In this article, we will explore the benefits and drawbacks of establishing a United States Limited Liability Company (LLC) while maintaining residency in Cyprus, how it effects income tax in Cyprus for both expats and locals and should it be chosen over a non dom status in Cyprus or not.
All business owners are no strangers to the challenges posed by high tax rates and intricate regulatory frameworks. In the meantime, many online sources advocate for registering an LLC in the US to enjoy tax advantages and financial flexibility. In this article, we will explore the pros and cons of having an LLC if you live in Cyprus, empowering you to make an informed decision.
Indice del artículo
The Burden of Taxes in Cyprus
As a business owner in Cyprus, you are well aware of the difficulties in making your business profitable due to various tax obligations. Whether it’s the 19% VAT, corporate tax (that is also called a Cyprus business tax), social contributions, personal income tax, or accounting expenses, the burden can be significant. While running a business in Cyprus is not inherently difficult, being self-employed comes with numerous taxes that you might want to consider as not favorable. However, it’s essential to analyze your specific situation before making a decision.
The Advantages of Having an LLC
There are several advantages to having an LLC, especially if you meet the necessary criteria for a non-resident LLC.
A non-resident LLC in the USA refers to a limited liability company that is formed in the United States but is owned and operated by individuals or entities who are not residents or citizens of the country. Non-resident LLCs are commonly used by foreign entrepreneurs and businesses to take advantage of certain benefits offered by the US business environment, such as favorable tax treatment and legal protections.
One of the key advantages of a non-resident LLC is the ability to potentially minimize or eliminate US taxes. Non-resident LLCs that meet specific criteria can be treated as “disregarded entities” for tax purposes. This means that the LLC itself does not pay federal income taxes. Instead, the income, losses, and deductions of the LLC are passed through to the individual owners as the income tax in Cyprus.
Non-resident LLCs also offer limited liability protection to their owners. This means that the personal assets of the owners are generally shielded from the liabilities and debts of the LLC. In the event of legal claims or financial obligations, the owners’ personal assets are not typically at risk.
Overall, a non-resident LLC in the USA provides foreign individuals and businesses with a flexible and advantageous business structure that allows them to conduct business in the US while enjoying potential tax benefits and limited liability protection.
Additionally, an LLC is one of the most cost-effective legal entities to create and maintain. Its simplicity and speed of setup allow you to establish an LLC and start invoicing clients within a few days.
Privacy is another crucial consideration when it comes to forming an LLC. While privacy regulations may vary between states, some states offer a high level of privacy, ensuring that your company’s ownership information remains private. This confidentiality is particularly valuable when your business is thriving and you prefer to keep your ownership details discreet.
LLCs also have simplified accounting requirements. Depending on whether you have a single-member or multi-member LLC, you may only need to submit forms to the IRS once a year. Single-member LLCs often require minimal accounting, while multi-member LLCs have slightly more involved accounting procedures. Nevertheless, compared to the rigorous accounting standards in Cyprus, LLCs provide more flexibility and ease.
Unlike business activities in Cyprus, an LLC doesn’t face strict invoicing regulations. While it is recommended to maintain invoices and account balances, the IRS doesn’t meticulously scrutinize them. This flexibility allows some business owners to cover personal expenses with LLC funds. However, it is essential to exercise caution and seek professional guidance in such matters.
Potential Drawbacks to Consider
While there are numerous advantages to having an LLC, it is essential to consider the potential drawbacks as well. The main disadvantage arises from the LLC’s pass-through taxation structure, which means that while the company itself does not pay taxes in the US, the tax burden falls on the owner. As a result, if your LLC generates a profit, you would be responsible for paying personal income tax in Cyprus for expats or for Cypriots, if the person is recognized as a tax payer in Cyprus. Generally, individuals who spend 183 days or more in a tax year in Cyprus are considered tax residents.
Personal income tax in Cyprus is a tax imposed on individuals based on their income earned within the country. It is a progressive tax system, meaning that the tax rates increase as income levels rise. The personal income tax in Cyprus for expats and for Cypriots is calculated on an annual basis for both individuals with non-dom status in Cyprus and domiciled once.
