Advantages and disadvantages of the Cypriot LP

The Cypriot LP can be a great alternative for those who want a company that is legally exempt from paying taxes, but at the same time is not in the United States. In today’s article we explain its pros and cons, as well as how it compares to the US LLC.

At Denationalize.me we are always looking for the best options so that our clients do not have to pay a penny more in taxes than necessary. This is how we have become one of the leading companies in the foundation and maintenance of US LLCs for non-residents.

However, we have found that, in some cases, the US LLC is not a good option. This is the reason why we have started offering our company formation services in the Emirates or Nevis, for example; and why we are now also going to start offering LP registration in Cyprus.

The Cypriot alternative may have certain disadvantages compared to the LLC, but would retain the attraction of keeping you tax free. Like the LLC, the Cypriot LP is also a fiscally transparent company: a Limited Partnership.

This Cypriot partnership allows you to avoid the usual pitfalls one faces with a US LLC. In principle, these obstacles can also be solved with an LLC, but they often add unnecessary complications. Thus, it may be more interesting to go directly to the Cypriot LP. In this article, we analyse the main problems for LLCs that can be better solved with a Cypriot LP.

It allows (officially) to have several partners or shareholders

The LLC only has tax advantages if it is a disregarded entity. For this, it must be a single member LLC —i.e., a single member LLC owning 100% of the shares of the LLC. A US multi-member LLC must pay full income tax on its US source income.

Of course, there are ways around this problem of the LLC: You can have a manager-managed LLC (so that it is not known who owns the company) and then stipulate in the operating agreement (private document) that there are different owners. Thus, it is still possible to set up an LLC with several partners, as there is no obligation to officially disclose the content of the operating agreement.

However, there are cases where it is preferred that the owners of the company are officially and clearly known, either externally (the company’s dealings with banks, public entities, and other companies) or internally (legal certainty of the owners, responsibilities).

The Cypriot LP cannot be founded with just one owner: the Cypriot Limited Partnership is a type of personal partnership, in which at least one partner with unlimited liability (general partner) and another with limited liability (limited partner) coexist. The general partner must own at least 0.5% of the shares. If you cannot rely on a family member or acquaintance to fill this role, you can always rely on trustees or companies that provide this service. However, to facilitate the KYC process in opening accounts and so on, the general partner must be a natural person or a Cypriot Limited company with a shareholding of 0.5% or more, and not an offshore company. By doing so, you will also ensure a limitation of liability. In any case, it is simpler and, above all, cheaper to hand over a minimum shareholding in the LP to a second natural person, unless there is already more than one partner in the company.

And here, some may ask, why not use a Canadian LP as an alternative to the LLC to solve this problem? First of all, it has the same problems as the LLC as a non-EU company, but this structure rarely has any limitation of liability. With the Ontario LP, the same person can act as both partners, but this confers unlimited liability.

British Columbia LLCs are officially reserved for the legal professions only: lawyers, tax advisors, accountants, etc. Those who use them for other purposes not only run a tax risk, but also lose the limitation of liability in case problems arise… and this is not the only reason why we initially discourage the incorporation of Canadian companies. In our opinion, as was seen during the COVID pandemic, Canada is no longer a legally safe country: You do not know what the local government can do if suddenly tax-free LPs come more clearly into the public eye. Then again, opening accounts or obtaining a VAT number in the EU can be quite complicated… But let us return to Cypriot LPs and their comparison with US LLCs.

EU VAT number

A classic obstacle faced by LLCs is the application for a European VAT number. This particularly (but not exclusively) affects those engaged in the sale of physical goods in the EU. The days of VAT evasion in e-commerce are long gone: almost all platforms and most payment providers for e-commerce in the EU now require a VAT number to operate.

