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CYPRUS / Legal Framework

Legal Framework

Forms of enterprises
 
The laws and regulations for setting up and administrating Cypriot entities are the same for foreign investors carrying on international business activities as they are for local entities. Entities may be registered in the following legal forms under Cypriot company law which is very similar to the UK’s former Companies Act 1948:
  • limited liability company (private or public)
  • partnership
  • branch
  • European company (SE)
Limited liability companies make up the vast majority of entities registered in Cyprus. Branches and partnerships constitute only a small percentage, mainly because their legal status and financial liabilities are ultimately the same as those of their beneficial owners.
 
Limited liability (private) company
 
The liability of a private company’s members is limited either by shares or by guarantee. If a company is limited by shares, the liability of its members is limited to the nominal value of the shares fully paid up and the shareholders are not liable to contribute further. If a company is limited by guarantee, the liability of its members is limited to the amount to which they have agreed to subscribe in the case of liquidation. Companies limited by guarantee are usually non profit making organisations.
A private limited company means a company which by its articles:
  • restricts the right to transfer its shares and prohibits the issue of bearer shares
  • prohibits any invitation to the public to subscribe for its shares or debentures
  • limits the number of its members to a maximum of fifty
More stringent regulations from the Registrar of Companies and more requirements by law govern public companies. International business entities are as a rule registered as private companies because this legal form enjoys comparatively inexpensive formation procedures, consensus of a few shareholders, control over the membership and uncomplicated reporting requirements.
 
Partnership
 
A partnership can be either general or limited and comprises two or more persons aiming to profit by carrying on a common business.
 
Each of the partners of a general partnership are liable severally and jointly with the remaining partners for all debts and obligations of the firm. Furthermore, after a partner’s death, his estate is also liable for all debts and obligations and is subject to prior payment of his separate debts.
 
Limited partnerships comprise general and limited partners. The one or more general partners are liable for all debts and obligations of the firm and the one or more limited partners must, at the time of entering into such a partnership, contribute a stated amount to its capital or property valued. The limited partners are not liable for debts and obligations of the firm above the amount contributed.
 
A limited partner may neither take part in the management of the partnership nor have the power to contractually bind it. A company can become a partner with another company or with individuals, provided that it is authorised to do so by its articles.
 
Branch
 
A branch of a foreign company may be registered in Cyprus with the Registrar of Companies under the relevant section of the Companies Law. A branch does not constitute a legal entity different from that of its founding overseas company. There are two types of branches:
 
  • local branch of a foreign company
  • branch of a local company
Overseas companies may establish a branch in Cyprus by registering it with the Registrar within 30 days from their establishment. They must also file the company’s memorandum of association, list of directors and details of the local representative.
 
European Company (SE)
 
The registration of a European Company is in line with EC Council Regulations 2157/2001. The main objective is to allow companies in different EU member states to merge or form a holding company or joint subsidiary while avoiding the legal and practical constraints arising from the existence of 27 or so different legal systems.
 
We address key issues relating to private limited liability companies which are governed by the Cyprus Companies Law Chapter 113, as amended.

We refer to private companies limited by shares. They are by far the most common type of legal entity registered in Cyprus and used in international tax structures. They have Articles of Association (Charter) that specifically:
 
  • restrict the number of members to less than 50
  • restrict the right to transfer its shares
  • prohibit any invitation to the public to subscribe to its shares or debentures
  • prohibit the issue of bearer shares

Key features of Cyprus private companies

Incorporation and capacity to contract

A company comes into existence as a legal entity as soon as it is incorporated by the Registrar of Companies. This is evidenced by the Registrar issuing a Certificate of Incorporation that is conclusive evidence that the company has satisfied all legal requirements in respect of incorporation and that the company is duly registered under the Companies Law.
A company cannot contract or enter any other obligation under the law until it has been incorporated. It cannot become liable on, or entitled under contracts purporting to be made on its behalf prior to incorporation. It cannot ratify contracts that were made prior to its existence. In practice, companies should enter new contracts to give force to agreements that were made prior to incorporation.

Memorandum of Association

The company's objects and powers are defined in the company's Memorandum of Association. Any act beyond a company's legitimate powers as defined in its Memorandum is void. Consequently, the Memorandum of Association is normally drafted as widely as possible to enable the company to engage in any type of business.

Articles of Association

The Articles of Association set out the administrative regulations and procedures for running the company. They stipulate and define how meetings of shareholders and directors are held, the powers bestowed on directors, the method of appointing and removing directors, determine the minimum number of persons that must be present for a quorum, set out the procedures for issuing new shares, transferring shares, borrowing powers and so on.
Although the Articles of Association can often be in standard form, they are also drafted to take into account the specific needs and requirements of the shareholders.

