Cyprus Tax Guide For Small Businesses:
An Executive Summary

This is an introductory guide for Small-Business Owners, linking in to our full Cyprus Fact-File. If you'd rather dive right in to the Fact-File, you can use the navigation on the right of this page, or start from the Cyprus home page.

Business Formation: The government has a fairly light touch in terms of statutory requirements. You don't need anyone's permission to start a business, and you won't have to register or license your business unless you form a limited company or a formal partnership, or unless you require a special license, eg to run a pub or make atom bombs. Limited companies do have to be registered of course, and have to report annually. And remembering that the only two certainties in life are death and taxes, inevitably you'll have to make annual tax returns, whether you're a limited company or not. If you're really a small business, you won't have to bother with VAT. Of course if you take on staff, life becomes more complicated!

Domestic Taxation: The big issue is whether to be taxed as an individual trader or as a company. At first sight it's a no-brainer, with individual taxes going up to 30% while company profits are taxed at 10%. Needless to say, it's more complicated than that. Broadly, if you are building an investment-heavy business, a company may be best, while if you are in a simple cash in/cash out sort of business, being an individual trader may be better. Husbands and wives can play some interesting variations, and get the best of both worlds. Longer term, the holy grail is to turn income into capital, but it isn't easy - if company profits aren't distributed after two years they are charged 15% tax. If you're not born and bred in Cyprus, another goal is to remain non-resident, which means not having a permanent establishment (fixed place of business) so that you get taxed only on Cyprus-source income. If there's one aspect of your business on which you should consider taking paid-for advice, it's probably the tax structure. It's so important to get it right at the beginning!

International Taxation: A small business usually has a static location, and you'll trade from there. If you're selling goods overseas it's straightforward, at least within the EU, but if you're selling services to corporates it can be more complicated because the foreign country may take a bite out of your returns, called withholding tax. Then you have to turn to double tax treaties of which indeed Cyprus has many, to try to get the money back. It's all a bit of a jungle. And if you're big enough, VAT is an extra complication. If you set up a branch in a foreign country, you need to try to avoid the 'permanent establishment' trap, and you may get bogged down in local VAT. If you send staff - or yourself - to work in foreign countries you need to think hard about their tax situation in advance, both in respect of local income taxation and perhaps because of withholding tax. E-commerce companies have special opportunities and special problems, although the new EU VAT rules do simplify matters to some extent.

Tax-Efficient Structures: With a corporate tax rate of 10%, there appears to be not much need for exotic structures to minimize tax; but if you are resident, things are not so simple, and there is a case to be made for locating businesses in low-tax, 'offshore' jurisdictions, especially if you are eventually planning to retire somewhere out of Cyprus. As yet, there are no 'CFC' rules in Cyprus, so that profits made in such places can stay there. Offshore structures are often useful for inheritance tax and asset protection reasons as well, and anti-avoidance law has not gone nearly so far in Cyprus as in, for example, the UK. Non-resident small businesses meaning to trade in Cyprus can also use offshore structures, as long as they avoid the 'permanent establishment' trap.

Business Incentives: Thereare quite a few support schemes operated by various levels of government, some of them in association with the European Union, ofering direct grants to support employment, rebates on taxes, and loans for SMEs. It is well worth investigating what's on offer. However, the saying: 'He who sups with the devil needs a long spoon' comes to mind. The schemes are well-intentioned, no doubt, but they can be intensely bureaucratic, with very intrusive qualification procedures, and a long 'tail' of reporting requirements.

Employing People: Many businesspeople will just tell you: 'Don't do it'. 'Marry in haste; repent at leisure', they say, and it was never so true than when it comes to employment. Don't kid yourself that employees will feel that they owe you anything. Today's workers, encouraged by a slew of anti-business legislation from Brussels, and the general nannying attitude of government, often feel that the world owes them a living. Many employers of course bring problems on themselves by treating employees as little better than slaves. At all events, try as hard as you can to use contractors (ie self-employed people) rather than employees. The tax authority has plenty to say about that, of course, so if you are left with no choice, realize that you will have to operate 'PAYE', provide various statutory social benefits, and that it is extremely hard to dismiss an unsatisfactory employee once you have taken them on. Of course, there are plenty of exceptions to these rather sweeping generalizations. Lucky you if you find some!

Welfare And Lifestyle: Meaning, for the business person herself. Obviously, state social welfare schemes apply to business owners as much as to anyone else, although there may be problems if you operate across national borders. Many business-people will want to have improved (meaning private) health benefits, and almost all will want to find tax-efficient ways of making provision for their pensions. It's important to separate these from your business itself, in case of failure. If you have it in mind to retire to somewhere less highly taxed, then the time to start is now, in terms of building up a pension away from the grasp of the tax authority. If you are an expat, though, Cyprus itself may be your chosen retirement home, and you'll pay only 5% tax on your pension.

International Aspects: Perhaps you plan to live out your life as a respected and contented member of your local community. The salt of the earth, one might say, if that's not patronising. But some people will find themselves drawn intentionally or otherwise to an international existence, doing business and/or living in other countries. There are many challenges: apart from the difficulty of arranging your tax affairs satisfactorily, there are the problems that go along with property ownership, education of your children, international removals, health care and pension provision, just to take some of the more obvious issues. Of course no one can predict the future with any certainty, but there are all too many stories of people who have trapped themselves in the wrong investment in the wrong currency in the wrong place, with multiple taxmen on their backs. Most such problems are avoidable, with forethought.

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Part 1: Cyprus Business Formation for Individuals

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