* This article was updated to reflect 2023 tax rules. This article is relevant for the tax year ending 31 December 2023.
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.
You should note 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, 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 profits. Profits can then be distributed to individuals through dividends. Dividend income by individuals is taxed at 17% (but note if you have a non-domicile status dividend is tax-free!).
Income tax rates for individuals, on the other hand, go as high as 35%. Income tax rates for individuals can be found in this link. 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. Same rules apply to self-employed individuals and companies, there is therefore no advantage from a VAT perspective..
Social Insurance
Self-employed individuals must 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 (Cyprus healthcare system).
On the other hand, companies pay 25.85% social insurance & GESY for their employees (14.90% employers, 10.95% employees).
It is important to note however that Cyprus companies are not required by law to have employees. And for companies which have employees, another significant point to note is that there is no minimum wage in Cyprus.
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 are obliged to pay an annual company levy €350 per year, whereas individuals do not have to pay this fee.
Furthermore, companies need to pay a municipality tax (approx. €200 per year for Limassol based companies).
Lastly, 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 company incorporation requires money (cost varies).
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 you minimise your tax liabilities.
