Cyprus is a low-tax jurisdiction, making it attractive for conducting business activities or developing companies. Registering a business in the Republic allows you to expand your operations internationally and adds status to the business owner. There are two ways to start your own business in Cyprus: registering as a self-employed person (individual entrepreneur) or opening a company.
In the case of an individual entrepreneur, you will act as a natural person. To conduct business on behalf of a legal entity, you need to open a company. It's important to note that a self-employed person operates using themselves as the primary means of conducting business, while someone operating through a company uses the company to conduct their business.
To decide which business format in Cyprus suits you better, you need to carefully consider the key aspects of operating as a self-employed person and a company.
Legal Responsibility
Self-employed individuals bear personal and full legal responsibility for any violations and unlawful business conduct. Personal data of the natural person, such as tax identification number, social insurance number, address, and more, are used for conducting business. In the case of conducting business through a company, the responsibility falls on its directors and shareholders, not the owners themselves. Personal financial risk is a key factor when deciding to register a company or operate as an individual entrepreneur.
Taxes
Both options for conducting business involve a profit tax. However, for company profits, tax is paid at a fixed rate of 12.5% (in the case of using the IP BOX tax regime, the actual corporate tax rate is 2.5%). For self-employed individuals, income tax rates apply, as listed below:
- Up to €19,500 – not subject to tax;
- €19,501 to €28,000 – 20%;
- €28,001 to €36,300 – 25%;
- €36,301 to €60,000 – 30%;
- Over €60,000 – 35%.
Based on this information, if you anticipate earning less than €19,500, it would be more advantageous to register as an individual entrepreneur. If you project higher earnings, for example, above €36,000, conducting business through a company becomes a more acceptable choice.
Additionally, contributions to the state social insurance fund are applicable. For companies with employees, a rate of 8.3% is applied to both the employee and the employer until December 31, 2023. After that, the rate will increase by 0.5% every five years until it reaches 10.3% on January 1, 2039. As of January 1, 2019, contributions for self-employed individuals are 15.6% of their income (14.6% from 2014 to 2018). Afterward, the rate will increase every five years until it reaches 20.4% on January 1, 2039. The contribution amount depends on the minimum and maximum limits, depending on the profession or type of self-employed activity. These limits are set annually.
Additionally, contributions must be made to the General Healthcare System (GESY) in Cyprus. As of March 1, 2020, contributions are made at the full rate and amount to 2.65% for employees, 2.9% for employers, and 4% for self-employed individuals.
Regarding the value-added tax (VAT), it will not depend on the chosen business form, and its rates are fixed: 19% for the standard rate and 5% for the reduced rate.
It should be noted that a company can exist and operate without having employees. In this case, there will be no contributions to the state social insurance fund or GESY.
Registration and Operation of Business
To open a company in Cyprus, you will need the organization's articles of incorporation, personal information of directors, shareholders, beneficiaries, and an application. Copies of documents must be notarized in the country where the company is located. Additionally, startup capital is required.
In addition to the initial registration costs, which depend on the company's share capital and are not present when operating as a sole proprietor, every company registered in Cyprus must pay an annual fee of €350 to the Companies Registrar. Companies are also obliged to prepare financial statements and undergo audits. Therefore, if the annual turnover does not exceed €70,000, the sole proprietorship format may be more advantageous.
If the annual turnover of an individual entrepreneur does not exceed €70,000, they are not required to conduct a financial audit of their business; filing a tax return on time is sufficient. However, if the annual turnover exceeds €70,000, the self-employed person will need to use auditing services for their financial reporting.
For an individual entrepreneur, there is no formal registration process. However, the natural person must take the following actions to enable business operations:
- Register as a VAT taxpayer. VAT registration is voluntary but becomes mandatory if the turnover exceeds €15,600 within 12 consecutive months.
- Register as an income tax payer and file an annual tax return, regardless of income amount. To do this, you need to have a personal tax identification number (Tax Identification Code/T.I.C).
- Register as an employer if you have employees.
- Perform the same functions as a company independently.
Opening a company provides certain opportunities for the owner that are not available in the self-employment format, including:
- Increasing capital.
- Expanding the number of shareholders.
- Delegating business management to others.
- Obtaining licenses (some authorities do not license individuals).
Conclusion
The main differences between an individual entrepreneur and a company in Cyprus are as follows:
- The legal framework that protects company owners under the principle of "limited liability."
- The income tax rate, which is fixed for companies but individuals are subject to a differentiated tax rate.
- Ownership structure is more flexible for companies, while individual entrepreneurs cannot have new owners.
- Reporting requirements, which entail auditing for companies, but for self-employed individuals, this becomes a requirement only if the annual turnover exceeds €70,000.
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