The TaxedInCyprus Protocol: The Optimal Method for Retaining the Majority of Your Business Profits
August 31, 2024
For entrepreneurs thinking about starting a new venture within the European Union, Cyprus offers a range of appealing benefits that extend far beyond its laid-back lifestyle. This Mediterranean island isn't just a beautiful place to live; it's also a strategic location for business with some great advantages for startups.
From its favorable tax policies and non-domicile status to its high quality of life and prime location, Cyprus provides a unique opportunity for those looking to grow their businesses efficiently. In this guide, we'll explore why Cyprus is such an attractive option, take a closer look at its tax benefits, and introduce the TaxedInCyprus Protocol—a thoughtful approach to help you mazimize your profits.
Why Cyprus?
Cyprus is a standout choice for entrepreneurs for several key reasons:
1. Strategic Location: Positioned at the crossroads of Europe, Asia, and Africa, Cyprus serves as a strategic gateway for international business. Its location facilitates easy access to major markets and offers significant advantages for businesses engaged in trade, logistics, and global operations. The island’s geographic advantage also means it benefits from a favorable time zone for coordinating with both Western and Eastern markets.
2. Legal and Financial Framework: Cyprus’s legal system is grounded in English common law, which is familiar to many international investors and entrepreneurs. This legal foundation provides a predictable and stable environment for business operations, reducing uncertainties often associated with unfamiliar legal systems. Additionally, Cyprus is a member of the European Union, offering access to the EU’s single market and regulatory standards.
3. Quality of Life: Cyprus is renowned for its high quality of life, characterized by a favorable climate with over 300 days of sunshine annually. The island boasts a low cost of living relative to many other EU countries, which can be particularly appealing for startups and their teams. With excellent healthcare, education, and safety standards, Cyprus provides a conducive environment for both work and living.
Tax Benefits in Cyprus
Cyprus offers a range of tax benefits that can significantly enhance the financial efficiency of your startup:
1. Corporate Tax: The standard corporate tax rate in Cyprus is 12.5%, one of the lowest in the EU. However, businesses involved in intellectual property (IP) activities can benefit from the IP Box regime, which reduces the effective tax rate on qualifying IP income to as low as 2.5%. This regime encourages investment and supports innovation by providing substantial tax relief on IP-related income.
2. No Withholding Taxes: Cyprus does not impose withholding taxes on dividends, interest, or royalties paid to non-residents. This means that businesses can transfer funds internationally without incurring additional tax liabilities, facilitating cross-border operations and profit repatriation
3. Capital Gains Tax: Cyprus provides exemptions on capital gains arising from the sale of securities, such as shares and bonds. This is particularly beneficial for startups that may engage in frequent investment transactions or deal with venture capital.
4. Extensive Double Tax Treaties: Cyprus has signed over 70 double tax treaties with countries worldwide, aimed at reducing or eliminating double taxation on income. These treaties ensure that income earned across borders is taxed fairly and prevent the issue of being taxed twice on the same income, which can be a significant advantage for international businesses.
The Non-Domicile Advantage
The non-domicile (non-dom) status in Cyprus offers several tax benefits that are especially attractive to young startup founders, entrepreneurs and even high net-worh individuals:
1. Exemption from Special Defence Contribution: Non-doms are exempt from the Special Defence Contribution (SDC) on dividends and interest. This exemption is valid for 17 years, making it an excellent option for those who earn significant passive income from investments. By avoiding SDC on these income streams, non-doms can substantially reduce their tax liabilities.
2. Income Tax Exemptions: If you're not a Cypriot resident and come to Cyprus to work you can get a 20% tax exemption for 7 years. If you're a high earner you can get a 50% exemption. If your income is over €55,000 a year, this exemption can last for up to 17 years, while if your income is over €100,000 a year then that tax exemption can last up to 10 years.
3. Minimal Physical Presence Requirements: Non-doms need to spend only 60 days per year in Cyprus to qualify for tax residency. This relatively low threshold is ideal for digital nomads and global entrepreneurs who may need to travel frequently or have businesses with an international focus. However, keep in mind that in order to get your tax residency, you must also have a permanent residence in Cyprus either rented or owner, and engage in economic activity.
The TaxedInCyprus Protocol
The TaxedInCyprus Protocol is a strategic approach designed to help startup founders maximize the tax benefits available in Cyprus. Here’s a detailed step-by-step guide to implementing this protocol:
1. Create a Company
Company Registration: To start, you need to register your company in Cyprus. The registration process is straightforward and involves several key steps which are carried out by a local lawyer:
1. Choose a Company Name: Ensure the company name is unique and complies with Cypriot regulations. The name should be checked and approved by the Department of Registrar of Companies.
