Operating as a sole trader in Cyprus requires no up-front costs, whereas a company incorporation requires a cash outflow (cost varies). Also, companies are obliged to pay €350 per year (annual company levy) whereas individuals do not have to pay this fee.
Probably, the most important reason why someone may choose to run a business as a company instead of as a sole trader, is the potential of lower overall taxation on profits. However, other factors like the protection someone may enjoy from the veil of incorporation of a company might not be disregarded.
1. The major Characteristics self-employed businesses
Sole trader businesses in Cyprus have similar characteristics to companies, with the exemption that the ultimate responsibility remains to the sole trader instead of a legal person. Some of these characteristics are listed below, sole trader businesses:
- Are taxed on profits, not turnover (just like companies)
- Expenses incurred for the running of the business are tax allowable (deducted for tax purposes)
- Are taxed on the PAYE tax brackets of the employed persons
- When their turnover exceeds Euro 70,000 annually, audited financial statements must be prepared just like companies
- Must be VAT registered and follow VAT rules and regulations
- Can register as employers and be responsible personally for their staff payroll taxes, just like companies
- Are frequently scrutinized by the VAT and Income Tax offices (more often than companies)
- Are personally liable to VAT and Income Tax offices (unlike companies)
2. Conclusions
The protection from the veil of incorporation as well as the tax benefits from the incorporation of a company may leave no space for doubt as to whether a potential business person should incorporate a company in Cyprus instead of operating as a sole trader .
In certain cases, however, working as self-employed in Cyprus may be an ideal option if someone deals with temporary and/or lower income businesses.
A qualitative factor that should be taken into consideration, is the need for existence of a sole trader with employees. The risks of a sole trader having employees are high enough to justify the incorporation of a company even if the benefits in terms of profitability do not justify the incorporation of a company.
In all cases, the advice of a local expert should be sought before a decision is made.
