Cyprus: What Are The Consequences Of A Limited Liability Company?

Last Updated: 8 December 2016
Article by Antonis Paschalides

Incorporating a company not only has tax benefits but there are more advantages in general in respect of the notion of 'limited liability'.  A company is regarded as a legal person separate from its members able to own property under its own name, be a party in a contract, sell shares and more.  As a consequence, the liability of its members is limited according to their original contribution and this is also enshrined in paragraph 4 of our Memorandum of Association which states that the 'liability of the members is limited'.  This means that upon winding up of the company, Shareholders cannot lose more than what they have originally invested in the company.  Only the company itself is responsible for its debts.  All that the company may request from Shareholders is that their shares be paid in full.

What are the benefits of incorporating a company in Cyprus?

Cyprus is an attractive destination to form an IBC.  Cyprus in general is a low tax jurisdiction.  Firstly, there is no withholding tax.  Secondly, the corporate tax companies need to pay on their international income is 12,50%.  Thirdly, there is no tax on the transfer of shares and fourthly Cyprus accepts invoices from offshore companies and this is rare in the EU.

Apart from these, there are more advantages such as economical stability, corporate laws which are based on the English Companies Act and harmonised with EU corporate laws, low incorporation fees and a quick incorporation process.  Additionally, it has an efficient network of lawyers, accountants and banks.  Cyprus is at the crossroad of Europe, the Middle East and Africa.  Moreover, Cyprus has numerous Double Taxation Agreements, and is also currently negotiating more.  

What is the procedure which has to be followed in incorporating a company in Cyprus?

The first step is to apply to the Company Registrar to get a name approval for the company.    After the name is approved, the necessary documents need to be prepared by a lawyer.  The forms needed are forms HE1, HE2, HE3 (affidavit signed by the lawyer, company's registered address, company's Directors and secretary respectively).  Moreover, the Memorandum and Articles of Association need to be prepared.  These include information such as the nature of the company's activities, the names of the company's Shareholders and their respective shares and more.  When the company is approved by the Registrar the company gets a unique registration number and its Certificates. 

How long does it take for a new company to be registered?

For the approval of name, the Department of Registrar of Companies usually needs 2-3 working days if an acceleration fee is paid.  Then for the company to be registered, it usually takes 7-10 working days.

Do I have to be present in order for my company to be registered?

The whole process can take place without the presence of the client being necessary.  As long as all due diligence protocols have been carried out, instructions may be given through e-mail or telephone for the incorporation and later running of the company. 

What is the difference between a Shareholder and a Director?

A Shareholder owns the company whereas the Director manages the company.  A Shareholder may also be a Director of a company.  A Director could have various roles within the company.  Someone can be a Director, a Shareholder and an employee of the company and be paid a monthly salary.

Who can be a Shareholder and a Director?

Anyone could be a Shareholder and a Director.  There is no express reference in the Cyprus Companies Act, Cap 113 as to these.  Cap 113 only puts a restriction as to persons who cannot be Directors by virtue of their criminal record and persons who are bankrupt.  Section 179 expressly states that bankrupt persons cannot be Directors of a company unless they get permission from the court.  If they do not, they are liable to imprisonment, fine or both.  Further, section 180 states that persons who have been previously disqualified from being Directors of a company may not be Directors unless they get leave from the court to do so.

What is the difference between Authorised Share Capital and Issued Share Capital?

 Authorised Share Capital is the shares of the company in total.  It is the maximum number of shares that a company may issue according to its Memorandum and Articles of Association.  These shares may have been issued or not.  The Issued Share Capital is the Share Capital which is owned by the Shareholders.  This may not be all of the Authorised Share Capital. 

Are there any minimum Share Capital requirements for a Cyprus company?

The law does not impose minimum Share Capital requirements however in practice the usual start-up Share Capital amount is € 2,000.  Cyprus tax legislation does not contain any provisions on thin capitalisation meaning that the Share Capital need not be proportional to the company's assets.

Does the Share Capital have to be paid at the Companies Registrar upon incorporation?

No, the Share Capital need not be paid and actually cannot be paid at the Registrar of Companies. Instead the full value of the Issued Share Capital must be shown to have been paid to the company (e.g. in its bank account) and from then on this capital must be used for company purposes only.

