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Cyprus
Company formation in brief
Cyprus was, is, and we will have the courage to assume - it will remain until the end of the "offshore era" one of the most popular destinations for entrepreneurs around the world who want to establish an international company or open a bank account.
However, you need to know that the concept of "offshore" for Cypriot companies has long gone down in history (as well as the Cypriot Pound has gone down in history, giving way to Euro) and, being a full member of the European Union, Cyprus has undergone in recent years, perhaps the largest the whole history of changes in your tax and corporate legislation.
The most common organizational and legal forms of enterprises that foreign investors choose to establish their business in Cyprus are as follows:
* Private company limited by shares
* Public company limited by shares
* Trust
Private company limited by shares has the following features:
• The minimum authorized capital of a company that does not have a deployed office in Cyprus is € 1,700;
• the minimum authorized capital of a company with a deployed office in Cyprus is € 17,000;
• The minimum number of directors is 1;
• The minimum number of shareholders is 1, and the maximum number is 50;
• The company is not entitled to offer its shares for public sale, and for transferring them to third parties it is necessary to obtain the consent of the majority of shareholders.
Public company limited by shares has the following features:
• The minimum number of directors is 2;
• The minimum number of shareholders is 7, and the maximum number is not limited;
• A minimum registered capital of € 25,650 must be paid at the time of registration;
• The company's articles of association must contain a detailed description of the rights and obligations of directors, as well as the procedures for their appointment and dismissal.
• The company has the right to list its shares on the stock exchange and can offer its shares for public sale.
• Under Cyprus company law, an offer of shares to more than 50 investors is considered a public sale. Such a proposal must be drawn up in writing in the form of a "prospectus" according to the model approved by law.
If the prospectus has not been issued, then the company is entitled to carry out economic activities if the following conditions are met:
(a) the Registrar of Cyprus Companies has been advised that the prospectus is not being issued;
(b) each director who subscribes to the shares of the company has paid them to the company in the amount determined for such purpose in the articles of association;
(c) the Registrar of Cyprus Companies is notified in writing that the conditions described in (a) and (b) above have been met.
An individual or legal entity, creating a Cyprus company of any form of ownership, can simultaneously hold the position of a shareholder and a director. In addition, the company must have a secretary who has the right to simultaneously be both a director and a shareholder of the company. Shareholders, directors and secretaries of Cyprus companies can be non-residents.
It is useful for a potential founder of a Cyprus company to know that a state duty is imposed on the amount of the authorized capital of the company, which, upon registration, is € 102.52 + 0.6% of the amount of the authorized capital, and for the subsequent increase in the authorized capital of the operating Cyprus company, 0.6% is charged on the actual amount of the increase in the authorized capital.
Cyprus companies are entitled to engage in any type of activity that is not subject to licensing, which include financial, banking, insurance and reinsurance services.
Every company in Cyprus is required to submit financial statements on an annual basis, for the preparation of which it is necessary to involve accountants and auditors licensed in Cyprus.
Article 2 of the Law of the Republic of Cyprus "On Income Tax" takes the following approach in relation to the concept of "resident of the Republic".
“Resident of the Republic”, as applied to an individual, means an individual who stays in the Republic for a period or periods that collectively exceed 183 days in a tax year that coincides with a calendar year.
Provided that a person does not reside for a period or periods exceeding 183 days in a tax year in any other country outside the Republic, [he] may elect to become a resident of the Republic if he can satisfy one of the following conditions:
(a) has resided in the Republic during the current tax year, and in the immediately preceding tax year for one or more periods exceeding 210 days, of which 90 days of stay in the Republic are at least in the current tax year, or
(b) cumulatively meets the following conditions:
(i) has been in the Republic for at least 60 days in the current tax year, and
(ii) carries on a commercial activity (business) or is employed or holds an office in the Republic during the current tax year.
Cyprus is a traditionally popular jurisdiction for establishing trusts.
Although the legislation of Cyprus, based on the English system of law, does not have a precise definition of the concept of "trust", this circumstance does not prevent the regulation of trusts in accordance with the Trust Law (Trustee Law, Chapter 193), understanding the following scheme of trust relations of this kind:
A) the duty of the “trustee” who owns the assets transferred in trust by the settlor.
B) manage these assets ("trust property")
C) in favor and in the interests of a third party (“beneficiary”).
The transfer of assets from the settlor of the trust to the manager, as well as the settlor's instructions for managing the assets, can be expressed both in writing in documents called “trust instrument” and “letter of wishes”, and (less often) orally.
