S. Dionysiou & Partners LLC presents a second part of our lawyers’ contribution to Mondaq‘s publications highlighting the key points of doing business in Cyprus!

Doing Business Q&A (Edition 2)

8. Employment

8.1 What is the applicable employment regime in your jurisdiction and what are its key features?

Employment in Cyprus is divided into the public and private sectors. For the public sector, the law on Public Service is mainly applicable, while for the private sector, the two main applicable laws are the Termination of Employment Law and the Annual Leave with Benefits Law. In addition to these there are other laws that regulate the health and safety of employees and the relationship between employee and employer (e.g. the new law for the Provision of Information to the Employee by the Employer on the Conditions Applicable to the Contract or Employment Relationship). Although the system is based, to a large extent, on the determination of employment conditions through the conclusion of collective agreements, whether these are at the sectoral or operational level, the need to harmonize Cyprus with the European Law, in the field of Labor Legislation, led to the regulation of important terms of employment. This fact has not reduced the importance of collective agreements, which remain the most important way of determining terms of employment in Cyprus, but it has simply filled gaps in the regulation of the minimum levels of terms of employment of those not organized by trade unions, but also of those who work in companies that do not have collective agreements. It should be noted that the terms of collective agreements or personal employment contracts are not allowed to be more unfavorable than those provided by labor legislation, since the provisions of the relevant laws always prevail.

8.2 Are trade unions or other types of employee representation recognised in your jurisdiction?

According to article 21 of the Constitution of Cyprus, every worker/employee has the right to associate with others, including the right to establish and join trade unions to protect his/her own interests. In Cyprus, apart from the Trade Union Organization of Public Employees, there are various trade unions of various categories of employees in private sector, which play an active role in determining the terms of collective labor agreements.

8.3 How are dismissals, both individual and collective, governed in your jurisdiction? What is the process for effecting dismissals?

The Termination of Employment Law covers all employees, whether in the private or the public sector, including apprentices. It also covers the shareholders of private companies who are employed by their companies. An employer intending to terminate the employment of an employee, who has completed at least 26 weeks of continuous employment with that employer, is obliged to give the employee a minimum period of notice, depending on the length of his/her service. The employer is not obliged to give notice, if the employment is on a probationary basis for a period not longer than 104 weeks.

The employer has the right to terminate the employment of an employee without notice, where the employee’s conduct is such as to justify his dismissal without notice, e.g.:

(a) Gross misconduct by the employee in the course of his duties.

(b) Commission by the employee in the course of his duties of a criminal offence without the agreement, expressed or implied, of his employer.

(c) Immoral behaviour by the employee in the course of his duties.

(d) Serious or repeated contravention or disregard by the employee of work or other rules in relation to his employment.

Where the employer does not exercise his right to dismissal without notice within reasonable time, the termination of employment is deemed to be unjustified.

8.4 How can specialist talent be attracted from overseas where necessary?

See below several incentives introduced by Cyprus to attract specialist talent:

(a) Business Facilitation Unit (BFU): The BFU serves as a focal point of contact for all international companies of foreign interest and provide fast-track services to such companies. Work permits are issued within 1 month, while employee’s spouses also have access to the country’s labour market. The BFU provides work permits for high-skilled employees from third countries, with a minimum gross monthly salary of €2.500.

(b) Digital Nomad Visa: Such visas are granted to people who wish to live in Cyprus but work remotely in companies operating abroad. The visa is granted of a period of 12 months, with the right to renew for another 2 years.

(c) Tax incentives: There is 50% exemption (for a period of 17 years) for the remuneration of first employments exercised in Cyprus for individuals with an annual salary of €55.000 who were not residents of Cyprus for a period of 15 consecutive tax years immediately prior to the year of commencement of the employment in Cyprus.

There is a 20% exemption for a period of 7 years for the remuneration (with a maximum amount of €8.550 annually) for first employments exercised in Cyprus commencing, by individuals who immediately prior to the commencement of their employment in Cyprus were not a resident of Cyprus for a period of 3 consecutive tax years and were employed outside of Cyprus by a non-resident employer.

(d) Cypriot citizenship: Highly skilled foreign workers can now obtain citizenship within 4 or 5 years depending on their knowledge of the Greek language.