2. Prepare the Memorandum and Articles of Association: These documents must be drafted and signed by a lawyer in which they outline the company’s purpose, structure, and operational rules. The Memorandum and Articles of Association need to be submitted to the Registrar of Companies.
3. Register the Company: Submit the necessary documents, including the company name approval, Memorandum and Articles of Association, and details of the directors and shareholders, to the Registrar of Companies. The registration process typically takes 1-2 weeks.
4. Obtain a Tax Identification Number (TIN): Register your company with the Cyprus Tax Department to obtain a TIN, which is required for all tax-related matters. This must be done within 60 days after the registration of the company.
5. Register for VAT: If your company’s annual turnover exceeds or is expected to exceed €15,600, you must register for Value Added Tax (VAT). This involves submitting an application to the VAT Department.
Legal Structure: For most startups, a private limited company (Ltd) is the preferred legal structure due to its flexibility and limited liability. This structure provides protection to shareholders by limiting their liability to the amount they have invested in the company.
Bank Account: Open a corporate bank account in Cyprus to manage business transactions. Choose a reputable bank and provide the necessary documentation, including company registration documents, identification of directors and shareholders, and proof of address.
Accounting and Compliance: Cyprus has specific accounting and reporting requirements. Ensure your company maintains accurate financial records and complies with annual reporting obligations. Engaging a local accountant or accounting firm can help you navigate these requirements effectively.
2. Become an Employee
Salary Structure: As a startup founder, paying yourself a salary below €19,500 annually allows you to benefit from the 0% tax bracket. This strategy minimizes your personal income tax liability while ensuring you can draw a reasonable income.
Tax Residency: To qualify for the non-domicile status, you must meet the criteria for tax residency. This includes working or generally having economic activity in the island. By becoming an employee of your company, you fulfull this requirement.
3. Get Paid With Dividends
Non-Domicile Dividends: As a non-domicile resident, you can receive dividends from your company tax-free. This approach leverages Cyprus’s favorable tax laws to minimize personal income tax and allows you to efficiently manage your company’s profits.
Profit Distribution: Decide on a profit distribution strategy that aligns with your business goals. You can either reinvest profits into the company to support growth or distribute them to shareholders. The flexibility of dividend payments can help in optimizing your overall tax situation.
With this protocol, you will be able to stay below the taxable threshold for income tax while also receving tax-free dividends. The only taxes payable are corporate taxes which are 12.5%.
Additional Considerations for Startups
Intellectual Property Box Regime: If your startup involves significant IP development, Cyprus’s IP Box regime can be particularly advantageous. This regime offers substantial tax reductions on income derived from IP assets, such as patents, trademarks, and copyrights. By taking advantage of this regime, you can reduce your tax liabilities and support innovation within your business.
Social Insurance/Healthcare Contributions:Even as a self-employed individual or company director, social insurance and healthcare contributions in Cyprus are relatively low. This adds an additional layer of financial efficiency and helps manage overall expenses. The contributions provide coverage for health care, pensions, and other social benefits.
Legal and Regulatory Compliance: Ensure your startup complies with local regulations and industry standards. This includes obtaining necessary licenses, adhering to employment laws, and following health and safety regulations. Staying compliant helps avoid legal issues and ensures smooth business operations.
Networking and Business Support: Cyprus has a growing entrepreneurial ecosystem with numerous business support organizations, networking events, and incubators. Engage with local business communities and leverage available resources to support your startup’s growth and development.
Cultural Adaptation: Understanding the local business culture and practices can significantly improve your interactions with clients, partners, and employees. Embracing the Cypriot way of doing business and building strong relationships within the local community can greatly contribute to your startup's success. However, if you’re focused on building software or working in a sector that's less dependent on local interactions, this aspect might not be as crucial.
Conclusion
Cyprus offers a compelling package for startup founders with its favorable tax regime, strategic location, and high quality of life. By leveraging the TaxedInCyprus Protocol, you can optimize your tax situation and maximize the benefits available on the island. From setting up your company and managing your income to taking advantage of the non-domicile status and exploring additional benefits, Cyprus provides a supportive environment for entrepreneurs to thrive.
By using our services, you can implement the TaxedInCyprus Protocol for your own business and maximize your profits. Our team is here to support you throughout the entire process, from establishing your company to fine-tuning your tax planning, all while ensuring compliance with local regulations. Our goal is to help you fully leverage the opportunities that Cyprus offers, allowing you to focus on what matters most—growing your business in an environment that supports innovation and success. If you're considering Cyprus as your base, we're here to assist you in making the transition as smooth and beneficial as possible.