If you want to apply for a VAT number with a business in a non-EU third country (such as the United States) you will often have to present a certificate of residence, which is precisely what non-resident US LLCs (and, of course, perpetual travellers) cannot obtain. LLCs are tax exempt because they are not resident anywhere. Be that as it may, we do have cases of clients who have managed to apply for a VAT number without being asked for such a certificate of residence.

However, this still does not solve the problem of marketing goods in the EU. Both customs legislation and labelling laws require a distributor with a branch or permanent establishment in Europe. If you do not have one, you are acting illegally. You can get around this loophole with the help of service providers such as Helloclearance.de. Otherwise, US LLCs can also get by with so-called tax representatives, who, in addition to positioning the products on the market, also take care of VAT matters independently. These services are convenient, but relatively expensive.

In the end, these are all problems that can generally be solved. However, for those who want to make it easier, you could opt to register a company directly in the EU, a company like the Cypriot LP we are analysing today. The Cypriot LP allows you to operate tax free without having to do without a VAT number. With the Cypriot VAT number, it is quite easy to apply for VAT numbers from the other EU countries and it will be easier to find accountants and tax advisors to take care of the VAT accounting. In short, it is easier and cheaper than working with a company outside the EU.

Improved access to banking and payment providers within the EU

In the same vein, there is the problem of customer payments. It is true that US LLCs can obtain business accounts in the SEPA area and in euro, but there are many banks in the EU that do not accept US businesses. Online FinTechs are the ones who grant US LLCs most business accounts with IBANs. Due to FATCA, many European banks are reluctant towards LLCs, as it puts a considerable additional compliance burden on them.

More important than the limited availability of bank accounts, however, is the fact that US payment providers tend to settle in USD rather than EUR. Even if they allow settlement in EUR, exchange rate losses will occur when debiting the linked US accounts. US accounts do not hold euros.

With a Cypriot LP, you would automatically be in the euro zone and save these fees. In addition, these companies often have better access to specific European payment providers and can offer their customers, for example, popular payment methods such as direct debit.

US LLCs also have numerous options in this respect, but when it comes to European clients, a Cypriot LP usually has more options at its disposal and easier access to them. It is true that Cypriot banks themselves are quite complicated, but there are solutions available in 27 other member states.

Popular payment providers, such as PayPal, can be used more easily with a Cypriot LP than with a US LLC. Due to the existence of audited accounting, it is also easier to provide evidence of banking compliance.

Proof of income required

Not only are more and more financial institutions of all kinds facing this hurdle every day when opening and maintaining accounts, but also in the private sphere people are facing more and more questions: what do you do for a living, where does the money from your investments come from… US LLCs can file voluntary accounting and tax returns, but Cypriot LPs are obliged to do so. The additional audit of these accounts generates a record of income or net worth that you can use against banks and public institutions without having to pay taxes or file a personal income tax return.

EU data protection rules

When European customers reject service providers with US LLCs, it is often not because they will not be able to deduct their invoices or because the US is on any blacklist, but specifically because of data protection laws. Service providers working on customers’ critical systems have a big problem: the US is considered the third most insecure country for data protection under the GDPR. For this reason, it is difficult to find well-paid contracts for certain IT projects, as companies must deal with additional disadvantages regarding legal compliance.

Here, too, the Cypriot LP offers an effective solution, since it is a company from an EU member state that can comply with the regulation without the local authorities being too strict in its application. Thus, one can invoice one’s clients with a regulated EU company and continue to operate completely tax-free.

Platform restrictions on EU companies

In addition to data protection aspects, there are common access restrictions on some platforms. Many online sellers can only register on certain networks with a European legal form. Indeed, there are other business areas where specific solutions require an EU branch. In all these cases, a Cypriot LP can help you remain tax exempt.

So, in general, we can say that the Cypriot LP can always help you where the US LLC cannot. This is more the exception than the rule (generally the LLC is the best option in most cases), but it can happen in some business sectors. In addition, the Cypriot LP also offers a sustainable alternative should the LLC one day lose its tax attractiveness. This is not currently the case nor is it expected to happen, but it would not be the first surprise to rock the world of flag theory.

