Choosing whether to operate as self-employed or instead set up a limited company, is a key decision for a new business wishing to operate in Cyprus. As two of the most common legal structures, there are some important differences that one will need to consider. Which option you choose will have an impact on your administration and tax responsibilities amongst other things.
What is the financial risk?
Most people who set up their own business register as self-employed. The other popular option is to “incorporate” a business, which means registering a private limited company with the Companies Registrar. The personal financial risk is a key factor to consider when weighing up whether to register as a self-employed or set up a private limited company.
If you register as self-employed, legally, there is no distinction between you and the business. This makes you personally liable for business debts, which can place your personal assets – even your primary residence – at risk if the business fails.
Some people are not comfortable with having personal liability and incurring such a financial risk, so they set up a private limited company, of which they become a director and shareholder. In law, the limited company is a separate entity, so, provided you do not trade recklessly or fraudulently and do not give personal guarantees for loans, your risk of loss is restricted to shares you own in the company and any personal cash you invest.
Accounts preparation
If you register as self-employed you will not be legally required to either prepare or file audited annual accounts, as long as your revenue does not exceed €70.000 within the tax year (in this case you must probably consider the possibility of setting up a private company instead). In any case though, you will still need to keep a record of business expenses and income to fill in your personal tax returns.
On the other hand, companies must prepare annual audited accounts at the end of the financial year even if there are no revenues. These are filed with the Tax Authorities as part of the company tax return and sent to all shareholders. A limited company must also file a Statutory set of accounts with the Company Registrar by filling the form HE32.
Tax and Social Insurance payments
Those who are self-employed pay income tax on their business profits by submitting the IR1 tax form after the completion of the tax year. There is a tax-free limit of €19.500 per year, upon which you do not pay Income Tax. Thereafter, the rates are:
- 20% on €19.501 – €28.000
- 25% on €28.001 – €36.300
- 30% on €36.301 – €60.000
- 35% on any amount more than €60.000
If you are self-employed and earn income you must also pay Social Insurance and NHS contributions. Regarding the social insurance calculation, the insurable earnings of self-employed persons are fixed by regulations according to their specific occupational category and are payable on quarterly basis. For the NHS contribution the rate is applied to the actual income.
Each year, limited companies pay a corporation tax on their business profits at a rate of 12.5% with no tax-free limit. For companies, the procedure is more complex as they must submit a Temporary Tax Assessment (IR6) and pay the estimated Corporation Tax in two installments, the first on 31st of July and the second on 31st of December. Since the temporary tax assessment is based on predicted business profits for the tax year, after the completion of the year they must pay the difference on actual tax computation by submitting their corporate IR1 form.
Company directors are classed as employees and (via PAYE) pay their income tax on their salary and bonuses over €19.500. The company also pays social insurance contribution and NHS deductions on director earnings which are payable on a monthly basis.
Additionally, given that the company directors and the shareholders are the same, they will also receive dividend payments and will accordingly pay a special contribution for defense tax at a rate of 17% calculated on the total amount of dividends received within that tax year. This income is not subject to Income Tax. If no dividends were distributed during a period of two years, then the company will pay a deemed dividend distribution of 17% on the 70% of the undistributed profits.
Special Government Levy Payment
Any company operating in Cyprus is required to pay a yearly annual fee to the government; this is called the Annual Levy. The Annual Levy is €350 for every company and is payable from the year of the company’s incorporation. After the year of registration, the annual levy must be paid by the latest, 30th of June of each year. In the case of a group of companies the total amount payable is capped at €20.000. This obligation does not apply to self – employed individuals.
Filing of VAT Reports
Both structures are obliged to register with the VAT Department and get a tax number if they involved in taxable activities provided the registration threshold of €15.600 is exceeded or expected to be exceeded within a period of 12 months (not a calendar year). Those already registered must then file quarterly VAT reports – even if no transactions at all have been made during these months.
It is important to remember that the quarterly filings do not match the divisions of the calendar year – they are determined by the tax office itself.
What is more tax-efficient?
If you set up a private limited company, combining a minimum basic wage (so you enjoy the benefits of paying Social Insurance and NHS contribution) with dividend payments, this may be a more tax-efficient way to earn income.
But many individuals who are starting up their own business (normally with limited available capital) choose the self-employed structure. It is simpler and cost effective in terms of administration and other costs. Then, once the business grows in terms of revenues and in terms of assets, they change into a private company (reminder: for annual revenues that exceed the €70.000 limit they are obliged by law to prepare audited accounts). This will enable them to access capital more easily (as they will be assessed as a company and not as individuals) and finance a possible expansion in operations. In addition, customers and suppliers perceive limited companies to be more professional, credible, stable, and better managed – something that will further enhance the expansion of a company.
This thought-provoking article has been written by our in-house expert Marios Mortis, a qualified ACCA holder and professional training instructor. Amongst his specialised fields is Accounting, Audit and Tax including the Association of Accounting Association of Accounting Technicians (AAT) Accountancy and Bookkeeping Qualifications.
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