An International Trust can only be established by non-residents of Cyprus in favor of beneficiaries who are non-residents of Cyprus (except in the case of a charitable trust). At least one of the Trustees is required to be a resident of Cyprus. The founder, manager and beneficiaries have the right to be both natural and legal persons.
A Cyprus trust can be created in one of the following forms:
• PRIVATE TRUST, in which beneficiaries have the right to flexibility regarding the terms of the trust in the course of its life;
• EXPRESS PRIVATE TRUST, which differs from the previous one in that the will of the founder is initially expressed very evenly and does not change afterwards;
• RESULTING TRUST, the terms of which are flexibly determined by the results of personal relationships between the founder and beneficiaries;
• CONSTRUCTIVE TRUST, the terms of which provide for the account of each individual intention of the manager;
• IMPLIED TRUST, which can combine and take into account the conditions of the two previous forms - RESULTING TRUST and CONSTRUCTIVE TRUST;
• CHARITABLE TRUST. Although there is no clear definition of the concept of “charity” in the legislation of Cyprus, this kind of trust is usually established for religious and educational purposes and in the interests of a large group of persons united by some kind of humanitarian interest;
• FIXED TRUST, which severely restricts investments, in which the income or share of the beneficiaries is predetermined by the terms of the trust agreement;
• DISCRETIONARY TRUST, in which the trustees have the power to decide whether to distribute income among beneficiaries, and if so, between which ones and in what quantity. It is clear that the trustees have a duty to act in the best interest of all beneficiaries and therefore must treat them all as a whole.
International trusts, as such, are not subject to taxation in Cyprus, however, trustees must carefully monitor the tax status of the beneficiaries in cases where the latter receive income.
A number of amendments to the Law on Cyprus International Trusts in accordance with current EU laws and directives removed all restrictions on the place of permanent residence of the founders and beneficiaries of the trust, leaving only one condition that the settlor is not entitled to be tax resident in Cyprus earlier than in the calendar year following the year when the trust was established, which simplifies the solution of property problems for persons deciding to subsequently move to Cyprus for permanent residence. At the same time, the term “beneficiary” includes (in terms of the current interpretation) also an unborn beneficiary.
Due to the fact that a trust is a very specific tax planning tool, we strongly recommend that a potential settlor obtain detailed legal advice before making any decision in favor of a particular scheme.
Cyprus resident companies are subject to local taxation on all types of income derived from any source, both in Cyprus and abroad.
A company is recognized as a tax resident of Cyprus if it is managed and controlled from the territory of Cyprus.
For all resident companies in Cyprus, a flat tax rate of 12.5% applies.
Type of Income:
Benefit amount, (%)
Income received from the sale of securities *
(100)
Dividends
(100)
Passive income, such as interest on deposits and other interest not arising from the ordinary activities of the company **
(fifty)
Income from a permanent branch or other registered office of a company abroad (100) subject to the following conditions:
A) more than 50% of income outside Cyprus is derived from trading activities;
B) the tax rates in the country of source of income are not lower than the similar tax rates applicable in Cyprus.
Unrealized income from currency trading
(100)
Please note that bills of exchange and bills of exchange do not fall under the definition of "securities" in Cyprus.
** To determine if the company's income is eligible for this benefit, you must first apply in writing to the tax authorities of Cyprus and receive their official opinion.
The so-called special contribution for defense is levied on dividends, interest and rental income received by both individuals and legal entities - residents of Cyprus, regardless of whether they are received in Cyprus or abroad. Only non-resident companies in Cyprus are exempt from this tax.
Defense tax rates depend on the type of income.
Cyprus legislation provides for a variety of fines not only for late filing of reports, but also for late payment of calculated taxes.
In case of late submission of financial statements and tax returns for the previous year, a penalty of 8% per annum is provided.
Any tax not paid on time is subject to a penalty of 8% per annum and an additional penalty of 5% (interest is charged for the elapsed full months of delay in payment).
Late payment of defense tax for the first six months of the fiscal year is charged at 5% per annum.
At the same time, late payment of the annual state duty entails the following fines:
• in case of non-payment of the state duty during the first 2 months, the amount of the fine will be 10% of the payment amount.
• in case of non-payment within the next 2-5 months - 30%.
Our reader may ask a legitimate question: “how to consider a Cypriot company from a tax point of view, all directors of which are non-residents of Cyprus, meetings of the board of directors of which are held outside Cyprus, and all major decisions that determine the life of the company in all its aspects are taken outside Cyprus "?