Shareholders and directors

The powers in a company are distributed between the board of directors and the shareholders as stipulated in the Articles of Association. The power of the directors can therefore be as wide or narrow as the Articles provide except that the exercise of certain powers are specifically reserved for the shareholders. For example, the shareholders always have the right to remove directors.
The Memorandum of Association and the Articles of Association are filed with the Registrar and are therefore public documents available for inspection by everybody.
As previously stated, an action outside the objects of the company is void and therefore unenforceable. The remedy commonly available to the other contracting party is to recover money or property paid or transferred under the void transaction to the extent that it is possible to trace it.
However, the situation regarding an action that is within the objects of the company but made by directors acting outside their powers as stated in the Articles of Association may be very different. The "indoor management rule" as it is often called, accepts that persons dealing with directors are entitled to assume that the directors have the authority which they claim to have. Under common law principles, the company is bound by the actions of a director where that director acted within the usual, apparent or ostensible scope of the "director's authority".

Directors and secretary

A private company may have only one director and a secretary. A director may also be the secretary. From an administrative point of view it is advisable for the secretary to reside in Cyprus and be conversant in Greek as all communications and filings with the Registrar of Companies are required to be made in the Greek language.

Procedural requirements

All companies are required to hold in each calendar year, an Annual General Meeting (AGM). Not more than 15 months must elapse between one AGM and the next. The first AGM must be held within 18 months of incorporation. Failure to comply makes the company and each director liable to a fine not exceeding €250.

The Articles of Association normally provide that the directors may call an Extraordinary General Meeting at any time. Notwithstanding the provisions of the Articles, the law states that the holders of 10 percent of the paid up capital of the company have the right to require the directors to call an Extraordinary General Meeting.

The notice period for an AGM or the meeting for the passing of a special resolution is 21 days. The notice period is 14 days for every other case. These notice periods may be shortened if 95 per cent of the members entitled to attend and vote agree to so do, except in the case of AGM where all the shareholders must agree to the shorter notice period.

The Cyprus law contemplates 3 types of resolutions: ordinary, special and extraordinary. The minimum notice period and majority required in each case, are summarised
Type of resolution
Minimum notice period
Majority required
Ordinary 14 days 50% plus 1 share
Special 21 days 75% plus 1 share
Extraordinary 14 days* 75% plus 1 share
 
*21 days if the resolution is to be passed at an AGM
The Cyprus law details the nature of resolutions for each type of decision required
Description of decision
Type of resolution
 
 
Amendment to Articles of  Association Special
Amendment to Memorandum of Association Special with Court approval
Issue of shares at discount Ordinary with Court approval
Purchase of own shares Special
Reduction of share capital Special with Court approval
Change of name Special
Change of auditor Ordinary with special notice (28 days)
Removal of director Ordinary with special notice (28 days)
Member's voluntary liquidation Special
 
Obligations to maintain accounting records and to prepare audited financial statements
- The directors are obliged to ensure that the company maintains accounting records that enable the preparation and audit of financial statements that show a true and fair view of the company's financial position and performance in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).
- The accounting records must be held either at the registered office or at another place in Cyprus and must always be available for inspection by the directors. Where the bookkeeping function is maintained outside Cyprus then arrangements must be made for those accounting records to be sent to Cyprus in regular intervals not exceeding 6 months.
- Every company that has subsidiaries is obliged to prepare consolidated financial statements in accordance with IFRS and IAS and to present these financial statements to the members in general meeting. Additionally, those financial statements must disclose the following:
  • remuneration of auditors
  • amounts paid to directors as compensation for loss of office
  • the total amount paid to directors in fees and emoluments
  • directors holdings in shares and debentures
  • loans granted to directors
It is important to understand that one company is considered to be a subsidiary of another only if that other company controls the constitution of its board or holds the majority of the voting rights either directly or through an appointed agent or trustee.

The financial statements must be accompanied by a report of the board of directors which includes:
  • details of any changes in the nature or volume of operations
  • any changes in the share capital
  • any significant change in the constitution of the board of directors or the duties assigned to its members
  • directors' proposals regarding the distribution or not of the retained profits
Failure to comply with these requirements leaves the directors open to prosecution with the possibility of a fine of up to €10.000 and imprisonment of up to 12 months. The financial statements must be audited by a registered auditor.

Exception from consolidated statements
 
“Small groups” as defined in the law are exempted from the preparation of consolidated accounts, unless:
(a) they are public companies
(b) the preparation of consolidated accounts is governed by other specific legislation, and
(c) they exceed any two of the following three criteria:
  • total balance sheet assets of €17.500.000
  • total turnover €35.000.000
  • total number of employees 250

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