* This article was updated to reflect 2024 tax rules. This article is relevant for the tax year ending 31 December 2024.
ADVANTAGES OF OPERATING A BUSINESS IN CYPRUS AS SELF-EMPLOYED, COMPARED TO REGISTERING A COMPANY.
The two most common ways to operate a business in Cyprus are as a self-employed (also called freelancer sometimes), or through a limited liability company.
Below is a high-level comparison of a company’s tax and administrative implications, compared to self-employment.
It should be noted that there are numerous non-economic considerations which are relevant to this discussion (for example: branding and business image, ease of selling/transferring a business, anonymity, the concept of limited liability, etc). This article focuses on a comparison of self-employment vs incorporation from a purely economic perspective only.
Tax on profits
Cyprus companies pay 12.5% tax on their profits (and in some specific cases, even lower than 12.5%).
The after tax profits of companies are then distributed to the shareholders of the company as dividends. Dividend income for individuals is taxed at 17% in Cyprus (but note if you have a non-domicile status, dividend is tax-free for 17 years). There is also a GESY (Cyprus healthcare system) contribution of 2.65% on dividends.
On the other hand, income tax rates for individuals go as high as 35%. Income tax rates for individuals can be found in this link.
Consequently, a very 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. Same rules and rates apply to self-employed individuals and companies, there is therefore no advantage from a VAT perspective..
Social Insurance
Self-employed individuals must pay 16.6% 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 (Cyprus healthcare system).
On the other hand, companies pay 26.85% social insurance & GESY for their employees (15.40% employers, 11.45% employees).
It is important to note however that Cyprus companies are not required by law to have employees. For companies which do have employees, minimum wage in Cyprus is €1.000 per month, but part-time employment is allowed.
Audit
All companies – irrespective of income – have an obligation to submit to the tax authorities financial statements signed by a licensed audit firm. A self-employed individual on the other hand, is obliged to submit audited financial statements only if his revenue (not profit) exceeds €70.000.
Other charges and levies
Companies need to pay an annual municipality levy (approx. €220 per year for Limassol based companies).
Furthermore, companies need to submit their audited financial statements to the Companies Registrar annually, whereas self-employed individuals do not.
Setup costs
Operating as a freelancer (self-employed) requires no up-front costs, whereas a company incorporation requires a fee (legal and government fees).
Conclusion
From a purely economic perspective, a Cyprus company is more expensive to set up and maintain, and requires more administration overall compared to being self-employed. However, a company is more tax efficient – especially if you are a non-domicile tax resident.
If you would like to find out more about company formation in Cyprus, click here.
If you want to start a business in Cyprus, get in touch with us. We are happy to help you identify whether incorporating a company makes economic sense in your circumstances, assist with the registration of a new company if required, and offer tax advice to ensure your tax liabilities are minimised.
