Cyprus - Compliance With Laws/Regulations
Sponsored by Fiducenter
08 May, 2014
In this special feature, we summarize the rules and regulations governing the formation and operation of a company in Cyprus, corporate tax obligations for companies registered in the jurisdiction as well as the islands anti-money laundering requirements.
According to the Cyprus Investment Promotion Agency, just short of 18,000 new companies were registered in the jurisdiction in 2012, taking the total number of registered companies there to almost 270,000. And this despite the countrys well-publicised fiscal and economic problems, which have resulted in taxes rising and an EU-funded bail-in of the banking sector.
The fact is that while Cyprus has been obliged to bring aspects of its tax, legislative and regulatory system into line with the more stringent requirements of the European Union (EU), its fiscal regime remains highly attractive and the jurisdiction continues to be a favoured location for holding and investment companies aimed at emerging markets. Indeed, despite regular criticism of Brusselss propensity to over-tax and over-regulate, the kudos of EU membership can be said to have enhanced Cypruss standing as an international financial and business hub.
Cyprus Companies Law
Companies in Cyprus are formed under the Companies Law (Cap. 113) which is based largely on the English Companies Act 1948. However, the Companies Law underwent a major revision in 2003 and in subsequent years to bring Cypriot company law into line with European directives in preparation for Cypruss accession to the EU, which took place in 2004.
The Companies Law provides for the formation of five company formats, as follows:
- Private and public limited liability companies (Cyprus companies can also be limited by guarantee)
- General and limited partnerships
- Sole Proprietorships
- European Companies (Societas Europeas)
- Branches of a foreign company
The overwhelming majority of business registrations in Cyprus are however in the limited company form.
Characteristics of a Cyprus Company
A private limited company requires at least one director and a company secretary. Directors and company secretaries can be physical or legal persons and of any nationality. In certain cases a director may also act as a company secretary.
The Companies Law requires there to be at least one shareholder, and while nominee shareholders are permitted they must be licensed. It is a requirement that shareholders hold an annual general meeting, but other meetings of the shareholders can be held via a resolution in writing.
It is an obligation that the registered office of the company be in Cyprus.
Any physical or legal person, whether of EU origin or not, is entitled to form a company in Cyprus. The process begins with the registration of a company name with the Registrar of Companies either directly by the applicant or by engaging the services of a lawyer or corporate services provider. The website of the Registrar contains a search facility to establish whether the intended company name is already in use. However, under Cyprus legislation only a lawyer licensed by the Cyprus Bar Association is allowed to prepare the memorandum and articles of association, and the declaration form that must be submitted to the Registrar of Companies. While corporate services providers regulated under Cyprus legislation (regulated firms) can form a Cyprus company on behalf of an applicant, they do so in cooperation with lawyers in order to fulfil the regulatory requirement concerning the lawyers role.
Applicants are required to submit the following information to enable the company registration to be processed:
- A brief description of the main objects of the company, unless the standard Memorandum and Articles of Association are to be used;
- The amount of nominal share capital and how it is divided (for a public company there is a minimum share capital of EUR25,629);
- The names, addresses and passport details of the proposed directors and secretary of the company;
- The proposed registered address of the company;
- Certified copies of the passports of the ultimate beneficial owners of the company;
- Bank or other references on the good standing of the ultimate beneficial owners;
- The chain of ownership behind the Cyprus Company up to and including the ultimate beneficial owners; and
- Any other information necessary to satisfy the requirements of the Know Your Customer rules in order to comply with the Anti-Money Laundering Law (see below).
Additionally, four documents are required by the Registrar to complete the company registration, as follows:
- Declaration Form (HE1)
- Declaration Form concerning the registered office address (HE2)
- Form containing details on the Company Directors and Secretary (HE3)
- Original Memorandum and Articles of Association which should be signed by (a) the subscribers to the Memorandum whose signatures must be attested by at least one witness; and (b) the lawyer who has drawn up the same.
