THE CYPRUS LIMITED LIABILITY COMPANY

Cyprus has a modern common law legal system based on English law. The most common form of legal entity in Cyprus is the Private Limited Company which is incorporated pursuant to the Companies Law, Cap. 113.

The first step in formation of a Cyprus company is to apply for approval of its name by the Registrar of Companies. The name of the company must end with “Limited” or “Ltd.” to denote limited liability. After the name of a proposed company is approved, the Memorandum and Articles of Association of the company, which are its constitutional documents must be signed by the subscribers (can be signed by nominee). The Memorandum establishes the basic structure of the company and states its name, objectives, the amount of share capital and division thereof into shares of a fixed amount, and any other matters which affect the basic existence of the company. The Articles of Association govern relations between various members of the company. They deal with the procedures for calling meetings of shareholders, passing resolutions and transferring shares including any restrictions which may apply. A company may alter or add to its Memorandum and Articles of association by passing a special resolution.

The next step of the incorporation procedure is to file the Memorandum and Articles of Association with the Registrar of Companies. As soon as the registration of the company is effected, the Registrar of Companies issues a Certificate of incorporation which specifies the name of the company, the date on which it was incorporated, and its reference number (HE). Certificate of incorporation constitutes evidence of the company’s legal existence and will be accompanied by the Certificate of the Registered Office address, Certificate of shareholders, Certificate of Directors and Secretaries.

There is no minimum required issued and paid up share capital, however it is common to have share capital of at least €1.000.

There is no restriction on overseas ownership. The shareholders’ details are public information at the Registrar. Nominee shareholders with trust deed are commonly used, thus at the Registrar only the nominee shareholders can be found.

The directors of the company are responsible for the management of the company. At least one director is required. Although not a requirement, it is strongly recommended that the majority of directors are Cyprus residents (tax residency requirements).

The secretary of the company maintains the statutory records and arranges for notices, minutes and resolutions. For practical reasons the secretary of the company should be in Cyprus.

A company must have a registered office within Cyprus which may also be used as its business address.

All Cypriot companies are required to maintain proper accounting books and records and prepare audited financial statements in accordance with IFRS (except the dormant companies).

Despite of the statutory audit exception granted by the Company Law to small companies (certain criteria exist), the Tax Legislation gives exception only for the dormant companies. Thus the statutory audit is required by all companies. The audited financial statements form the basis for the tax computations and for the preparation of the corporate income tax return which is required by the tax authorities to be certified and submitted by a registered auditor or a professional tax advisor

The financial statements must be submitted together with an Annual Return including details of details the share capital, shareholders, directors and secretary to the Registrar of Companies.

The only fixed taxation for all companies is the Levy of €350 which is payable on annual basis to the Registrar of Companies. Additional compliance requirements of the Cyprus Tax Legislation, other administration issues as well as possible tax liabilities are outlined in the relevant taxation sections.

The tax loss incurred during a tax year and which cannot is carried forward and set off against the profits of the next five years.

Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus; however, subsequent profits up to the amount of the loss will be taxable in Cyprus.

The current year loss of one company can be set off against the profit of another company, subject to conditions, provided the companies are Cyprus tax residents and are both within the same group. (Group is defined as: *One company holding at least 75% of the voting shares of the other company or *Both of the companies are at least 75% (voting shares) held by another third company). As from 1 January 2015 a Cyprus tax resident company may also claim the tax losses of an EU tax resident company, provided both companies are within the same group and the EU tax resident company has exhausted all possibilities available for using its tax losses in its respective country or in the country where its immediate holding company resides.

Relief for taxes paid abroad is given for overseas income that is subject to tax in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty exists, the treaty provisions apply if more beneficial. The relief shall not exceed the Cyprus Tax Liability for that income.

Reorganizations are fully exempt from corporation tax, capital gains tax, stamp duties and property transfer fees. Also, tax losses can be carried forward to the receiving company. A reorganization generally includes a merger, division, transfer of assets and exchange of shares.

The Cyprus Tax Legislation is in line with all EU Directives including the Interest and Loyalty Directive, the Parent – Subsidiary Directive and the Directive on Mergers.

Cyprus developed an extensive network of tax treaties, currently with more than 50 countries. Most treaties provide for reduced or nil rates of withholding tax on dividends, interest and royalties paid from the treaty country and the avoidance of taxation in both countries.

Dividends paid to non Cyprus tax resident shareholders (companies or individuals) or to Cyprus tax resident individuals who are not Cyprus Domiciled are exempt from withholding tax in Cyprus. Also, no withholding tax is imposed on interest paid from Cyprus as well as on royalties paid from Cyprus in respect of intellectual property exploited outside Cyprus to any company or individual. The nil withholding tax rates apply irrespective of the country of residence of the recipient or whether a relevant tax treaty exists.

Every company must be registered with tax authorities and TAXISnet
Every company must keep proper book and records
Every company must submit annual corporate income tax return to tax authorities electronically through TAXISnet. This return should be certified and submitted by a registered auditor or professional tax advisor.
Companies that have employees must submit on annual basis the employer’s total payroll return
Income tax is paid under a self-assessment regime. The payment of tax is effected thought the submission of temporary tax return which should be submitted on 31st July of the year in the profits are generated. Estimated income can be revised anytime before the year end. Provisional tax payments must be made on estimated current year income in two installments. When the temporary tax return is submitted and at the year end. A final payment must be made after the year end by self- assessment so as to bring the total installment payments to the level of the actual tax liability due according to the corporate income tax return.

VAT is imposed on the supply of goods and provision of services in Cyprus, provided the supply of goods or provision of services is not specifically exempt from VAT. In addition, VAT is imposed on the acquisition of goods from the European Union and on the importation of goods from third countries.

Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on services, goods, machinery, etc which they receive (input tax). If output tax in a VAT period (normally 3 months period) exceeds total input tax, a payment has to be made to the VAT athorities. If input tax exceeds output tax, the excess input tax is carried forward as a credit and set off against future output VAT. Under certain circumstances immediate refund of excess input VAT can be obtained.

The standard VAT rate is 19%. The Cyprus VAT Legislation provides also for two reduced VAT rates 5% and 9% as well as for zero rated supplies.

For the supplies & aquisitions of goods and in general for the provision of services within European Union no VAT is charged. The recipient, applies the reverse charge mechanism and without paying VAT it self-charges VAT and at the same time claims it back, provided it relates to supplies for which the right to recover input VAT is granted.

The exportation of goods to third countries is zero rated, thereby there is no output VAT and any input VAT can be recovered.

Notes:

1. The threshold is either the accumulated turnover subject to VAT during the 12 preceding months or the expected turnover subject to VAT within the following 30 days.
2. The threshold is the accumulated sales made during any calendar year.
3. The threshold is either the accumulated services received during the 12 months preceding any point of time or the expected services to be received within the following 30 days from any point of time.
4. The threshold is either the accumulated acquisitions made during any calendar year or the expected acquisitions to be made during the following 30 days.

Businesses have the option to register voluntarily when they do not meet the registration thresholds or when they have supplies that are outside the scope of VAT but for which the right to claim the related VAT input is granted.

• Every VAT registered business must submit quarterly the VAT returns and pay the excess of Output tax over Input tax
• Every VAT registered business must keep proper accounting books and records

If a Cyprus tax resident company does not distribute dividends that cover 70% of the adjusted for DDD accounting profits within two years from the end of the tax year in which the profits were generated then:

• 70% of adjusted for DDD accounting profits are deemed to have been distributed, and 17% special contribution is imposed to shareholders who are residents in Cyprus.
• Any actual dividends paid reduce this liability, and
• No liability will arise from actual dividends that will be paid in the future from these profits.

The provisions of DDD (payment of 17% special contribution apply also to the following cases:

• Disposal of assets to shareholder at less than the market value: The DDD applies to the difference between the consideration paid and the market value. The provision does not apply for assets originally gifted to the company by the shareholder. (The term shareholder, covers individuals, their spouse and relatives of them up to second degree).
• Company dissolution: The DDD applies to the cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed. The provision does not apply in the case of dissolution under Reorganisation.
• Reduction of capital. The DDD applies to the amounts paid or due to the shareholders over and above the previously paid-in equity.

Special contribution for defense is imposed on dividend income, “passive” interest income and rental income. Companies are subject to Special Contribution for Defense if they are tax resident in Cyprus.

Individuals are subject to Special Contribution for Defense if they are both Cyprus tax resident and Cyprus domiciled. (Prior to 16 July 2015 individuals were subject to Special Contribution for Defense if they were tax resident in Cyprus).

* As from 01/01/2016 when dividends received from non – Cyprus resident companies are deductible for tax purposes by the paying company are subject to Corporation Tax. Thus this section applies only to dividends which are not deductible for tax purposes by the paying company. When this section applies, the exemption from Special Contribution for Defense does not apply if: -more than 50% of the paying company’s activities result in investment income and, – the foreign tax is significantly lower than the tax burden in Cyprus (below 6.5% on the distributed profit).

The Deemed Dividend Distribution (DDD) is applicable only when the ultimate direct/indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled. For the same company, DDD might be applicable for some shareholders who are both Cyprus tax resident and Cyprus domiciled and not be applicable for the shareholders who are not Cyprus tax resident or to shareholders who are Cyprus tax resident but not Cyprus domiciled. (Prior to 16 July 2015 individuals were subject to DDD if they were tax resident in Cyprus).

If a Cyprus tax resident company does not distribute dividends that cover 70% of the adjusted for DDD accounting profits within two years from the end of the tax year in which the profits were generated then:

• 70% of adjusted for DDD accounting profits are deemed to have been distributed, and 17% special contribution is imposed to shareholders who are residents in Cyprus.
• Any actual dividends paid reduce this liability, and
• No liability will arise from actual dividends that will be paid in the future from these profits.

The provisions of DDD (payment of 17% special contribution apply also to the following cases:

• Disposal of assets to shareholder at less than the market value: The DDD applies to the difference between the consideration paid and the market value. The provision does not apply for assets originally gifted to the company by the shareholder. (The term shareholder, covers individuals, their spouse and relatives of them up to second degree).
• Company dissolution: The DDD applies to the cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed. The provision does not apply in the case of dissolution under Reorganisation.
• Reduction of capital. The DDD applies to the amounts paid or due to the shareholders over and above the previously paid-in equity.

*As already noted rental income is subject to income tax (corporation & personal) as well.

Capital Gains tax is imposed (when the disposal is not subject to income tax ie trading activity) at the flat rate of 20% on gains from the disposal of immovable property situated in Cyprus including gains from disposal of shares in companies which own immovable property, excluding shares listed on any recognized stock exchange. From 17 December 2015 the disposal of shares of companies, which indirectly own immovable property situated in Cyprus and at least 50% of the market value of that shares derive from the immovable property, is also subject to Capital Gains Tax.

The gains from the future disposal of Land as well as land with a building / buildings acquired within the period from 16 July 2015 up to 31 December 2016 will be exempt from Capital Gains Tax subject to conditions. The basic condition is that the immovable property is acquired through purchase or purchase agreement and not through an exchange or donation, at market value, from a non-related party.

Expenses that relate to the acquisition and disposal of the property are deductible from the taxable base. Indexation allowance is always granted and lifetime exemptions are available.