Cyprus operates a progressive tax system with various income tax brackets and corresponding tax rates. The tax rates for the tax year 2023 are as follows:
Up to €19,500: 0%
€19,501 – €28,000: 20%
€28,001 – €36,300: 25%
€36,301 – €60,000: 30%
Above €60,000: 35%
It’s important to note that these rates are subject to change, and individuals should consult the official tax authorities or a tax professional for the most up-to-date information.
In Cyprus, taxable income includes various sources such as employment income (Cyprus salary tax), rental income, business profits, pensions etc. So the income generated by the LLC will be added to the total taxable base of an individual.
Another aspect to consider is the reporting requirements. While not overly complicated, you would need to submit forms accurately and on time. Failure to do so can result in substantial fines. To ensure compliance, you may need to hire a specialist to handle these reporting obligations, incurring additional expenses. However, the reporting requirements are only applicable to the US laws, according to the laws of Cyprus, other than submitting the annual tax declaration, no other reports are needed to be submitted in Cyprus.
It is also important to be mindful of the risk of Cyprus recognizing your LLC as a Cyprus tax resident. In such a scenario, you would be liable to pay corporate tax in Cyprus (Cyprus business tax), currently set at 12.5%. However, if your business activities are primarily conducted outside Cyprus, with international clients and digital services, the chances of this happening are significantly reduced.
Conclusion:
In conclusion, whether having a US LLC while being a tax resident in Cyprus is advantageous depends on various factors.
If you are conducting business in the US and may face tax liabilities there, it is generally not recommended, as you could end up with a substantial tax burden. Similarly, if you have a company in Cyprus and employees working locally, the likelihood of Cyprus tax authorities considering your LLC as a tax resident increases.
However, if you are self-employed and provide services digitally to clients in multiple countries, operating through an LLC might be beneficial. In such cases, you would still be subject to personal income tax but could potentially enjoy exemptions for the first EUR 19,500 as the income tax paid in Cyprus by both expats and Cypriots, as well as reduced social contributions and, in some cases, VAT exemptions.
It is worth noting that individuals who can become Cyprus non-domiciled tax residents may have access to even more favorable tax treatment without the need for an LLC.
In summary, the decision to have a US LLC while living in Cyprus requires careful consideration of your specific business activities, tax obligations, and long-term goals.
We hope this article has provided you with valuable insights into the benefits and considerations of having an LLC in Cyprus. If you need more information about Cyprus do not hesitate to book a consultancy with our team.
FAQ
What is limited liability protection, and how does it apply to non-resident LLC owners?
Limited liability protection refers to the legal safeguard that separates the personal assets of the owners from the liabilities and debts of a business entity, such as a limited liability company (LLC). It ensures that if the LLC faces legal claims or financial obligations, the personal assets of the owners are generally shielded and not at risk.
In the context of non-resident LLC owners, limited liability protection still applies. Even if the owners are not residents or citizens of the United States, they can still enjoy the benefits of limited liability. This means that the personal assets of non-resident LLC owners are protected from the liabilities and debts of the LLC.
The advantage of limited liability protection is that it helps protect the personal wealth and assets of the owners in case the business encounters financial difficulties or legal disputes. If the LLC faces lawsuits, creditors cannot typically go after the personal assets of the non-resident owners. Instead, they can only seek recourse from the LLC’s assets.
How are invoicing regulations different for LLCs compared to business activities in Cyprus?
LLCs in the US generally face less strict invoicing regulations compared to Cyprus. While it is still recommended to maintain invoices and account balances, the Internal Revenue Service (IRS) does not meticulously scrutinize them. This flexibility allows some LLC owners to cover broader range of expenses with LLC funds. However, caution should be exercised in such cases, and it’s advisable to seek professional guidance to ensure compliance.
Are there any tax exemptions or favorable treatments available for individuals living in Cyprus without the need for an LLC?
Cyprus non-domiciled tax status: Cyprus offers a non-domiciled tax regime, also known as “non-dom” status, which provides certain tax advantages for individuals who are not considered domiciled in Cyprus. Individuals with a non-dom status in Cyprus may be eligible for various tax exemptions and reductions. This status allows individuals to enjoy favorable tax treatment without the requirement of establishing an LLC.
