This article is especially useful to young creatives, start-uppers and persons who have started a business which is now ready to be taken to the next level.
The two most common ways to operate a business in Cyprus are as a self-employed (also called freelancer sometimes), or through a private limited liability company.
Below is a high-level comparison of a company’s tax and administrative implications, compared to self-employment from a strictly economic perspective only. As you know, there are many other considerations apart for purely economic which would be relevant to the decision-making process for choosing the best way to organize your business such as branding, ease of selling, personal liability and other.
Tax on profits
The most important reason why someone would choose to run a business as a company instead of as self-employed is the potential of lower overall taxation on profits.
Cyprus companies pay 12.5% tax on profits. Profits may then be distributed to the shareholders through dividends. Dividend income of individuals is taxed at 17% (unless you have non-domicile status and then dividend is tax free). Income tax rates for individuals reach as high as 35%.
Social insurance costs
Self-employed individuals are required to pay 15.6% social insurance on their ‘estimated earnings’ (an amount determined by the social insurance services based on an individual’s profession, and years of experience). Self-employed individuals must also contribute an additional 4% towards GESY (the Cyprus General Healthcare System).
Companies are required to pay 14.9% social insurance & GESY for their employees on the employees’ gross income and the employees are required to contribute another 10,95% themselves. This means that if you are an employee of your own company the total social insurance cost reaches 25.85%.
However, Cyprus companies are not required by law to have employees and therefore your renumeration could be in the form of director fees, contract fees or just dividends.
Audit
All companies – irrespective of income – have an obligation to prepare audited financial statements. Self-employed individuals are obliged to submit audited financial statements only if their revenue (not profit) exceeds €70,000.
Annual government levy
Companies are obliged to pay an annual company levy €350 per year, whereas individuals do not have to pay this fee.
Municipal fees
Companies need to pay a municipality tax ranging from €140 to €170 per year.
Annual Return to the Registrar of Companies
Companies need to submit their audited financial statements to the Department of the Registrar of Companies annually, whereas self-employed individuals do not.
VAT Considerations
Self-employed individuals and corporations have the same obligation for VAT registration and the same rules apply to both. Therefore, VAT is not a consideration in the decision.
Initial setup costs
Operating as a freelancer (self-employed) requires no particular up-front costs, whereas registering a company involves an initial cost outlay depending on the service provider and capital considerations.
Conclusion
A Cyprus company requires an initial investment to set it up and and an annual cost to maintain it in accordance with Cyprus statutory requirements and the Companies Law. It also requires more administration as compared to being self-employed. However, a company is more tax efficient both for Cypriots and non-domicile tax residents.
If you would like to find out more about company formation in Cyprus and whether this is something that would make economic sense given your own circumstances, please get in touch with us here.
The article is relevant for the tax year ending 31 December 2022.