Are company documents in the Registrar open for public inspection?

All company documents are open to whoever wants to inspect them for whatever reason.  This can take place at the Registrar of Companies where an individual file for all companies is kept subject to any fees the Registrar imposes. 

What information may be disclosed about a company?

Generally all company Certificates are open for public inspection.  Financial statements of the company are also open for public inspection.  Some Resolutions passed by the Shareholders such as Resolution passed for a change of the name of the company are also filed at the file of the company at the Department of Companies.  The names of the Director(s), secretary and Shareholder(s) are in the public domain as well.  Someone can also view the Memorandum and Articles of Association of the company.  However, information such as the bankers of the company cannot be disclosed.

What is a 'nominee Director'?

A nominee Director is a Director of a company which does not wish to disclose the identity of its actual Director(s).  Since all company documents are open to the public, the only way confidentiality of the Directors and Shareholders of the company can be ensured is through nominees since their names will appear on the Certificates of the company kept at the Registrar of Companies instead of the names of the actual Directors and/or Shareholders.   A nominee Director can be a legal (company) or a natural person. 

What is a 'nominee Shareholder'?

Companies should have a minimum of one Shareholder.  A nominee Shareholder is a Shareholder of a company who holds shares nominally only, that is, only in name.  In such a way the identity of the actual Shareholder(s) or beneficial/true owner of the company is not disclosed thus corporate and financial privacy and anonymity is secured.   Nominee Shareholder(s) hold the shares in trust for the beneficial/true owner of the company.  Thus, the nominee Shareholder is a trustee holding the 'numbered' shares in trust for the beneficiary who is the true owner of the company.  The nominee Shareholder holds the legal title of the shares whereas the beneficial owner holds the beneficial title of the shares.  A declaration of trust is signed by the nominee Shareholder indicating that he has no rights whatsoever on those shares. This Declaration of Trust is a private agreement between Nominee Shareholder and Beneficial Owner and is not open for viewing by anyone else, even the Registrar of Companies. It will only be requested by a bank if an account is to be opened. It is the beneficial owner who is entitled to income and capital gains on the shares.   This safeguards the rights of the Beneficial Owner.  It is also customary for the Nominee Shareholders to issue and sign an undated Instrument of Transfer in favour of the Beneficial Owner which he can use at any moment to legally transfer the shares in his name.

What certified copies may be requested from the Registrar of Companies?

The certified copies which may be issued by the registrar of companies are the Director Certificates, the Shareholders Certificates, the Certificate of incorporation, the Certificate for the registered office of the company, the Certificate of good standing, the Certificate of capital and the Memorandum and Articles of Association.

What is a registered office?

The registered office of a company is an address which is entered into the Certificates of the company and which is registered with the Registrar of Companies and this serves as the official address of the company.  This is the place where official documents may be sent at.  All the legal correspondence with Government entities is served at this address.  This address should be displayed on business letters and any forms of the company.  Companies registered in Cyprus must have a registered office in Cyprus.  

What is a Certificate of good standing?

A Certificate of good standing may be issued by the Registrar of Companies stating that the company is of 'good standing', that is, that since its incorporation it has been conducting its business continuously and that no action has been brought against it in order to strike the company off the companies register.  Such a Certificate can also confirm that the company does not owe any tax.

What is the difference between notarisation and apostille?

Notarisation takes place when a copy of a document is certified that it is a true copy of the original and it is signed by a Notary Public.  He confirms that you have signed the document in his presence.  Apostille on the other hand, comes under the Hague Convention 1961.  An apostille is an authentication of a copy of a public document.  The competent authority to do this is the Ministry of Justice and Public Order. The apostille may also be the authentication of the Notary Public's authentication of a document when this document will be used in another country. The apostille is recognised and accepted by all the signatories of the Hague Convention 1961. 

What is a Double Taxation Agreement and how does this affect a company?

