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In this short article, we will demonstrate to you the best route to trade in Cyprus as a person or company.
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We take into consideration tax savings and of course the legal protection of the owner of the Company.
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1. Legal Protection
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Like all things in life, cheaper does not necessarily mean better, or cheaper, in fact!
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Here comes the elephant in the room.
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Creating a limited by shares company protects the owner against the law and in most cases the local authorities (tax and other). For some businesses, protection is significantly more important than tax savings. It all depends on the nature of your business, the type of services you offer, whether you have employees, and of course the conditions of employment.
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Outdoors dangerous repair work performed is surely more dangerous than office work. Imagine that one of your employees falls over a roof or accidentally damages the property severely. This could generate a plethora of legal issues for the business. It is the case that some services or product offerings are more dangerous than others. As such, the business must protect itself against potential risks including legal negligence.
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You can obtain such protection with the use of a limited company by shares.
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We will write another article just for this point.
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The essence is simple. Companies can close, dispose of their assets. Plus, you can replace them with other companies so that business continues as normal offering peace of mind to the owner. Physical persons, on the other hand, sole traders can't.
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This is the reason so many business people set up companies despite the additional accounting, audit, and tax fees involved. Tax savings come after!
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2. Taxes in Cyprus
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The Cyprus tax system is structured in such a manner that if you are trading as a person you are taxed as if you are an employee based on the below remuneration table with the exemption that your social securities and national healthcare system will be slightly different.
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Like other jurisdictions, taxes for salaried income is at the highest levels reaching more than 35% for taxable salaries exceeding Euro 60,000. In other words, if you earn more than Euro 60,000 it would be as if you give to the local Cyprus Tax Department 1/3 for tax payments!
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Employment Tax Thresholds
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On the other hand, if you create a Cyprus Company, tax stays at 12.5% on its profits, not turnover* and will enjoy tax-free dividends if you are a Cyprus Tax Resident but non-domiciled or if you are not a Cyprus Tax resident at all.
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This is why Cyprus companies are so popular. They are fully-fledged European Union companies, fully compliant with EU and OECD directives, taxed at only 12.5% locally in Cyprus with tax-free dividends for overseas businessmen.
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How are Cyprus companies taxed?
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Cyprus companies like any other company are taxed on their profits and not on their turnover.
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This implies that the following costs can be deducted from sales and can reduce the company taxation:
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- traveling expenses
- entertainment expenses - up to a certain threshold
- legal expenses
- advisory expenses
- accounting, audit fees
- telephone, stationery
- rental expenses
- any other expense incurred wholly and exclusively for business use
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3. Costs: Let's compare the company vs the Sole Trader (trading as an individual)
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Note that sole traders with income exceeding Euro 70,000 must prepare audited financial statements the same way companies do!
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In other words, you can not get rid of the auditor's fees if your turnover exceeds Euro 70,000. Nor the accountant's fees, in this respect, as you will need to have your accounting records, social securities, pay deductions, and national healthcare deductions prepared and paid by a licensed accounting firm whether a sole trader or a company.
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Your personal or corporate tax return needs backup from accounting ledgers and or evidence. In the event of an inspection by the Cyprus income tax office, the numbers can be supported.
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So what are the main differences between these two options:
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Conclusion
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Most businesses choose to operate via a Company rather as individuals. That is because the VAT threshold for registration is mandatory and reached if the turnover of a business is only Euro 15,300 within 12 consecutive months. Plus, an audit is mandatory for more than Euro 70,000 turnover for sole traders' books, coupled with the protection a Cyprus company offers to its employees.
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On the other hand, if expected turnovers are low <40,000 and the business services or operations do not carry any significant risk either to the actual person performing the work or to its clients, the most suitable solution would be to trade as a sole trader.
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Still not certain which option is best for you?
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Article provided by our partners at Cyause Audit Services . Contact them at kt@cyprusaccountants.com.cy or give them a call on +357 22 336 321 for more advice.
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