It would seem that the answer should be simple: such a company is not a tax resident of Cyprus and is not subject to taxation in Cyprus. However, in practice it is not as easy as it seems. We have already said that all Cypriot companies are required to obtain a tax number, that is, register with tax and, as a result, report annually in Cyprus. Thus, if a Cypriot company declares its non-resident status, the Cyprus Tax Authority will require formal confirmation that the company has a duly registered “permanent establishment” outside Cyprus, reports and pays local taxes there.
In line with the new Central Bank of Cyprus directive with regards to the cooperation with “shell” companies, all offshore and onshore companies that maintain Bank accounts with Cypriot banking institutions will have to provide to the banks:
- documents confirming their economic substance
- audited accounts which should be prepared by an EU orthird country applying equivalent AML measures regulated auditor for the last two years
- if no audited accounts are available on request, then the customers should provide an engagement letter from EU or third country applying equivalent AML measures regulated auditor confirming its intention to prepare audited accounts for the company
- a letter from the said auditor as to where the revenue generated income of the company is taxed.
Please be also informed that Audited or Management Accounts are now a requirement for all offshore companies which maintain bank accounts in the Republic of Cyprus.
Within the context of tightening Anti-Money Laundering regulations, the Central Bank of Cyprus has amended its AML Directive requiring thereby the clients of Credit Institutions in Cyprus to prepare and submit recent audited or management accounts.
This obligation concerns the following:
1. Legal entities of any kind (Companies, Foundations, Institutions, Trusts etc);
2. Individuals who receive income from any company they might control in any way.
In case of offshore companies, that it is not subject to a statutory obligation to prepare audited accounts, management accounts are required. By management accounts, we refer to the Profit & Loss and Balance Sheet of a company. The Profit & Loss shows the results of a company for a certain year. It includes the income earned and expenses incurred. The Balance Sheet shows the financial position of a company for a certain year (the company’s Assets, Liabilities and Shareholders’ Equity).
With the constant strengthening of AML regulation and enhancing transparency around the globe and in compliance with the provisions of the 4th AML European Directive (EU 2015/849) and 5th AML European Directive (EU 2018/843), the Cyprus Council of Ministers has resolved to appoint the Registrar of Companies (“ROC”) as the competent authority to maintain a centralised Register of Beneficial Owners (“UBO”) of companies and other legal entities.
An intermediary (i.e. temporary) UBO platform/register has been developed for this purpose and access to it is based on the provisions of the 5th AML European Directive (EU 2018/843).
Access to the intermediary (temporary) UBO platform/register in compliance with the 4th AML European Directive is only available to Competent Authorities upon their request to the ROC, so the intermediary (temporary) UBO platform/register is not available to the public. This is advised to be the case until the end of 2021, at the earliest.
As per Law 13(I)/2018, enacted on 3 April 2018 transposing into Cypriot legislation EU Directive 2015/849, “Competent Authorities” include the following:
➢ The Central Bank of Cyprus;
➢ The Cyprus Securities and Exchange Commission;
➢ The Institute of Certified Public Accountants of Cyprus;
➢ The Cyprus Bar Association;
➢ Other competent Regulatory Authorities superintending the operations of regulated professionals in Cyprus;
➢ The Cyprus Unit for Combating Money Laundering (MOKAS);
➢ The Cyprus Customs Department;
➢ The Cyprus Inland Revenue Department, and
➢ The Cyprus Police
Such Competent Authorities shall have unlimited access to the information in the intermediary (temporary) UBO platform/register (in compliance with the 4th AML European Directive) and shall not be informing the legal entities/persons/arrangements in case they do access it. The Competent Authorities may provide the information to the competent authorities of other Member States of the European Union.
For the purposes of the Companies/Entities UBO Register:
➢ “Beneficial Owner” is defined as any natural person that is directly or indirectly the ultimate owner of 25% + 1 share or has the ultimate control or participatory interest of over 25% in the company/entity.
For the purposes of the Trusts (and similar legal arrangements) UBO Register:
➢ “Beneficial Owner” is defined as any natural person that controls the Trust (i.e. the controlling person). This includes the Settlor, the Trustee, the Protector and the Beneficiaries.
➢ With regards to other legal arrangements, a “Beneficial Owner” is defined as any natural person that holds relevant and/or corresponding positions of the Settlor, the Trustee, the Protector and the Beneficiaries, as the case may be.
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