Incorporating a Cyprus company is an easy and relatively swift procedure, but what about the obligations regarding tax and statutory reporting?
It is very important for every company to comply with the local regulations in order to avoid any penalties and deadlines.
Such tax and statutory obligations and reporting are imposed, inter alia, by the Companies’ Law, Cap.113, the Income Tax laws and Social Insurance laws, irrespective of whether a company is active or dormant.
This publication sets out the basic, but important, obligations that must be complied with.
With the increased number of regulations set by the Authorities in the last years, we have to ensure the full compliance by the companies, in order to avoid any monetary penalties or deadlines.
A. CORPORATE RECORDS
- Maintain Statutory Records
Companies are required by Companies Law (Cap.113) to keep and maintain their Statutory Records at their Registered Office. These records include a Register of Directors, a Register of Secretaries, a Register of Shareholders, a Register of Debenture-Holders and a Register of Charges.
Furthermore, additional documents include certificate of incorporation, directors and secretary, shareholders, registered office, memorandum and articles of association, audited financial statements, copies of annual returns and minutes kept from general meetings.
Any updates must be added to the Register within 14 (fourteen) days.
A list of Directors, Secretary and Shareholder is also maintained by the Cyprus Registrar of Companies. Updates to that listing must be filed with the Registrar within 14 (fourteen) days and any information and/or updates which are maintained by the Cyprus Registrar of Companies are available online for public searching.
B. UBO REGISTRY
A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercises control over the company or its management. According to the Companies Registrar Directive (KPD112 / 2021) for the Prevention and Suppression of Money Laundering and Terrorist Financing Activities, all companies and other legal entities incorporated or registered in Cyprus are now obliged to declare to the Registrar of Companies (ROC) the details of their beneficial owners. In case of a change in the information of a UBO, an entity and its officers must, within fourteen (14) days from the change, file onto the UBO register the information regarding the new UBO or the change on the details of an existing UBO owner.
- Annual General Meeting
Companies Law (Cap.113) requires the Board of Directors of a Company to hold General Meetings (AGM) in order to resolve important decisions in accordance with the Articles of Association of the Company. For example:
- Approval of the Audited Financial Statements
- The Election/Re-election of the Board of Directors
- The Appointment/Re-appointment of the Company’s Auditors and determination of their fees
- The Declaration of Dividends in case the Board of Directors have proposed it
- The Meetings should be held in accordance with legislation and must be duly convened with appropriate notice as set in the law.
The resolutions passed in these meetings should be documented in minutes by the Company’s Secretary and kept at the Company’s Registered Office.
- Minutes and Resolutions
The Minutes of all the meetings of the Members of the Board of Directors of the Company (including any committees thereof) must be kept at the Company’s registered office. Any actions of the company which are taken by written resolution, must be also kept as copies at the Company’s Registered Office.
D. FINANCIAL RECORDS
- Bookkeeping and Audit Obligations
In accordance with the Companies Law in Cyprus (Cap.113), a Company is obliged to:
- Prepare Financial Statements in accordance with the International Financial Reporting Standards (IFRS); and
- The Financial Statements must be audited by an independent registered auditor in Cyprus in accordance with International Standards of Auditing (ISA’s).
- Submission of Annual Return (Form HE32) and Financial Statements to the Registrar of Companies
Every company must prepare and file with the Registrar of Companies an Annual Return (HE32) once a year which must include, among others, information as to the registered office of the company, registered shareholders, debentures, liabilities, directors and secretary.
The company must prepare its Annual Return (HE32) within 14 days after the Annual General Meeting and within a time limit of 28 days from such drafting date it must submit it to the Registrar of Companies. In effect, the Annual Return must be completed and filed with the Registrar of Companies within a time limit of 42 days from the Annual General Meeting of the company. A company’s first annual return may be submitted up to 18 months from the date of its incorporation.
A copy of the financial statements of the previous year must be filed with the Registrar together with the Annual Return (form HE 32) of the current year.
E. ANNUAL GOVERNMENTAL FEE
Payment of the Annual Levy imposed on all Cyprus Companies
Every company, registered in the Registrar of Companies, must pay a current annual fee of three hundred and fifty euros (€350) by 30th of June of each year of its operation.