A Double Taxation Agreement is an agreement between two nations whereby companies are not taxed twice for their income.  Such agreements are important particularly for natural or legal persons who are resident in one country and have income arising in another country.   Such natural or legal persons will not be taxed twice provided that those two countries have entered into a Double Taxation Agreement.  Cyprus has entered into a number of Double Taxation Agreements and more are currently being negotiated.  The advantages of these agreements are, as aforementioned, the avoidance of being taxed twice in two different countries and they also promote cross-border trade.  Such agreements do not encourage people to avoid paying tax since if people had to pay tax twice, most probably they would find ways in order to avoid paying tax in one of the counties and this could have criminal liability consequences. 

Are financial statements mandatory under Cypriot legislation?

Yes, audited accounts are required and need to be filed with the Registrar of Companies and the Inland Revenue Department.  Such accounts are open for public inspection. When the company is a newly registered company, the first financial statements need to be filed at the Registrar within eighteen months of its incorporation.  After this, the company needs to file its financial statements every 12 months (by the end of each tax year which is December).  The only exception where this is not required is shipping companies.

What are the VAT requirements for Cyprus resident and Cyprus non-resident companies?

VAT is an indirect form of taxation which burdens consumption expenditure.  It is charged on every taxable supply of goods or services.  It is collectable at every stage of the production.  The standard rate is 15% with the reduced rate being 5%, 8% or 0%. 

All transacting companies need to register for VAT to a local VAT office through the completion of VAT Form 101, which is the application for registration in the VAT Register, provided they exceed the threshold.  After registration, companies are given a VAT number which they have to display on all transactions.  People supplying goods and/or services are responsible for collecting the VAT and then passing it on at the VAT Service Department. 

A taxable person is every person, natural or legal, resident in Cyprus or abroad, who carries on a business and has registered as such in the VAT Register or he is liable to be registered according to the provisions of the VAT legislation.  Liability to register arises if at the end of any month, if the value of his taxable supplies in the period of one year then ending has exceeded € 15,600, or at any time, if there are reasonable grounds for believing that the value of his taxable supplies in the period of thirty days then beginning will exceed € 15,600.  Persons who are liable to register have to notify the VAT Commissioner through VAT Form 101.  Although liability to register for VAT falls on the businesses, it is not actually them who bear the cost.  The seller only acts as a vehicle of the VAT Services to collect VAT from the consumers.

Can a bank account be opened for a Cyprus company outside Cyprus?

Yes.  This can even be made without the need of the Directors being present to sign on behalf of the company since the documents can be sent by post or a power of attorney (PoA) could be prepared giving the client the authority to open a bank account for the company.   A company registered in Cyprus may open a bank account everywhere in the world.   

Can a bank account be opened in Cyprus?

Yes.  This can even be made without the need of the client and/or signatory being present to sign on behalf of the company since the documents can be sent by post and authenticated by a Cyprus lawyer.

How can a Director be removed?

A Director may be removed after a normal Resolution (51%) is passed by the Shareholders in a general meeting by virtue of section 178, Cap 113. 

What is the purpose of General Meetings?

The purpose of General Meetings is to pass Resolutions (either normal or special)  in order to change the Memorandum and Articles of Association, remove a Director, appoint and remove auditors of the company, approve the accounts of the accounts and increase, reduce and alter the Share Capital of the company.

What should happen if there is a conflict of interest between the Director and the company?

One of the general duties of Directors is to avoid any conflict of interest between them and the company.  If there is, such an interest needs to be disclosed.  Directors cannot benefit personally from a transaction of the company.

When is a Director restricted from selling or purchasing company shares?

A Director cannot buy or sell his shares if he holds company confidential information, for example, for a prospective transaction of the company.  Moreover, he cannot buy or sell shares a month before the financial year (01/01 – 31-12) ends.  The Director needs to inform the board of Directors in writing that he wants to buy or sell any shares.

Does the company need to hold an Annual General (Shareholders') Meeting (AGM)?

Yes.  The AGM needs to take place eighteen months of the date of the company's incorporation.  After this, the company needs to hold an AGM every year and no later than fifteen months from the previous one. 

How can minority Shareholders be protected?

When minority Shareholders feel oppressed, they can wind up the company through a petition in the court.  If the court thinks that it is just an equitable to wind up the company then it will do so.  A further action is for the majority Shareholders to buy the shares of the minority Shareholders who feel oppressed. 

How is a Cypriot company dissolved?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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