8.5 What key concerns and considerations should be borne in mind with regard to employment in your jurisdiction?

The field of employment and ensuring workers’ rights in proportion to ensuring a favourable economic environment for employers has made significant steps forward in Cyprus. One of the areas that needs further improvement is the operation of effective mechanisms within the workplace to deal with complaints of work (mobbing) and sexual harassment. At the same time, the specialized training of the staff of the Ministry of Labor is required to deal with such complaints and the strengthening of the legal framework for the protection of victims who suffer from such behaviours.

9. Tax

9.1 What is the applicable tax regime in your jurisdiction and what are its key features?

Set out below is an overview of the tax regime in Cyprus:

• Corporation tax: the corporate tax rate is 12.5%.
• VAT: The supply of goods and provision of services in Cyprus is subject to VAT at 19%. However, there are several categories of goods and services that attract VAT at lower rates or even exempt from VAT.
• Capital Gains Tax (“CGT”): Subject to limited exceptions (e.g. transfers on death and transfers due to organisations), CGT is imposed (where the disposal is not subject to income tax) at the rate of 20% on gains from the disposal of immovable property situated in Cyprus including gains from the disposal of shares in companies which directly own such immovable property.
• Special Contribution for Defence: SCD is imposed on dividend income, ‘passive’ interest income and rental income earned by tax resident companies in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled.
• Income tax: Please note that the following income tax rates apply to individuals:

9.2 What key exemptions and incentives are available to encourage enterprises to do business in your jurisdiction?

Cyprus offers several exemptions and incentives to encourage enterprises to do business in the country. In this regard, please note a high-level overview of the main tax exemptions and incentives:

(a) The following are exempt from corporate tax:

• Profit from the disposal of securities and shares of Cyprus companies.
• Dividends (excluding, as from 1 January 2016, dividends which are tax deductible for the paying company).
• Interest that is not arising from the ordinary type of business.
• Profits of a permanent establishment under certain criteria.
• Gains relating to foreign exchange differences (forex) (that are not arising from trading of related derivatives and currencies) are exempted.

(b) Partly exempted for tax purposes:

• 80% of the net profit as calculated in the nexus approach derived by a qualified intangible assets in form of royalty income, embedded income and other qualified income.

(c) Tax deductible expense

• Equity introduced to a company as from 1 January 2015 (new equity) in the form of paid-up share capital or share premium is eligible for an annual notional interest deduction (NID).
• Interest expense incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the 100% subsidiary company does not own (directly or indirectly) any assets that are not used in the business.

9.3 What key concerns and considerations should be borne in mind with regard to tax in your jurisdiction?

In the contents of real estate transactions, the following tax considerations should be considered:

(a) The buyer is required to pay transfer fees for the transfer of the immovable property unto his name. The transfer fees are calculated as follows:

However, no transfer fees are payable if VAT is applicable upon purchasing the immovable property. Also, the above transfer fees are reduced by 50% in case the purchase of the immovable property is not subject to VAT.

(b) According to the new provisions of the VAT Law (95(I)/2000), as amended, the reduced VAT rate of 5% will apply to the first 130 sqm of a primary residence, up to a value of €350.000, provided that the total transaction value does not exceed €475.000 and the total buildable area does not exceed 190 sqm.

(c) Moreover, stamp duty is payable on any agreement which relates to any property situated in Cyprus or to any matter or thing to be performed or done therein, irrespective of the place where it is executed. Stamp duty rates depend on the contract value, as follows:

(d) With respect to CGT, please refer to paragraph 9.1 above.

10. M&A

10.1 What provisions govern mergers and acquisitions in your jurisdiction and what are their key features?

The Companies Law, Cap. 113, as amended governs the mergers, divisions, the reconstruction and amalgamation of private and public companies and also exchange of shares between two (or more) companies. It also establishes the regulatory framework for cross-border mergers. In particular, the law provides, inter alia, for the obtainment of the shareholders’ and creditors approval of the merging companies, and also the sanctioning of the transaction by the Court.

Furthermore, reference must be made to the following legislations:

(a) The Control of Concentrations between Enterprises Law of 2014 (No.83(I)/2014);

(b) The Protection of Competition Law (Law 13(I)/2022) which grants powers to the Commission for Protection of Competition (CPC);

(c) The Preservation and Safeguarding of Employees’ Rights in the Event of the Transfer of Undertakings, Business or Parts Thereof Law (104(I)/2000) (as amended); and

(d) The Income Tax Law (No. 118(I)/2002) (as amended).

