Starting on your own: Some useful tax advice

Thinking up of starting a business on your own and debating whether to set up as a company or choose to be self-employed? Tax expert Marios Timinis explains the differences between the two routes

An individual can commence trading either as a self-employed or by forming an own-managed Company. There are several factors to be considered before taking any decision.

Commencement of trading as a self-employed
A self-employed individual can apply to the Cyprus Registrar of Companies for the approval and registration of a trade name at a cost not exceeding €150. The individual is taxed on the basis of trading profits. In case where the trading taxable profits do not exceed the amount of €19.500 per annum, which is the non-taxable threshold for an individual, then there is no tax liability. The trading profits can be withdrawn by the individual without paying tax. There is an obligation for self-employed individuals to contribute for social insurance at a percentage of 14.6% on their income. The contributions are subject to a minimum and a maximum amount which depends on the individuals’ profession or nature of trade. In case where the sales/turnover of the individual does not exceeding the amount of €70.000 per annum, there is no obligation to prepare and submit audited financial statements to the Inland Revenue.

Termination of trade as a self-employed
There are no costs incurred when the individual decides to terminate trade.

Trading through an own-managed Company
An own-managed company is a company registered with the Cyprus Registrar of Companies and the individual is simultaneously the sole director and shareholder of the Company. In this case, the individual must apply first to the Cyprus Registrar of Companies for name approval and provided that this is approved the Company can be registered. It will be necessary to appoint an accountant and/or solicitor to prepare all the required legal documents for the formation of the Company. The formation of a small Company is expected to cost approximately €1.000. In case where the Company is profitable, this is subject to a Corporation Tax at the rate of 12.5%. In addition, there is a 17% Special Defence Contribution (SDC) if the individual receives dividends from the Company under the capacity of a shareholder. If the individual does not receive dividends, then there is an obligation to pay 17% SDC on a deemed distribution of dividends which is calculated by multiplying the net profits after tax by 70%.

It is therefore advisable for the individual to absorb all profits by receiving salaries especially when the Company’s profits do not exceed €19.500 before the payment of salaries to the individual. This implies that there will be no taxable profits and therefore no Corporation Tax and SDC liabilities.

The Social Insurance contributions of a Company come to a total of 19,3% of the gross salaries. The 7,8% is deducted from the salary of the employee and the 11,5% relates to the employer’s contribution.

It is compulsory for all Companies to appoint an auditor, prepare Audited Financial Statements and submit them annually to the Registrar of Companies and the Inland Revenue together with a Corporation Tax Return. This implies the incurrence of audit and professional fees for the preparation and submission of the Audited Financial Statements and the Corporation Tax Return.

In addition, there is an annual levy and a statutory fee for the submission of an annual return to the Registrar of Companies amounting to approximately €400.

Termination of trade and dissolution of a Company
Dissolution of a Company will incur professional fees and costs which are expected to exceed €1.000. It is advisable for young professionals who are intending to establish their business; to obtain a professional advice before deciding whether to trade as a self-employed or through a Company. The decision depends on the level of expected profits and the results of a cost-benefit analysis which is necessary to be carried out.  

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