The Corporate Legal System of Cyprus
The Cyprus’ legal system is a mixture of common law and civil law, mainly due to the fact that Cyprus was a British colony until 1960. Following the accession of Cyprus to the European Union, Cyprus’ Law is in alignment with EU’s laws and regulations.
- Public Limited Liability Company;
- Private Limited Liability Company;
Cyprus Public Limited Liability Company
The Public Limited Liability Company has the following characteristics
- It must have at least seven (7) members;
- It must have a minimum Share Capital of €25.629,00 and it must be fully paid before the company exercises its borrowing powers;
- It can invite public subscriptions to its shares;
- Its shares are freely transferable;
- It must have at least two Directors;
- It must file with the Registrar of Companies its Memorandum and Articles of Association;
- It can be listed in a Regulated or an Unregulated Market.
Cyprus Private Limited Liability Company
Basic characteristics of the Private Limited Liability Company
- There are restrictions to the right of transfer of shares;
- The minimum number of members that can have one (1) and the maximum is fifty (50);
- Invitation to the public for subscription to its shares is forbidden;
- It must have a Secretary, at least one Director and a registered office address in Cyprus;
- There is no minimum Share Capital requirements, although at the time of incorporation a member must have at least one (1) share;
- It can be a Single–Member Company, in which case the Secretary, the Director and the Shareholder can be the same person;
- The liability of its members is limited to the amount of share capital they have subscribed for;
Foreign investors mostly use Private Limited Liability Companies as their business vehicle mainly due to the robust legal framework of Cyprus, the very attractive tax regime, the security that it provides such as the limited liability of shareholders and therefore the protection of their personal wealth and of course the low set up costs and the relatively light corporate governance requirements.
Contracts prior to Incorporation
Any contract which is entered into before the incorporation of the company by the persons who have signed the memorandum of association, or by persons authorized by them, in the name of or on behalf of the company under incorporation, is temporary and does not bind the company until the date of incorporation. After incorporation, the agreement constitutes a binding contract for the company.
Memorandum of Association
A Cypriot Limited Liability Company may amend its memorandum by special resolution and with the approval of the Registrar.
The memorandum must be signed by each subscriber in the presence of at least one witness. It is permissible to provide for nominee subscribers to the memorandum of association.
The memorandum of the Company may be altered on if ti meets certain criteria set out by the Companies Law Cap.113and only if it is confirmed on petition by the court.
The memorandum must include:
- The company’s name;
- its registered office address;
- provide the main objects / purpose of the company. A Cypriot Private Limited Liability Company can only carry out transactions permitted by the objects clause in its Memorandum of Association, otherwise the transaction will be considered ultra vires and void. The current professional practice in Cyprus is, therefore, to draft the objects clause as wide as possible;
- a limited liability clause, stating that the liability of its members is limited, meaning that the company’s finances are separate from the personal finances of their owners and as a general rule creditors of the business may only pursue the company’s assets to settle a debt. The personal assets of the owners are not at risk;
- a capital clause setting out the authorised or nominal capital of the company and its division into shares of a fixed amount. The authorised share capital may subsequently be increased by the company in general meeting.
No minimum share capital is provided by the Companies Law for private companies, although each subscriber to the memorandum must subscribe for at least one (1) share. Although usually denominated in Euros, the nominal share capital of a company may, be denominated in any other currency. The common practice in Cyprus is to incorporate the Cyprus Company with authorised share capital of one thousand euros (€1.000,00) divided into one thousand shares of one euro (€1,00) each.
The share capital of a Cyprus company may be divided into different classes of shares. Although the share capital must be stated in the memorandum, the types of shares and their respective rights need not be set out in it, and the power may be reserved in the articles to issue different classes of shares.
Articles of Association
The Articles of Association must be signed by each subscriber of the memorandum of association in the presence of at least one witness. The Articles of Association of a Cypriot Limited Liability Company set out its internal management rules and shareholders’ rights. The articles of Association must also be filed with the Regisrtar of Companies.