For completeness, if the M&A transaction involves public companies and/or listed companies in the Cyprus Stock Exchange, the following legislation is also applicable:

(a) The Public Take Over Law 41(I)/2007 (as amended);

(b) The Securities and Cyprus Stock Exchange Law of 1993 (No. 14(I)/1993) (as amended);

(c) The Transparency Requirements (Securities Admitted to Trading on a Regulated Market) Law of 2007 (No. 190(I)/2007) (as amended);

(d) The Market Abuse Law of 2016 (No. 102(I)/2016); and

(e) The Cyprus Corporate Governance Code.

10.2 How are mergers and acquisitions regulated from a competition perspective in your jurisdiction?

The legal framework governing M&A from a competition perspective in Cyprus is the following:

(a) The Control of Concentrations of Enterprises Law which sets out the rules for the control of concentrations to ensure that they do not result in the distortion of effective competition in a market.

(b) The Protection of Competition Law which regulates restrictions in agreements and abuse of dominant position.

Under the Control of Concentrations of Enterprises Law, a concentration of major importance must be notified and pre-approved. A concentration is deemed to be of major importance if either:

(i) The total turnover realised by at least two of the undertakings concerned exceeds, for each of them, EUR3.5 million and:

• at least two of the participating undertakings have turnover in Cyprus; and
• at least EUR3.5 million of the total turnover of all participating undertakings is realised in Cyprus.

(ii) It is declared by order of the Minister of Energy, Commerce, Industry, and Tourism as one of major importance.

A concentration is deemed to arise when a change of control on a lasting basis results from either the merger of two or more previously independent undertakings or parts of undertaking or the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, by a purchase of securities or assets, contract, or any other means, of direct or indirect control of the whole or parts of one or more other undertakings.

The substantive test for compatibility of a concentration with competition law is whether it substantially affects or obstructs competition in Cyprus (i.e., if it creates or strengthens a dominant position).

10.3 How are mergers and acquisitions regulated from an employment perspective in your jurisdiction?

The Preservation and Safeguarding of Employees’ Rights in the Event of the Transfer of Undertakings, Business or Parts Thereof Law (104(I)/2000) is applicable to any transfer of undertakings or businesses (or parts) to another employer as a result of a legal transfer or a merger. The law provides that the selling company’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer which, by reason of the transfer, shall be transferred to the acquiring company.

Accordingly, following the transfer, the acquiring company shall continue to observe the agreed terms and conditions of any collective agreement, on the same terms as previously applicable under such an agreement, until the date of its termination or expiry or until the entry into force or application of another collective agreement for a minimum period of one year. It is important to note that the transfer of an undertaking, business or part of undertakings or business shall not of itself constitute grounds for the dismissal of an employee by any of the contracting parties.

If a termination or a dismissal of an employee occurs and the relevant provisions of the aforementioned law are not upheld during a transfer, then employees may seek compensation under the Termination of Employment Law (24/1967), as amended.

10.4 What key concerns and considerations should be borne in mind with regard to M&A activity in your jurisdiction?

The key concerns and considerations with regard to M&A activity are as follows:

(a) Pre-contract: A thorough legal, financial and tax due diligence must be conducted to understand the operations of the target and thus and be able to negotiate the purchase price and the terms of the acquisition. Accordingly, it is crucial to enter into binding exclusivity and/or non-disclosure agreements in order to facilitate the negotiations.

Furthermore, the buyers will need to consider how the business will fit in with existing operations and how the acquisition and financing will be structured.

(b) Contract: The agreement needs to be properly drafted and clearly specify the purchase price and method of payment and also include purchase price adjustment and earn-out provisions, conditions precedent, material adverse effect clause, termination rights and allocate the risk between the parties through the warranties, representations and indemnities contained therein.

(c) Completion: The key to a well organised completion meeting is the preparation of a completion agenda. The agenda should cover all actions that must take place before and after completion and all documents that need to be produced and signed.

