How to Carry On Business in the EU After Brexit - A Comparison
What's the impact for expats of no withdrawal treaty as Brexit negotiations heat up?
In this article we compare two of the best EU locations for setting up business - UK and Cyprus
For more information and insights go to our website www.proactpartnership.com for further articles, blogs and access to podcasts and our Guide to EU Brexit for Expats.
Setting Up Business
Basic business are either self employed sole trader or a company. There are other ways such as using a partnership or trust, but for this article lets stick to these two start up propositions.
Any individual could set up a business and start trading. The EU enshrines the 4 freedoms including movement of people, capital, services and goods.
Capital means your money can be invest in property or business in any EU country.
Goods means you could freely move your goods to sell around the EU countries. There are no custom tariffs (ie taxes) applied between EU countries.
Services means any service provision should be able to be applied in any other country. In practice this doesn’t work smoothly as ‘false’ barriers such as language or local regulations stifle this free movement. for example a doctor must continue to practice to retain his medical licence, but if he relocated to Cyprus he must register to practice as a doctor in cyprus. This he can do without restriction provided he confirms he can read, write and speak Greek.
People means labour. While EU citizens have the right of free movement, this is for holiday or too work. there can be no discrimination. There can be immigration and residency requirements that block this free movement.
Set Up Costs
The set up costs as self employed in Cyprus or the UK can be nil, as long as you have your residency permits, and tax registration in place.
A UK company is very low cost and quick to set up online. You must have a registered office, this can be a professional service provision or your own home office or the business branch or main address.
Audit for UK business is not required until turnover exceeds £5million, reducing audit and accounting costs for small business up to that level of turnover.
Cyprus requires all companies to be audited, even dormant, and self employed with turnover greater than Euro 70k.
Coupled with VAT regulations (see below) this makes the accounting and audit costs of a cyprus business higher from day one.
The government charges and duties when setting up a Cyprus company, along with the requirement for ‘unique’ memorandum and articles prepared, and sworn in court by a registered barrier, mean there is a much higher setting up cost for a cyprus company, usually 1-2 thousand euros.
Social / National Insurance Taxes
Social Insurance provides for welfare payments when we get old , sick or fall on hard times. Generally if you are economically active as an employee or employer or self employed then social insurance is due for those working in the country they are working.
Recent changes within the EU mean that such SI must be paid in the country where the work is done, rather than the country of the employer.
The UK encourage business formation with allowances and concessions to new businesses setting up in the UK. A UK self employed person could pay as little as £3 a week in social insurance until net profits exceed £9000 per year.
This encourages people to move away from benefits or economic inactivity and take an entrepreneurial step forward. this relief extends to hard times if profits or income drops in any year.
In Cyprus a different approach is applied. No allowances are offered, so all net profit income for a self employed person is taxed from day one. This is compounded by minimum earnings levels whereby the self employed person is assumed to be earning a minimum income per profession from day one. A professional service provider could be deemed to earn 40k pa from the day he opens his doors to business, making the near 15% social insurance tax a heavy drain on cashflow for any new business
For employers the rates are more comparable, a total employee / employer Social Insurance tax of around 22% for employer and 25% in the UK. Again thought there are allowances for new business and employers in the UK but not in Cyprus.
VAT Sales Tax
VAT is an EU sales on tax. There are common EU laws although individual states have some discretions how the revenues are applied.
The EU does impose minimum and maximum VAT rates and banks that member states can apply within.
Cyprus choose to use a minimum turnover threshold for VAT registration around Euro 16k. In effect almost all business has an obligation to register and operate under quarterly VAT returns.
The UK uses VAT, and is likely to continue to use this sales tax after EU Brexit. Once out of EU controls though the UK could vary its rates, and allowances. This is an issue of concern to the EU in Withdrawal treaty negotiations, as they don’t want post Brexit UK to be a backdoor for VAT avoiding goods to flood the EU.
The EU is set to lose a significant income from EU Brexit by the UK so EU business can expect to see local governments introducing higher VAT taxes to help balance the budget in the future where the island of Britain becomes detached from the EU mainland.
The UK approach to VAT is again very new business friendly. The threshold to register is around £85k, nearly Euro100k.
This allow many contractors and small business to operate outside the VAT regime and gives small business and contractors a competitive advantage against bigger business.
