if a bank customer comes under investigation.
Subsequent amendments to this piece of legislation extended the list of predicate offences to include all crimes punishable with imprisonment in excess of one year and facilitated the exchange of financial information with other financial intelligence units as well as the sharing of assets with other governments.
The regulatory body in charge of implement EU AML directives is the AML Advisory Authority in Cyprus. On 20May 2015, the EU’s 4th Anti-Money Laundering Directive was officially adopted. EU member states were given two years to implement the directive in full. Cyprus aimed to achieve this via the Prevention and Suppression of Money Laundering Laws 2007-2013.
The deadline for transposition of the 4th AML directive was 26 June 2017. Cyprus was one of 20 EU member states which failed to implement the directive within the required time-frame. As with most of the other defaulting member states, Cyprus did not fully implement the 4th AML Directive because the territory found it difficult to set up a national registry of beneficial ownership.
On 15 May 2018, the EU launched the Fifth Anti-Money Laundering Directive, even though some countries had not at that time transposed the previous directive. The new directive, when implemented, will grant citizens access to information on beneficial owners of EU-based companies. In addition, those who request and can demonstrate a ‘legitimate interest’ will receive information on beneficial owners of trusts and other similar structures.
In April 2016, the Central Bank of Cyprus announced an update to its directive on the prevention of money laundering and terrorist financing. The amendment bolsters the “know your customer” principle and credit institutions’ obligations to verify the identity and economic profile of their customers through their own processes. It also strengthens the requirements regarding the handling of business relationships with third parties, on which the credit institutions depend for the execution of the identification procedures and due diligence of their customers, the Bank said.
The Central Bank of Cyprus said the amendments are part of continuous efforts to strengthen Cyprus’s regulatory framework, with the aim of enforcing a zero-tolerance approach to deficiencies or weaknesses that might lead to money laundering or terrorist financing or both. The amendments follow consultation with credit institutions operating in Cyprus.
In the Turkish-occupied northern part of the island (the self-declared Turkish Republic of North Cyprus, though this is not internationally recognized), the rule of law is considerably less developed is less regulation and control which makes the zone more vulnerable to money lending and other illicit activities such as smuggling.
In many respects, Cyprus can be said to have the best of both worlds. While EU membership means that the country has had to tighten up certain aspects of its legislative framework and strengthen the regulatory environment, the reputational effects of EU membership seem to have been largely positive. What’s more, it has been able to adapt its tax regime to ensure that it remains highly attractive to international investors. The thousands of companies that register in the jurisdiction each year are a testament to its enduring appeal.