Subject to the provisions of the Companies Law and to the conditions contained in its memorandum, a company may, by special resolution, alter or add to its articles without a need for court approval.
The Articles of Association bind the Cyprus Company to its members and vice versa, but not the shareholders to each other. Therefore, if the shareholders of a Cyprus Company want to keep certain matters private, they can enter into a separate shareholders’ agreement which does not need to be filed publicly.
The proposed name of the company must be approved by the Registrar before the incorporation of the Cyprus Company and must include the word “Limited” or its abbreviation “Ltd” as the last word of the name. Any time after incorporation a Cyprus Company may change its name by special resolution and with the approval of the Registrar.
A Cyprus private company must have at least one registered shareholder. A shareholder may, however, hold its shares as nominee for another person. Shareholders can either be individuals or legal corporate entities.
A shareholder in a Cyprus Limited Liability Company, as a holder of shares and in no other capacity, is only liable for the amount payable on issue of those shares and their liability cannot generally go beyond that amount.
Minority protection is available at common law and under legislative provisions.
The Cyprus Companies Law (Cap. 113) requires a minimum percentage of votes for the passing of certain important decisions (such as members’ liquidation, amendments of the articles of association, and so on).
Shareholders’ agreements can be entered into and can contain provisions safeguarding minority rights. Any action brought under a shareholders’ agreement would be for breach of contract and against fellow shareholders or other parties to the agreement, if the company is not a party.
A Cyprus Company must have a registered office address in Cyprus and it must be filed with the Registrar of Companies.
Board of Directors of a Cyprus Company
The business of the Cyprus Company are managed by the Board of Directors according to rules that have been set out in the Articles of Association.
A Private Limited Company may have one or more directors and a secretary, but the same person may not be a sole director and the secretary. However, this restriction does not apply in the case of a company with only one shareholder.
The Directors may be either individuals or legal entities. Although it is not required by law that the Directors need to be residents of Cyprus, it is recommended that the majority of the Directors are residents of Cyprus in order for the Cyprus Company to claim that it has its Management and Control in Cyprus and therefore is a Cyprus Tax resident.
The Directors of a limited company, amongst other must:
- Follow the company’s rules, as are shown in its Articles of Association;
- keep the company records;
- report changes in the structure of the company to the Registrar of Companies;
- file the Financial Statements and your Company Tax Return to the Registrar of Companies and the Tax Department;
- pay Corporation Tax
Although the Board of Directors may hire other people to manage some of these things day-to-day (for example, an accountant) they are still legally responsible for the company’s records, accounts and performance.
A Cyprus Company must appoint a Secretary which may be either an individual or a legal entity.
Transfer of Shares
The way a transfer of shares of a private limited liability company is to take place is governed by the rules set out in Articles of Association of the Cypriot Company
Typically, in order to transfer shares in a private limited liability company, the following procedure is required:
- An instrument of transfer is signed by the transferor and transferee. It is noted that this is a legal requirement and prerequisite for a transfer;
- Other existing shareholders should waive any preemption rights that they may have;
- The transferor returns to the company his existing share certificate for cancellation;
- The board of directors of the company approves the transfer;
- The secretary of the company enters the transferee as a shareholder in the Register of Members of the company;
- The company issues a share certificate in the name of the transferee;
- The company notifies the Registrar of the transfer;
- The Registrar issues a new certificate of shareholders.
It is noted that the transfer is completed on the completion of item (5) above.
A Cypriot Company is obliged to maintain proper accounting books that sufficiently present an accurate and fair picture of the affairs of the company, with proper explanations of the different transactions. The accounting books must be kept at the registered office of the Cypriot Company.
Financial Year end
A Cypriot Company must set a date as its Financial Year end. The most commonly used date for Financial Year end is the 31st of December.
