In Cyprus, a self-employed person operates a business directly under their own name without forming a separate company.
This arrangement allows individuals to conduct business with fewer formalities, but they might still need to meet several regulatory requirements, including:
Registering for VAT,
Registering as an employer if they hire personnel,
Submitting returns,
Pay taxes,
Obtaining a license for certain activities,
Assuming all duties similar to a company,
etc.
Self-employment in Cyprus has its advantages, such as the ability to register for free and having a relatively straightforward and cheaper management.
However, there are key reasons why not everyone opts for this path:
1. Legal Protection: As a self-employed individual, there is no separation between personal and business assets, so any debts or liabilities of the business may directly impact personal finances. This lack of legal protection exposes self-employed individuals to higher financial risks.
2. Tax Implications: Self-employed individuals are taxed as they had individual income, based on a progressive personal income tax system, which can result in higher taxes compared to a company structure.
The income tax rates are as follows:
€0 to €19,500: 0%
€19,501 to €28,000: 20%
€28,001 to €36,300: 25%
€36,301 to €60,000: 30%
Over €60,000: 35%
If a self-employed person’s turnover exceeds €70,000, they are required to prepare audited financial statements, much like a company.
Companies in Cyprus: Forming a company, on the other hand, establishes a separate legal entity, which limits the liability of shareholders to their investment in the company. This structure provides legal protection for personal assets, as only the company is liable for its obligations.
Companies are taxed at a flat corporate rate of 12.5%, which is often lower than the higher personal tax rates faced by self-employed individuals. However, setting up and running a company entails more rigorous compliance, including mandatory annual audited financial statements, regardless of turnover.
Ownership Flexibility: Companies also offer the flexibility of ownership through shares. New owners can be introduced by issuing shares, a process that is both simple and quick. In contrast, a self-employed person cannot take on new owners directly. If additional ownership is required, the self-employed structure would need to be converted into a partnership or a company to accommodate this need.
Costs and Obligations of Companies vs. Self-Employed: Unlike self-employment, which can be started for free, forming a company requires incorporation fees and ongoing management costs, including accounting, tax filings, and audits. Furthermore, a company cannot be simply abandoned if inactive; it must go through a formal closure process, which also incurs expenses. This legal process ensures all outstanding liabilities are settled and that the business is officially dissolved.
When deciding between self-employment and forming a company, individuals should consider factors like legal protection, tax efficiency, ownership flexibility, and the level of administrative responsibility they’re willing to take on. Each option has its own benefits and obligations, making the choice one that should align with the individual’s long-term business goals and risk tolerance.