It is noted that, if a company fails to timely pay the current annual fee it is subject to a late charge as follows:
- for payment within two (2) months from the 30th of June (i.e. up until 31st August), the charge imposed equals to an additional ten percent (10%) on the original fee, thus making the total amount to be paid three hundred and eighty-five euros (€385);
- for payment within five (5) months from the 30th June (i.e. up until 30th November), the charge imposed equals to an additional 30% on the original fee, thus making the total amount to be paid four hundred and ninety euros (€490).
Companies belonging to a group, for which the total payable fees do not exceed the sum of twenty thousand euros (€20.000), complete and submit the application for the payment of annual fee by allocating the sum amongst the companies in equal parts.
F. TAX COMPLIANCE OBLIGATIONS / FILINGS WITH THE TAX DEPARTMENT
(a) Registration with the Tax Department Companies have an obligation to register with the local tax department and obtain a tax identification code (TIC) within 60 days from their incorporation. Companies incorporated outside Cyprus and with their place of business within Cyprus, have the same obligation to register with the tax authorities within 60 days from the date of their registration with the Registrar or from the date they are considered Cypriot tax residents. Companies which have already been registered with the tax authorities are required to inform the Commissioner of Taxation of any changes that may affect the records of the tax authorities’ register, within 60 days from the date that the relevant change occurred. Corporate Annual Tax Returns (Form T.D. 4) should be filed by 31st of March of the subsequent year of the year following the relevant tax year. Administrative penalties apply for late submission of declarations.
(b) Payment of tax and refunds Cyprus operates a system of self-assessment for corporation tax. Companies have to pay provisional tax on the current year’s taxable profit in two equal instalments on 31st July and 31st December. The provisional tax assessment may be revised by the taxpayer at any time before 31 December of the tax year to which it relates. Any underpayment may be corrected by self-assessment by 1 August of the following year to avoid interest being charged.
(c) Value Added Tax (VAT) Under certain conditions specified in the relevant VAT law, Cypriot companies have an obligation to register with the Tax Department and have an obligation to submit VAT returns on a quarterly basis. VAT is imposed on the supply of goods and provision services in Cyprus, as well as on the acquisition of goods from the European Union (EU) and the importation of goods into Cyprus. VAT returns must be submitted quarterly and the payment of the VAT must be made by the 10th day of the second month that follows the month in which the tax period ends.
(d) Social Insurance If a company employs individuals, then the company as an employer must make contributions in respect of its employees – likewise, all employees are liable to make social insurance contributions. The social insurance contributions of employees are withheld by the employer from the monthly salary paid to employees. These contributions along with the employer contributions should be paid not later than the end of the calendar month following the month that the salaries relate to. The current contribution rate is 11,45% for employees (incl. National Health Insurance) and 15,40% for the employer (incl. National Health Insurance). The employer makes other contributions as well to the social cohesion fund, redundancy fund, industrial training fund and holiday fund (if not exempt).
(e) Corporation Tax All Cyprus tax resident companies are taxed on their income accrued or derived from all chargeable sources in Cyprus and abroad. A non- Cypriot tax resident company is taxed on income accrued or derived from business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus. For the purposes of taxation, a company is deemed to be a resident in Cyprus if it is managed and controlled in Cyprus. The current corporate tax rate is 12,5%, one of the lowest in the EU.
G. ECONOMIC SUBSTANCE
Economic substance is a doctrine in the international tax law under which a transaction must have an economic purpose aside from reduction of tax liability in order to be considered valid. A company must be able to show physical presence and actual activity of the independent management within the jurisdiction of incorporation and/or tax residence of the corporate structure. In addition to registering with tax authorities, companies need to prove their economic presence in Cyprus. As a general rule, companies in Cyprus are urged to proceed with the following governance procedures and indicators of substance in order to support the tax residency of their company and achieve economic substance:
- Rent/buy an office space in Cyprus intended for business activity (not residential premises);
- Appoint a qualified director, resident of Cyprus who will make independent decisions on the company’s activities;
- Have a functioning telephone line, domain email address and website;
- Open a bank account with local bank;
- Hire employees in the company and arrange for the payment of the relevant payroll taxes;
- Registration of the company and other employees with social insurance requirements;
- Have effective management and control of the company in Cyprus (make decisions concerning the company in Cyprus); and
- Ensure proper physical storage of the company’s documents (agreements, statements, invoices etc.) in the office located in Cyprus.