Companies are the most common vehicles for business and investment activity whether in Cyprus or abroad.
Types of companies
Under the Companies Law. Cap. 113 as amended (the “Companies Law”), there are two types of companies:
- Companies limited by shares, and
- Companies limited by guarantee (with share capital or without share capital)
Companies limited by guarantee are often employed for non-profit or charitable purposes whereas companies limited by shares for business purposes.
The latter may be either private companies or public companies. A private limited liability company must have at least one shareholder but no more than fifty whereas a public limited liability company must have a minimum of seven shareholders and there is no ceiling as to maximum number. The shareholders of a company may be either natural persons or legal persons (Cypriot or foreign). Shares cannot be issued to the bearer.
Liability of shareholders
Companies are separate legal entities distinct from their members. They have a separate corporate personality and are responsible for their obligations and debts. The liability of the shareholders in companies limited by shares (private or public), is limited to the nominal value of the shares agreed to be taken up or to an amount above the nominal value if the shareholder specifically agreed to subscribe to the shares at a premium. In the case of companies limited by guarantee, the liability of the shareholders is limited to the amount each shareholder agrees, at subscription, to contribute towards the debts of the company in the event of liquidation.
There is no restriction as regards the minimum or maximum share capital of a private company. But there is a minimum share capital requirement of €25629.02 in the case of public companies. Information as regards the initial authorised and issued share capital of the company is included in the memorandum of association and any subsequent changes must be notified to the Registrar of Companies.
The share capital may be paid in cash or in kind.
Transfer and allotment
The transfer of shares in a company is not restricted by law. It is however possible and common for restrictions e.g. right of first refusal to be included in the articles of association of the company. In such cases any transfer of shares must be made in compliance with the relevant provisions of the constitutional documents (see below).
On an allotment of new shares of a public company, the company is obliged to offer shares to existing shareholders pursuant to pre-emption rights provided as mandatory rules in the statute. In the case of a private company there is not such statutory duty and therefore it depends on whether pre-emptions rights and relevant obligations on the part of the company have been provided for in the articles of association.
All allotments of new shares and transfers of shares must be notified to the Registrar of Companies.
The Directors and Secretary
The directors of the company, acting collectively as a board, manage the business of the company and do all decision making to the extent not reserved for the general meeting of the shareholders.
A private company needs to have at least one director whereas a public company must have at least two. There is no statutory restriction as to the maximum number of directors but the articles of association of the company may provide limitations. The directors of the company may be natural or legal persons (Cypriot or foreign). The proceedings of the board of directors and its composition are very important elements for the tax treatment of the company (see below).
All companies are required to have a secretary. The duties of the secretary are mainly of an administrative nature.
The company must have a registered office in Cyprus. All communications and notices may be addressed to the company at the registered office and any document, whether official or otherwise, may be served to the company at its registered office.
The memorandum of association is the document which sets out important information in relation to the company; such information might be relevant for third parties e.g. potential counterparties, creditors etc.. The memorandum of association must state:
- the name of the company;
- the place where the registered office is situated;
- in the case of a public company, the fact that it is such a company;
- the objects of the company;
- a statement that the liability of its members is limited and the amount to which such liability applies;
- the names of the subscribers to the memorandum of association and the number of shares each of them takes up.
Following the registration of the company, the memorandum of association may be amended with the approval of the court.
The articles of association is the document regulating internal matters as regards the operation and management of the company and the rights of the members e.g. the procedures to be followed in general meetings, requirements for the adoption of resolutions, the voting rights of members, the conditions and manner in which shares are to be transferred, rights and duties relating to put or call options, rights and duties relating to tag and drag along rights, the appointment and removal of directors etc. The articles of association may be amended by a relevant decision of the members of the company.
Together with the memorandum of association, the articles of association form the constitutional documents of the company and constitute basically an agreement between all and each of the members of the company to abide to their provisions.
Establishing a company requires registration with the Registrar of Companies, the governmental office competent for matters relevant to the registration of companies and their ongoing obligations with regard to information that must filed pursuant to the Companies Law. The Registrar of Companies is responsible for keeping a relevant file which is available to the public for inspection.
The initial step in the formation of a company is the approval of the proposed name by the Registrar of Companies. Subsequently, the memorandum of association and articles of association of the company must be filed accompanied by the necessary forms which indicate the registered office, the details of the director(s) and secretary and an affidavit of the lawyer in charge of the registration of the company. Usually it takes approximately seven to fifteen working days for the completion of the registration of a company. A shelf company i.e. a ready-made company may be purchased if there is an immediate need for the use of a company. Following registration of the company, the Registrar of Companies issues a certificate of incorporation which constitutes conclusive evidence that all the requirements of the Companies Law, in respect to registration and matters precedent and incidental thereto, have been complied with.
Financial statements must be prepared annually and be duly audited by qualified accountants practising in Cyprus according to the International Financial Reporting Standards. Annual returns containing information as to any changes to directors, secretary, shareholders, authorised, issued or paid up capital, registered office, mortgages/charges and other related matters must be filed with the Registrar of Companies once per year accompanied by a copy of the financial statements.
In order be eligible to benefit from the favourable Cyprus tax regime and treaty network in place, a company should be considered as resident in Cyprus for tax purposes.
Under Cyprus tax law, a company is considered as tax resident in Cyprus if its ‘management and control’ is exercised in Cyprus. There is no statutory definition of ‘management and control’. In practice Cyprus tax authorities would look at several conditions to determine whether a company qualifies as a resident in Cyprus for tax purposes:
- strategic management decisions and preferably day-to-day decisions being taken in Cyprus,
- the majority of the board members being tax residents in Cyprus and exercising their office from Cyprus,
- an actual office being maintained in Cyprus,
- evidence of commercial documentation being stored in the company’s office,
- accounting records being prepared and kept in Cyprus,
- bank accounts being operated from Cyprus even if maintained with foreign banks.
Not all of the above must be established in order for the company to qualify a tax resident in Cyprus; the conditions would be considered in light of the nature and level of activities of the company and the country in which transactions or investments are made. For the purposes of the Cyprus tax authorities satisfaction of the first two conditions would normally be adequate for the company to be considered as tax resident.
Tax resident companies are subject to income tax on their worldwide income at the flat rate of 12.5% subject to tax credit for any tax suffered in a foreign jurisdiction on income which is also subject to tax in Cyprus.
Companies ought to submit tax returns, together with their annual financial statements, to the Tax Department in compliance with the applicable legislation.
It is possible for corporations from other jurisdictions to acquire a ‘domicile’ in Cyprus. Effectively this means that the company may change its governing law without going through the process of liquidation where it was firstly established and then fresh incorporation in Cyprus.
A company registered in another jurisdiction is eligible to apply to the Registrar of Companies to be registered as a continuing company pursuant to the provisions of the Companies Law if: the foreign jurisdiction allows the re-domiciliation, its constitutional documents provide for it and the steps required for the decision for the re-domiciliation have been complied with. Such companies must have their registered office transferred into Cyprus.
It is also possible for local companies to “re-domicile” moving their registered office in other jurisdictions.
In both cases of ‘re-domiciliations’ the permission of the Registrar of Companies is required and it is generally given upon certain conditions being met.