Opening an offshore company in Cyprus entails new opportunities for growth and profit. However, it’s also fraught with geopolitical and macroeconomic challenges that any entrepreneur should be wary of before doing anything official. In this article, I’ll cover all the basics of what an offshore company is and why Cyprus is a good place to start one while also offering concrete steps on how to actually open an offshore company in Cyprus.
Offshore Vs Onshore
Knowing the difference between these two types of companies is necessary to figure out whether or not offshore is actually the right path for you.
For the most part, an offshore company is fundamentally similar to its onshore counterpart.
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The only key difference is the tax rate that’s applied. For offshore company’s benefits, the rate applied by the country’s government in which the entity is declared is relatively low, sometimes even zero. For offshore company’s benefits, the rate applied by the country’s government in which the entity is declared is relatively low, sometimes even zero. In some countries, offshore companies also get a higher degree of privacy that is not afforded to onshore companies.
Location is one of the main reasons why Cyprus is a strategically sound choice for offshore company formation. The country is situated between three continents – Asia, Europe, and Africa, which fosters a healthy tourism sector. From a business perspective, this means higher foot traffic and potential sales.
Since the European financial crisis a few decades back, the country’s economy has stabilized, with a total GDP of $23.6 billion as of 2013. The economy’s strongest sectors include tourism, financial services, and shipping.
Following their integration into the EU in the early 2000s, Cyprus offered several tax breaks for foreign investments pouring into the country.
This included the signing of treaties to safeguard the interests of foreign investors. In fact, to avoid investors getting taxed twice, the government signed a double tax treaty with over 40 countries. This pivotal move also led to clearer fiscal transparency.
Four years after joining the European Union, Cyprus joins the Economic and Monetary Union, which further placed protection on foreign investment by completely eradicating the exchange rate risk.
Cyprus enforces a traditional tax-based model that has the most competitive corporate tax rate in the European Union at 12.5%. The country has at least a dozen more tax treaties in place, making it a tax haven for offshore companies.
Aside from these tax breaks, Cyprus’ rich culture, outdoorsy semi-tropical climate, developed transport infrastructure, and low cost of living are also good reasons to open an offshore company in the country.
These geographic qualities can help businesses reach more consumers over time while keeping operational spending to a minimum.
Starting an Offshore Company in Cyprus
I would advise visiting the country at least once before you actually set up a company. It’s about establishing a gut feeling that Cyprus is indeed the place you want to start an offshore company in, and no amount of financial paperwork or public records will help you answer that.
Decide on the Legal Forms of Your Offshore Company in Cyprus
Deciding on what type of offshore company you want to start in Cyprus is the first step in business formation 101. Not only will this affect the next several steps for business formation, but it’s also one of the details you’ll need to provide when you file through the Registrar of Companies.
The types of offshore company in Cyprus include:
- International Business Company or IBCs
- Offshore Corporation
- Offshore LLC
- Private Foundation
The type of offshore company in Cyprus can further be subdivided into the sector or industry the company specializes in, such as an offshore financial services company or offshore captive insurance company. What legal form you choose to incorporate your offshore company in will also affect the tax rates and breaks you are eligible for.
Determine the Requirements For Offshore Company Formation
Forming an offshore company will have slightly different requirements compared to forming a local business. The main branch of law to follow here is the Company Law. To be eligible for an offshore company in Cyprus, you’ll need a minimum number of shareholders. You’ll also need the company to have appointed at least one director and one secretary. The offshore company is also required to maintain a minimum share capital of 1,000 EUR and is not allowed to issue bearer shares.
Other equally important conditions that must be met by a prospective offshore company founder include: registration of their own legal address in the country, registration for taxation and employment rights thereafter, and registration for individual licenses and permits.
The latter is mainly for businesses that specialize in certain activities that may affect the local people or the environment. Applications to form an offshore company in Cyprus must also be accompanied by the Memorandum and Articles of Association, which I’d say are the two most important documents involved in the process. These two documents will contain the offshore company details including names of the appointed director/s, secretary, and shareholders.
It should also include outstanding share value and how shares will be divided amongst the company shareholders. A trading name is also required for all applying offshore company investors in Cyprus. Submit at least three name ideas to make sure that your trading name is approved on the first application attempt. Most, if not all, of the documents required for the formation of an offshore company in Cyprus, will be submitted to the Registrar of Companies.
Simply go to a legitimate Registrar of Companies website, fill out the application form, and obtain the credentials needed to log into the account.
The Registrar of Companies will ask for a registered office and address of your offshore company. We’ll talk about this later on. Your online application should be processed within four business days. Once processing is complete, the investor/owner of the offshore company can then log into the website to apply for a name and reservation. Last but not least, you will need a company bank account to open an offshore company in Cyprus. The share capital of your company will be deposited into this corporate account.
Fees For Opening an Offshore Company in Cyprus
The total costs of opening an offshore company in Cyprus will depend on several factors, such as your business’ legal form and additional services i.e. Nominee services.
