The two most common ways to operate a business in Cyprus are as (a) self-employed or (b) through a limited liability company.
A limited liability company is a separate legal entity from its owners (the shareholders). A key implication of this, amongst other things, is that if a company goes bankrupt, the personal wealth of the company's shareholders is protected from creditors.
Tax on profits
Cyprus companies pay 12.5% tax on profits. Profits can then be distributed to individuals through dividends. Dividend income by individuals is taxed at 17% defence tax and 2.65% for the general health system (but note if you have non-domicile status dividend is tax free!).
Income tax rates for individuals on the other hand, go as high as 35%, which is applied at progressive rates, as it follows:
| Taxable Income € | Tax Rate % |
| 0-19,500 | 0 |
| 19,501 – 28,000 | 20 |
| 28,001 – 36,300 | 25 |
| 36,301 – 60,000 | 30 |
| 60,001 and over | 35 (this rate is applicable as from the year 2011 onwards) |
The most important reason why someone may choose to run a business as a company instead of a freelancer (self-employed), is the potential of lower overall taxation on profits.
VAT
Both self-employed individuals and corporations have the same obligation to register to VAT – that is, if their income exceeds €15,600 in any 12-month period. There is therefore no advantage from a VAT perspective.
Audit
All companies – irrespective of income – have an obligation to prepare audited financial statements. A self-employed individual is obliged to submit audited financial statements only if his revenue (not profit!) exceeds €70,000.
Annual levy
Companies are obliged to pay €350 per year (annual company levy) whereas individuals do not have to pay this fee.
Setup costs
Operating as a freelancer (self-employed) requires no up-front costs, whereas a company incorporation requires money (cost varies).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.