VAT rates are comparable at UK 20% and Cyprus 19%.
So the higher UK threshold for VAT introduction could give an £80pa turnover contractor a £16K cash or pricing advantage over bigger competitors.
Corporation tax calculations are framed within international tax treaty guidelines. There can be different allowances for different countries.
Looking from a simple headline rate Cyprus wins hands down with a 12.5% corporation tax on net profits, while the UK also offer a competitive corporation tax rate of 19%.
Even so on £100k profit a UK business will pat £6500 more corporation tax.
Dividends are paid by companies to the shareholders usually out of profits. For a private company with a few shareholders and using the company as a service company, then dividends can become a major source of income.
In the UK £2000 can be earned on dividends tax free in any year. This is in addition to the personal income tax allowance.
Then basic rate tax payers pay 7.5% tax on dividends.
So for total earnings up £46,000 in the UK, using income and Dividends mix, a UK company service contractor can pay personal tax at a maximum rate of 7.5%.
Dividend tax then jumps to a higher rate tax level of 32.5%. with a maximum tax rate set at 38.1% on dividends.
These rates would apply to any Expat based in the UK working though a UK company.
In Cyprus there is a flat rate of 17% tax on dividends. however there is a piece of magic. Expats relocating abroad to Cyprus to work will pay 0% dividends on unlimited income. This is a zero % tax, so as log as declared by a Cyprus Tax resident , there is no tax in another country to apply, this being a subject of double taxation treaties.
So for a total earnings split between income £16k plus dividends £30k = £46 per year a CY based company service contractor will pay zero 0% personal tax.
There is no limit to the amount that could be earned by an Expat from dividends at 0%.
Earn £1million from dividends, pay no tax as an Expat Cyprus tax resident.
Cyprus offers an excellent location for profitable Expat business with low corporation and dividend tax rates.
Cyprus has a high personal allowance for income tax at Euro 19,500. this is around £17,000 pa. But this is stable and does not generally get indexed year on year.
Below this income zero income tax is paid in cyprus, although the taxpayer is still liable to social insurance, VAT, and defence levy tax on dividends, rents and bank interest.
New Expats Living and Working Abroad in Cyprus can also get an additional 20% tax allowance for the first 5 years in country. An Expats on a !00k personal income could therefore double her Nil Rate tax band.
Cyprus rates rise rapidly with only small bands, to 30% tax on income greater than Euro36,000 ( equivalent to £32k) per year. The maximum Cyprus income tax rate is 35%.
The UK has a personal allowance of £11850 with no tax.
So in Cyprus an additional £5000 can be earned before income tax , saving £1000.
The basic rate income tax is 20% in Cyprus and UK.
However the UK has a much larger basic rate band up to income of £46k is taxed at 20%.
The cyprus income tax payer would be paying 30% tax on the income from £32k to 46K. This is a £1200 income tax saving for UK tax payers against Cyprus tax payers.
Above £46k per annum income the UK tax payer then leaps to 40% tax. The maximum UK income tax rate is 45%.
Cyprus can be a low income tax country as can the UK, each country has its own tax rates and allowance to consider.
Expat Review and Summary
Comparison of Business Set Up in UK and Cyprus
Cyprus welcomes Expats Business with the offer of Zero taxes on Dividends and Bank Interest.
UK offers £2000 on Dividends tax free, and 7.5% up to £46k per year income , then rising to 32.5%
UK Bank Interest is taxed with Earned Income.
Cyprus Employees get an additional 20% tax allowance against income for the first 5 years in country.
UK offer low cost of entry for social national insurance contributions, with rates linked to net profits or earnings, at a similar rate to Cyprus.
Cyprus offer no concessions to business on Social Insurance and apply high minimum income assessments from day 1 for new Expat Self Employed Business
Cyprus Corporation tax rates at 12.5%
UK Corporation tax rates are 19%
This is a £6000 tax saving on a £100,000 net profit.
UK VAT threshold is high at around Euro100,000.
Cyprus is very low by EU standards at around 15,000 turnover,
This offers a UK Business with turnover under !00k a £16,000 cashflow / pricing advantage over larger business.
Cyprus Company formation casts are high and the expense of audit is always required for any business even if dormant.
A UK business has low and quick formation changes and no audit is required until turnover exceeds £5million
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