Generally, fees will include:
- Company registration fee
- Company annual maintenance fee
- Company accounting fee
Seek Legal Help. The process of forming an offshore company in Cyprus can be overwhelmingly complex and time-consuming. Though Cyprus is an appealing place to do business because of the tax breaks, they have very strict procedures when it comes to forming a business entity in the country. Foreign investors who want to open an offshore company in Cyprus should consider hiring local agents and business attorneys who can help them navigate through the red tape of business formation in the country. Some can even help you complete the entire process remotely. The new tax regulations and business policies in Cyprus are continuously shifting. A business attorney or legal strategist could help you avoid hefty penalties and fees from a failure to comply with these new laws.
They can also expedite the process for you. It can cost upwards of 1,000 EUR to register your Cyprus offshore company through these corporate services. That being said, it’s best to learn the legal implications of said regulations and policies yourself so you can make informed decisions for your company.
Hiring Employees For Your Offshore Company in Cyprus
Hiring for your offshore company in Cyprus will be regulated under strict government laws. The legal minimum working age in Cyprus is 15 years old. Employees can be hired either directly or through an employment agency.
Sources that are of interest when looking to hire employees in Cyprus include the Cyprus Human Resource Management Association and the Cyprus Chamber of Commerce and Industry. The Cyprus government allows an offshore company to hire both full-time, part-time, and contract-based workers.
An offshore company must also meet the required minimum employee benefits including health and unemployment benefits. Fortunately, aside from being a tax haven, Cyprus also boasts a highly educated workforce. Locals are mostly fluent in the English language, which creates minimal friction for foreign investors and businesses.
Before being eligible to work for any offshore company in Cyprus, however, company employees must meet certain conditions including:
- Tax permit/Residence permit
- Criminal record
- Bank guarantee
- Valid medical insurance
As mentioned above, an offshore company in Cyprus must have at least one director and officer, usually a secretary, to be incorporated into the country. An offshore company director is responsible for managing all material decisions about the entity. A director is elected by the shareholder/s, and can assume the role for an indefinite period of time until a new successor is elected by the company shareholder/s.
Set Up a Company Office
Now that you have people working for your company, you need a place to keep those people in.
As mentioned earlier, a registered office for your offshore company is required by the Registrar of Companies, but there are no minimum requirements in terms of how big space should be or the kind of arrangement you have with the leaser.
Virtual office spaces are something you can consider. Virtual office spaces in Cyprus will cover a broad range of tasks that your company needs handling, such as answering phone calls or setting up conference rooms.
Rather than get your own physical company space and hire for the individual services you’ll need, you can save both time and money by outsourcing to a virtual company office in Cyprus. You still get a registered office address for your company without your company having to be physically present. This means you can also hire remote workers for your offshore company.
Accounting and Auditing For an Offshore Company in Cyprus
As the jurisdiction of company incorporation, Cyprus does not require any offshore company to provide annual reports or financial statements. To keep an offshore company in Cyprus compliant with all laws and regulations, they are required to pay fees to Cyprus’ government. This government fee can be thought of as a replacement for paying taxes to the country where the company is incorporated in.
Albeit, if an offshore company conducts business outside the jurisdiction of Cyprus, the company is then subject to the tax laws and regulations of this other state and may be required to file annual financial reports to the local government of the state.
In the past, Cyprus waived the need for an offshore company to be audited. However, in 2016, the government decided to make auditing of offshore companies mandatory. The costs are usually around 1,000 EUR, in addition to 19% VAT. This covers multiple documents per month including invoices and receipts. If your offshore company has more documents to process, it bumps up the cost.
Potential Pitfalls to Opening an Offshore Company in Cyprus
Cyprus is renowned for the country’s various company tax breaks and incentives. For example, the profits generated from Cyprus vessels are free from tax. But does Cyprus really offer everything that foreign investors want for their offshore company?
From a company perspective, there aren’t a lot of compelling arguments as to why you shouldn’t start an offshore company in Cyprus. But while I’ve highlighted the significantly low tax rate of 12.5% in Cyprus, bear in mind that there are other countries that impose lower tax rates, such as Bulgaria which sets a 10% tax rate for offshore companies.
Depending on what type of offshore company you have and the operations/activities it is involved in, you can find other countries that offer the same if not better tax conditions for your offshore company.
Another possible downside to opening an offshore company in Cyprus is the cyclical nature of the local economy. The changes in activity from summer to winter seasons affect how much tourism actually passes through Cyprus and, subsequently, how much is being spent in the economy. Moreover, the winter season can restrict direct flights to and from other European countries, which again means fewer people that your company can sell to.
If you’re planning on moving to Cyprus and saving up until you can start your own offshore company, the salaries and welfare benefits can be a disadvantage depending on which country you are moving from.
Opening a company in Cyprus takes time to plan and prepare for. Avoid any shortcuts as you work towards filing for your offshore company. Make sure you have all the necessary registration forms and permits before you start conducting business in the country.
You can approach this DIY style, which means more time and energy spent on learning taxation laws and offshore company structures or work with specialists who can shoulder the seemingly complicated procedures for you while you focus on actually growing the company.
As a final note, always weigh the risk versus the potential reward.
Cyprus may be a good place to set up a company thanks to its corporate taxation structure, but if your cultural background and lifestyle don’t align with the country’s, you’ll find it difficult to stay in the country long enough to grow your company.