Every Cypriot Company is required at least once in every calendar year to file an annual return to the Registrar of Companies setting out particulars relating to the company as specified in the Company Law (Cap. 113). The return must be accompanied with the Audited Financial Statements of the Company.
A Cypriot Company can only pay a Dividend to its shareholders only if it has available profits from current and previous financial years.
A company may declare either a final dividend or an interim dividend.
The shareholders of a Cypriot Company must, at each annual general meeting, appoint auditors of the company who will be responsible for the auditing of the Financial Statements of the Cypriot Company.
The Corporate Tax Rate for Cyprus is 12.5%.
Certain income types are also subject to a special contribution for defense. (Interest, Dividends, Rents)
Temporary Tax is payable in two equal installments on the 31st July and 31st December of the current year, and Self-assessment tax (tax balance from the previous year) is payable on the 1st August (the following year).
The Deadline for electronic filing of the Company’s Tax Return is 31st March – 15 months after the end of the calendar year.
Taxable profits include the profits that the company makes from renting and/or doing business.
Additionally a company is subject to Capital Gains Tax based on the provisions of the relevant law for Profit from the disposal of:
- immovable property situated in Cyprus;
- shares of companies whose property consists of, inter alia, immovable property situated in Cyprus;
- shares of companies which either directly or indirectly participate in a company or companies which own immovable property situated in Cyprus and at least 50% of the market value of such shares is derived from the said property.
The Cypriot Company is liable to pay company tax on all its profits from Cyprus and abroad.
A company is tax resident in Cyprus if its management and control is exercised in Cyprus.
Although the term “management and control” is not defined in Cypriot tax legislation, it is generally accepted to be in line with international tax principles, that a company is considered to be a Tax Resident of Cyprus if:
- The Corporate sit of the company is in Cyprus
- The majority of Directors of the company are tax-resident in Cyprus and exercise their duties from Cyprus
- The meetings of the Board of Directors take place in Cyprus
- All strategic management decisions of the Board of Directors are made in Cyprus and all resolutions and contracts are signed in Cyprus.
- Accounting records of the company are prepared and kept in Cyprus.
- The bank accounts of the company are managed from Cyprus, even they are actually maintained by banks established outside Cyprus.
A Cyprus tax resident entity is taxed on its income accrued or derived from all chargeable sources worldwide.
The main compliance/reporting requirements of Cypriot Private Limited Liability Companies are set out below:
- Registration with the Tax Department in order to obtain a tax identification number and a VAT registration number;
- Registration with the Social Insurance Services. Employers are liable to pay contributions to the Funds (Social Insurance, Annual Holidays with Pay, Redundancy, Human Resource Development and Social Cohesion) for each of their employees whose remuneration is not less than €200 per week or less than €700 per month. Employers pay their contributions (including the employees’ share) monthly in arrears, within one month from the end of each contribution month.
- Obligation to keep proper and accurate Accounting Books.
- Submission of an annual return in statutory form accompanied by audited financial statements to the registrar.
- Payment of an annual levy of EUR350 to the registrar.
- Income tax return (Form IR4) must be filed within 15 months from the end of the year of assessment. The audited financial statements need to be provided only on request of the tax department. Non-resident companies have to also file Form IR4 if they have income from Cypriot sources (for example, permanent establishment). Otherwise non-resident companies must file Form IR4 on a simplified basis.
- VAT submissions on a quarterly basis (where applicable).
- VIES submissions on a monthly basis (if the company is engaged in EU intra-community transactions)
Additionally, companies are under an obligation to file certain notifications with the registrar where, for example, any changes in its particulars (including changes in shareholders, directors, capital and registered office details) together with copies of relevant resolutions.
- Approval of the proposed company name;
- Draft of the Memorandum and Articles of Association;
- Completion of the forms that state the Directors, the Secretary and the Registered office of the company;
- Filling of the above documents to the Registrar of Companies.
The whole incorporating process usually takes between 15 – 20 working days.