Applicants are required to pay various fees to the Registrar of Companies, including: a fee of EUR105, plus subscription tax of 0.6% of nominal share capital; and fees of EUR60 for the submission of forms HE1, HE2 and HE3. A fee of EUR100 applies if the accelerated registration procedure is used.
The processing and approval of the company name by the Registrar usually takes about 2-5 working days, with another 2 5 days required to process the registration application itself. However, a fast track procedure is available whereby an applicant can purchase a shelf company which has already been registered by a Cypriot legal firm or service provider. Changes to the companys particulars, such as directors or shareholders, can be effected by the submission to the Registrar of the relevant forms, either at the time the shelf company is purchased, or at a later date.
All companies must register with the Inland Revenue Department and obtain a tax identification number (see below for tax obligations and administration requirements). They may also need to register for value-added tax (VAT), as well as with the employers register of the social insurance services. Registering for income tax, VAT and social insurance usually takes approximately 1-2 working days, provided that the applicant submits the necessary information and documentation without errors or omissions.
As from 2011 all limited companies registered in Cyprus are liable for an annual levy of EUR350 which must be paid by 30th June each year. Penalties are imposed for late or non-payment of this levy, starting at 10% for payments made up to two months after the deadline, and rising to 30% for payments received up to five months after the deadline. Companies refusing to pay the levy after five months will be struck off the companies register by the Registrar of Companies, but can be reinstated with a payment of EUR500 within two years of the strike off, which rises to EUR750 after two years.
Company Audits: Statutory Obligations
A Cyprus company has the following two statutory obligations with respect to the audit of its financial statements, as follows:
- A company must submit its audited financial statements to the Registrar of Companies in Greek or English, by attaching them to the annual return of the corresponding year. These financial statements must be prepared on an annual basis, except for the first financial statements of a company which can cover a period of up to 18 months from the date of the companys incorporation. Companies with subsidiaries are required to file consolidated financial statements with Registrar of Companies, unless specifically exempted under the Companies Law.
- A company must submit its Annual Tax Return to the Inland Revenue authorities on a calendar year basis. Annual Tax Returns must be supported by the audited separate (non-consolidated) financial statements of the company.
Companies without subsidiaries may submit a single set of audited financial statements to satisfy both statutory obligations. However, where consolidation is required, a company should prepare a set of consolidated financial statements for the purposes of the Registrar of Companies and a set of separate (non-consolidated) financial statements for the purposes of the Inland Revenue.
One of the main reasons why foreign investors choose to locate a company in Cyprus is because of its favourable tax regime, at the centre of which is its low rate of corporate tax, which at 12.5% (2014) remains one of the best in the EU.
Besides a low flat rate of corporate tax, Cypriot legislation provides tax exemptions on the trading and disposal of securities and on dividends (subject to certain conditions), tax-neutral group reorganisations, tax relief for group losses, tax credits for foreign tax, tax relief of 80% on intellectual property income and access to the EU parent/subsidiary directive. Unusually for a low-tax jurisdiction, it also has an extensive network of double tax avoidance agreements.
Under the Income Tax Law (Law No. 118(I) of 2002, as amended), companies resident in Cyprus are liable to income tax on their worldwide income. A company is considered tax-resident in Cyprus if it demonstrates that its management and control are effected in Cyprus. Although this requirement is not defined as such by the Companies Law, it is generally satisfied if the majority of the individuals who make up the board of directors are Cyprus residents and board meetings take place in Cyprus.
Companies deemed to be non-resident in Cyprus are liable for tax on their Cyprus-sourced income only. However, non-tax residents having a permanent establishment in Cyprus may elect, if it is to their benefit, to be taxed in accordance with the provisions applicable to tax residents. The income liable to income tax includes (but is not limited to) business profits, interest derived in the ordinary course of business, royalties, rent from property and any consideration for the trading of goodwill.
Tax Filing and Payment
Company tax returns must be filed in respect of each fiscal (calendar) year by 31st December in the year following the fiscal year, together with balance sheet and profit and loss account, auditor's report, income tax and Defence Tax computation and additional information report.