(d) Post-completion: In a share acquisition, the buyers need to ensure that all internal registers of the target have been updated and all the relevant information have been filed at the Registrar. In an asset acquisition, the buyers need to make appropriate registrations at the Land Registry. Lastly, buyers should not overlook the post-merger integration (strategic and cultural) as this would maximize synergies and increase profits.

11. Financial crime

11.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction?

Please see below the key legislation with respect to money laundering and other forms of financial crime:

(a) Money laundering and other forms of financial crime are primarily governed by the

The Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007 Law 188(I)/2007, as amended which is aligned with the EU directives to combat money laundering and terrorist financing.

(b) For completeness, reference should be made to the Criminal Code, Cap. 154 as well.

11.2 What key concerns and considerations should be borne in mind with regard to the prevention of financial crime in your jurisdiction?

Key concerns and considerations that merit attention include adherence to stringent Anti-Money Laundering requirements. Accordingly, the implementation of robust Customer Due Diligence (CDD) and Know Your Customer (KYC) procedures, including the verification of the source of funds for high-risk transactions, and ongoing staff training is mandatory and not optional. Furthermore, conducting thorough risk assessments to identify and understand the specific risks of each case is also imperative.

In addition, all companies and other legal entities that are incorporated or registered Cyprus (subject to certain exemptions) are obliged to identify and record on the Beneficial Ownership (BO) Register all relevant information about their beneficial ownership.

Lastly, as Cyprus aligns its legislation with evolving international standards, businesses, and financial institutions must stay abreast of regulatory updates to ensure full compliance.

In this regard, vigorous measures for the prevention of financial crime are imperative.

12. Audits and auditors

12.1 When is an audit required in your jurisdiction? What exemptions from the auditing requirements apply?

Since 01 January 2023 and in accordance with the amendments in Companies Law and to the Assessment and Collection of Taxes Law, subject to certain thresholds, small and medium sized Cyprus companies are allowed to submit their financial statements for review (so called limited assurance audit), instead of audit, to a licensed auditor operating in Cyprus.

Prior to these amendments, all Cyprus companies were obliged to perform an audit, irrespective of their size, risk, turnover and volume of transactions. This led to extensive audit work and high costs for small companies.

Below are the thresholds that a Cyprus company must meet to be able to submit financial statements for a limited assurance audit, instead of a full audit:

• Net turnover does not exceed €200,000. Turnover refers to all sources of income with no exceptions (i.e., income from rent, dividends, interest etc.) and;
• Total assets’ value does not exceed €500,000.

The above thresholds must be met for at least two consecutive years.

However, the above exemptions do not apply, and full audit must be prepared for the following types of companies:

(a) Parent companies that are required to prepare consolidated financial statements.

(b) Companies regulated and supervised by the Central Bank of Cyprus, the Cyprus Securities and Exchange Commission and the Commissioner of Insurance or companies holding a qualifying participation in such companies.

12.2     What rules relate to the appointment, tenure and removal of auditors in your jurisdiction?

In relation to the appointment of auditors please refer to clause 12.1 above.

Auditors are appointed by the shareholders at the AGM. The first auditors of a company can be appointed by the directors at any time before the first AGM. They hold office until that meeting is concluded. Notwithstanding the contractual arrangement between the auditors and the company, every company must at each AGM appoint the auditors to hold office from the conclusion of that meeting and until the conclusion of the next AGM. Shareholders have the authority to remove the auditors at any time before the expiration of their tenure.

12.3     Are there any rules or recommendations that limit the scope of services as regards the provision of non-audit services by an auditor?

An auditor must be independent from the accountants and it is prohibited to provide book-keeping and also accounting services to the same company. The reason for the need of independent auditing in Cyprus is that the law requires the auditor to control and overview the accountants to ensure the proper and truthful accounting services in the country.

12.4     Are there any rules or recommendations which cap the remuneration of an auditor as regards payment for the provision of non-audit services?

Remuneration of the auditors, in relation to audit and non-audit services, is not fixed under Cyprus law. Remuneration is decided between the Company and the auditors through contractual arrangement.

13. Termination of activities

13.1 What are the main routes for terminating business activities in your jurisdiction? What are the advantages and disadvantages of each?

