Located in the north eastern corner of the Mediterranean Sea, Cyprus enjoys a strategic importance belying its small size. Geographically, it is ideally positioned as a commercial gateway between Europe, Asia, the Middle East, and Africa. This natural advantage was further strengthened when on 1 May 2004 Cyprus became a member of the European Union (EU) and then, on 1 January 2008, a member of the Eurozone.
Cyprus is a former British colony which in 1960 became an independent, democratic, sovereign republic with a presidential system of government and a written constitution. In 1974, Cyprus was invaded by Turkey and, although re- unification talks are ongoing, about 37 per cent of the island remains under Turkish occupation. Except where specified, this chapter refers to the areas controlled by the government of the Republic of Cyprus, not the occupied area.
The elected President is the Head of State and the legislative authority is the elected House of Representatives. There is a two-tier judicial system consisting of the Supreme Court and subsidiary district courts. The doctrine of the separation of powers between the legislature, the executive, and the judiciary is embodied in the Constitution. The Constitution prevails over domestic legislation but acknowledges the supremacy of European Community (EC) law via the Fifth Amendment to Cyprus Constitution Law 127(I) of 2006.
Cyprus benefits from its modern and well-educated workforce and from a declared policy, which has been shared by successive governments, of encouraging foreign investment. This forward-thinking attitude is reflected in various laws, regulations, and international agreements which have helped to create an extremely favorable environment for all forms of inward business activity and international foreign investment.
The entire island occupies an area of 9,251 square kilometers and its total population is estimated at 1.1 million. The population of the government- controlled area is about 800,000, of whom 80 per cent are Greek Cypriots, 18 per cent are Turkish Cypriots and Turks, and the remaining 2 per cent are foreign residents and workers. The official languages are Greek and Turkish but English is also used widely, especially in business.
Establishment of Enterprises In General
The principal legislation governing the formation and activities of business entities is contained in the Cyprus Companies Law (Cap 113), as amended from time to time, and the Partnership and Business Names Law (Cap 116), as amended. These have their origins in English law and have been adapted over time to reflect the nature of the Cyprus economy and, in the period immediately preceding accession into the European Union (EU) in 2004, to harmonize domestic legislation with the acquis communautaire. Five principal forms of business entity are legally recognized in Cyprus. These are listed below.
A person who carries on a trade, profession, or business on his own account, either in his own name or under a business name, is registered with the Cyprus Registrar of Companies (the Registrar) under Cap 116. The proprietor is personally responsible for all the assets, liabilities, profits, and losses of the business.
Partnerships are registered under Cap 116. They must consist of between two and 20 partners unless the partnership is engaged in banking activities, in which case the upper limit is reduced to 10. A partnership may be formed between individuals or legal persons such as corporate entities. Non-residents of Cyprus may join a partnership registered in Cyprus. Non-EU nationals are required to obtain a work permit. Two types of partnership are recognized:
- General partnership ⎯ Each partner is liable jointly and severally for all debts and obligations of the partnership incurred during his or her time as a partner. This is a liability which is without limit.
- Limited partnership ⎯ The liability of some but not all partners is limited. The liability of the partnership to third parties remains unlimited. The partnership must include at least one general partner, but it is possible for the general partner to be a limited company and hence effectively enjoy the benefits of limited partner status.
European Public Limited Company
The European Public Limited Company (SE) is a pan-European corporate form introduced to Cyprus in 2006. It allows companies to move from one jurisdiction to another without the need for a takeover or transfer of assets to a company already registered in the destination country.
Incorporation as an SE can significantly reduce the costs for businesses which operate in more than one Member State of the EU. It allows them to restructure rapidly and hence to exploit the advantages of the internal market. Existing companies from other Member States may be merged into an SE in Cyprus without any tax cost since Cyprus has fully implemented the EU Mergers Directive.
Limited Liability Company
Limited liability companies are governed by Cap 113. A company may be limited by shares or by guarantee. It has a legal persona which is separate from that of its members who may change or increase or decrease in number over time. Hence, it has perpetual succession. Where a company is limited by shares, the liability of the member is restricted to the greater of:
- The nominal value of the shares which he takes up; and
- The total amount agreed as the price of the shares.
Companies limited by guarantee are generally incorporated as non-profit- making organizations under Cap 113 and their importance as a class of business entity is minimal. The liability of the members of such a company is an agreed sum to be contributed in the event of the company going into liquidation.
Companies Limited by Shares
Companies which are limited by shares may be either "public" or "private". Cap 113 provides a precise definition of private companies and in practice a public company is defined as a corporation which does not meet the definition of a private company. A public company is subject to stricter control by the Registrar.