Self-assessment operates, and corporate income tax payments are due on 1st August for the previous year's final tax. Fines apply to late or materially faulty self-assessments; from 1st January 2014, this fine was 4.5% of the unpaid tax (4.75% prior to this date).
As from 1st, April, 2011, all tax returns submitted by companies and self-employed individuals with an annual turnover of more than EUR70,000 must be accompanied by a Tax Confirmation that is prepared and signed by an independent tax advisor or auditor. This requirement follows the issue by the Commissioner of Income Taxes of Circular 2011/1 on February 15, 2011. In addition, all tax returns submitted by companies and self-employed individuals with a turnover exceeding EUR70,000 for the 2010 and subsequent tax years must submit their tax returns electronically.
Anti-Money Laundering Laws
Despite recent criticism from some quarters, but especially from Germany, that its anti-money laundering (AML) laws were lax, Cyprus has in fact had AML legislation in place for almost 20 years, and well before the issue of money laundering and terrorist financing became a major global issue in the wake of 9/11. In recent years this legislation has been strengthened to bring it into line with EU directives, and Cyprus has also ratified international AML conventions including the UN Convention Against Transnational Organized Crime, the UN Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention). Cyprus is also largely compliant with the Financial Action Task Forces 40+9 Recommendations.
The Prevention and Suppression of Money Laundering Activities Law (No. 61(I)/96) was enacted by Cyprus in May 1996 and the law criminalized money laundering from all serious crimes and provided for the confiscation of criminal proceeds. It also codified actions that banks and non-bank financial institutions had to take, including customer identification (drug related money laundering was criminalized by previously enacted legislation). The 1996 law also established the Unit for Combating Money Laundering (MOKAS), which became operational in January 1997.
Subsequent amendments to this piece of legislation extended the list of predicate offences to include all crimes punishable with imprisonment in excess of one year and facilitated the exchange of financial information with other financial intelligence units as well as the sharing of assets with other governments.
On 13th December 2007, the Cypriot House of Representatives enacted legislation which consolidated, revised and repealed certain parts of the Laws on the Prevention and Suppression of Money Laundering Activities of 1996-2004. Under the current Law, which came into force on 1st January 2008, Cyprus anti-money laundering requirements have been harmonised with the Third European Union Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Directive 2005/60/?C).
The law places additional administrative requirements on all institutions, including banks, engaged in financial and designated non-financial activities. It requires all persons engaged in relevant financial and other business (banks, financial institutions, lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones) to establish and maintain specific policies and procedures to guard against their business being used for the purposes of money laundering and terrorist financing. Specifically, these persons are required to implement customer identification and record keeping procedures, appoint compliance officers and offer training and education to their employees. These procedures are designed to achieve two objectives: firstly, the recognition and reporting of suspicious transactions to MOKAS through strict implementation of KYC procedures; and the creation of an audit trail for law enforcement agencies if a bank customer comes under investigation.
On March 27, 2009, Cyprus ratified the Council of Europe Convention on Money Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (CETS No. 198). The convention opened for signature to the member states of the Council of Europe, the non-member states which have participated in its elaboration, and the European Community, in Warsaw, on 16th May, 2005. It entered into force on 1st May, 2008.
The latest convention replaces the Council of Europes 1990 convention, providing legislation to take into account the fact that not only could terrorism be financed through money laundering from criminal activity, but also through legitimate activities.
The new convention is the first international treaty covering both the prevention and the control of money laundering and the financing of terrorism. The text addresses the fact that quick access to financial information or information on assets held by criminal organisations, including terrorist groups, is the key to combating them. The convention includes a mechanism to ensure the proper implementation of its provisions by participants.
In many respects, Cyprus can be said to have the best of both worlds. While EU membership means that the country has had to tighten up certain aspects of its legislative framework and strengthen the regulatory environment, the reputational effects of EU membership seem to have been largely positive. Whats more, it has been able to adapt its tax regime to ensure that it remains highly attractive to international investors. The thousands of companies that register in the jurisdiction each year are a testament to its enduring appeal.
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