(a) Liquidation

• Shareholders’ voluntary liquidation: The company can resolve by special resolution that the company be wound up voluntarily or if it cannot by reason of its liabilities continue its business, and that it is advisable to wind up.
• Creditors’ voluntary liquidation: Creditors’ voluntary liquidation is used to distribute the available assets of an insolvent company among the creditors and bring the company’s existence to an end.
• Compulsory liquidation by court: A compulsory liquidation is ordered by the Court following an application filed by the company itself, a creditor, or any other interested party.

(b) Strike-off

• Strike-off: A company that has ceased to or never carried out business, may apply for its strike off. Before proceeding with the submission, the company must fulfil its obligations towards the Tax Department, Social Insurance Services and the Registrar.
• When the fixed period for the duration of the company by the articles expires, or the event, occurs which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily.

The liquidation option is more expensive than the strike-off option but faster. Furthermore, with respect to liquidations any creditor of the company can apply to the Court for reinstatement within 2 years, whereas for strike-offs within 20 years.

13.2 What key concerns and considerations should be borne in mind with regard to the termination of business activities in your jurisdiction?

As mentioned under paragraph 13.1 above, it is essential to consider that for cases (b), (c) and (d), any member or creditor of the company can apply to the Court for reinstatement within a period of 2 years, whereas for case (a) within a period of 20 years. Therefore, in order to avoid such an application for reinstatement at a later date and/or a voluntary strike off or liquidation process from being halted by a third party, before proceeding with termination, companies must ensure that they have satisfied all of theirs obligations towards the Registrar of Companies, tax authorities, social insurance services and any other creditor or third party (e.g. employees or other contractual obligations).

14. Trends and predictions

14.1 How would you describe the current landscape for doing business and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The current business landscape in Cyprus is characterized by a resilient and dynamic environment that fosters both local and international business activities. Over the past few years, Cyprus has positioned itself as one of the most attractive destinations for foreign investors due to, inter alia, favourable tax regime, its well-established legal system, membership with the European Union and a well-regulated financial sector. All these factors contribute significantly to the country’s international reputation as a financial hub and business centre.

One prevailing trend is the growing emphasis on technology and innovation. The Cypriot government has been proactive in promoting a digital economy, with initiatives to support startups and tech-based businesses. The development of fintech and blockchain sectors has gained traction, positioning Cyprus as a hub for innovation in the Eastern Mediterranean region.

With respect to legislative reforms, Cyprus Securities and Exchange Commission is working towards upgrading the current Innovation Hub to a Regulatory Sandbox, which will provide regtech and fintech companies with detailed guidance in a safe regulatory space.  It is expected to promote fintech and alternative finance further. The announcement for the launch of the regulatory sandbox is expected to be made by Q2 2024.

15. Tips and traps

15.1 What are your top tips for doing business smoothly in your jurisdiction and what potential sticking points would you highlight?

In navigating the business landscape in Cyprus, several key tips can contribute to the seamless and efficient operation of business activities. It requires a combination of local networking, legal and business acumen and familiarity with the procedural and bureaucratic complexities of the governmental authorities.

Establishing strong local connections is crucial. Networking within the Cypriot business community can provide valuable insights and foster collaborations and therefore, add value to someone’s business. Building relationships with local legal professionals and accountants, who have expertise in local laws can prove invaluable in providing efficient solutions in complexities that may arise and in navigating administrative processes. Furthermore, being familiar with the Cyprus legal system, taxation policies and filing requirements is important in order to ensure compliance and avoid any potential pitfalls such as penalties and bureaucratic delays.

Despite its business-friendly environment, potential sticking points include bureaucratic processes. While Cyprus has made efforts to streamline procedures, occasional delays may still occur. In this regard, a proactive approach to understanding and managing these processes can help mitigate their impact. Moreover, it should be borne in mind that in real estate transactions, property title issues have been known to cause complications, and as such, it crucial to conduct a thorough due diligence.

Having in mind these dynamics and proactively addressing potential challenges, one can position his business for success in Cyprus. Seeking local expertise and staying adaptable will contribute to a smoother business experience in this dynamic market.

We at S. Dionysiou & Partners LLC advise on various matters related to business or private activities. For any further assistance, you may contact us at info@dplawcyprus.com.

This content is solely for general information purposes. None of the information herein should be relied on or substituted for specific professional advice regarding a particular matter or situation and no person should act or refrain from acting on the basis of the information contained in this brochure without first obtaining advice from an attorney.

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