Companies must file a copy of their constitution with the Registrar. This consists of the memorandum of association (memorandum) and the articles of association (articles). They are public documents which when registered bind the company and its members to the same extent as if they had been signed and sealed by each member. The memorandum details the activities which the company is authorized to carry on. The articles contain rules which govern the internal management procedures of the company. Under Cap 113, the articles of a private company should:
- Restrict the right of the members to transfer their shares;
- Prohibit public offerings of shares or debentures;
- Prohibit the issuing of bearer shares; and
- Limit the number of company members to a maximum of 50.
A public company does not restrict the transfer of its shares. Further specific differences are as follows:
- It has a minimum of seven members, whereby there is no upper limit;
- The minimum issued share capital is €25,630;
- It has a minimum of two directors;
- Where the directors are appointed in the articles, the consent of the directors to act must be filed on incorporation;
- No trading may take place until a trading certificate has been obtained from the Registrar;
- The company must hold a statutory meeting and the directors must make a statutory report to members;
- It may issue share warrants;
- It may not issue shares at a discount; and
- It is obliged to produce a prospectus or a statement in lieu of a prospectus before offering any of its shares or debentures to the public.
There are four types of members' meetings:
- Annual general meetings (AGM) ⎯ Every company must hold an AGM in each calendar year. The only exception to this is the first AGM, which must be held within 18 months of incorporation. The only statutory business to be conducted at the AGM is the appointment of auditors. It is usual for the articles to provide that certain other "ordinary" business such as the consideration and approval of accounts will also be transacted.
- Extraordinary general meetings (EGM) ⎯ An EGM may be called: (a) at any time by the directors when they think fit (provided power is given in the articles); (b) at the request of holders of 10 per cent of the paid-up capital of the company (5 per cent in the case of a listed company); or (c) by the court under Cap 113 if for any reason it is otherwise impracticable to do so. If the directors fail to convene an EGM within 21 days of a bona fide request from the holders of 10 per cent of the paid-up capital, then the holders may convene the meeting themselves.
- Statutory meetings ⎯ Every public company must hold a statutory meeting not less than one month and not more than three months from the date when it is entitled to commence business. It is common practice to circumvent the requirement to meet by forming the company as a private company and then converting it to a public company.
- Separate class meetings of shareholders ⎯ Such meetings are rare and will often be to discuss and vote on proposed variations of class rights.
Cap 113 lays down minimum periods of notice which must be given prior to any meeting. Accidental failure to serve notice on a member or its non-receipt by him does not invalidate the meeting. Unless the articles specify otherwise, initial voting is on a show of hands which excludes proxy votes and gives each member present only one vote irrespective of his shareholding. Controversial issues will more normally be decided via a poll which includes proxy votes and takes account of the size of each member's shareholding.
Board of Directors and Company Secretary
A private company may have a sole director. It must also have a secretary who, except in the case of private companies with only one member, must be a separate person from the director. Public companies must have at least two directors and a secretary. The general principles of the law of principal and agent regulate in most respects the relationship between the company and its directors. The powers of the directors to act on behalf of the company may be restricted via the memorandum and the articles, but, notwithstanding any deficiency in the directors' capacity to act, the company will still be bound by the contract in relation to an innocent third party. Cap 113 restricts the exercise of certain powers (for example, the alteration of share capital) to the members.
Appointment of directors is governed by the articles. All directors may be removed from office via an ordinary resolution of the company. The secretary of the company will normally be appointed by the board.
Directors owe fiduciary duties to the company. The duties and powers of the secretary usually emanate from the members and the board rather than the articles. Cap 113 also imposes some specific duties, which include:
- Making the statutory declaration required before the commencement of business by a public company;
- Signing the annual return and documents of the company; and
- In the event of a winding up of the company, verifying the statement to be submitted to the Official Receiver.
Additionally, since the secretary is an officer of the company, many of the duties stipulated by Cap 113 imposing liability on officers in default apply to the secretary.
There is no requirement for a supervisory board in Cyprus and few companies have a separate supervisory board.
There is no minimum share capital for a private company. The minimum issued share capital for a public company is €25,630. Shares may be allotted for cash or non-cash consideration or a combination of the two. Where shares are not fully paid up, the shareholder retains a liability to pay up the balance of the nominal amount in the event of a further call on capital or the winding up of the company.
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This chapter is from Legal Aspects of Doing Business in Europe – 2nd Edition. © Juris Publishing, Inc. 2013 www.jurispub.com
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