US rejection for whatever reason

This is more common than you might think, both from clients and from the businesspeople themselves: one hears horror stories about the IRS, another had a bad experience the last time he entered the country or refuses to support the “warmongering Americans” on ethical principles. Often these reasons have little or no basis, but in the end, they are there and must be accepted. A typical concern is litigiousness in the United States. Ironically, however, with an LLC you will be much better protected against lawsuits and injunctions all over the world. You will never achieve that level of protection and anonymity with an EU company.

What are the disadvantages of the Cypriot LP compared to the US LLC?

The tax exemption of a Cypriot LP works basically the same as that of a US LLC. The income is not subject to Cypriot corporate tax or income tax: it is taxed where the partners have their personal tax residence. Therefore, as a perpetual traveller or with a tax-free residence (in Paraguay, for example), the Cyprus Limited Partnership is also completely tax exempt.

However, unlike the LLC, you should be careful not to serve any Cypriot clients with your LP. The local income of the Cypriot LP is taxed at local rates. This is why there is an annual audit in addition to the obligation to keep and file your accounts. The audit, which is included in our administration fee of €5000 per year, checks, for example, that there are no local sales and no invoicing to local customers. However, it should not be too difficult to exclude local activities on the tiny island of Cyprus.

The obligation to file accounts and have them audited is, of course, a costly disadvantage compared to the US LLC —which, at most, requires you to keep its accounts, but not to file them. However, most of the effort in this case can be delegated to our tax advisors, so that all you will worry about will be getting your invoices and costs to them. Unlike the LLC, it is essential that you refrain from making business payments for private expenses and that you formally declare withdrawals of profits. You can still withdraw the money to your private account at any time and use it freely from your accounts.

Remember that the Cypriot LP is also subject to EU VAT rules. This is a significant disadvantage compared to the US LLC (especially for services to private clients), as you will always have to pay VAT at 18% and can only avoid advance VAT returns under the Cypriot Small Business Act. In this regulation, however, the threshold is only €15,600 per year. For automated digital products, you will only have to pay Cypriot VAT up to a turnover threshold of €10,000 per customer country.

At least, Cyprus makes it easy to obtain a local VAT number, which is often denied in similar transparent EU constructions. Without a VAT number, invoicing EU customers through your LP would make the reverse charge procedure impossible: the customer would have to pay VAT without being able to offset it. With the US LLC you can forget about this problem, as the US is a third country outside the EU and is not even in the EU VAT area. With Cyprus you will not have this problem either, but you will have to apply for local VAT (included in the incorporation of the company).

Unlike in the US, anonymity is also much worse in Cyprus: LP shareholders are listed in the Cypriot Companies Register and must also register in the Transparency Register – open to the public – if they own more than 25% of the shares. Therefore, the use of trustees will not help you maintain your anonymity as you would appear in the Transparency Register.

In the US, on the other hand, many company registries still only record basic information, such as the name of the company and the date of incorporation. Often, the director is only visible upon request, and the owners are not revealed under any circumstances. In fact, even the transparency register, which will be finally introduced in 2024, will not be public. The truth is that the US authorities did not used to know who is behind LLCs on their own territory. This situation will change soon, but foreign states and ordinary people will still not be able to find out who is hiding behind your LLC.

Cypriot Limited Partnership (LP) vs Cypriot Limited (LTD)

It is easy to come across online entrepreneurs operating in Cyprus from a normal Limited, why do not these entrepreneurs use an LP, which is much better from a tax point of view?

Many are not aware that this fiscally transparent alternative exists in Cyprus. Moreover, the usual context for Cypriot companies is usually tax residency under the Cyprus non-dom programme, and this only exempts dividends from tax, not income from partnerships (such as LLCs in the USA or LPs in Cyprus). The best scenario in this scenario is to pay 12.5% at the partnership level and be exempt from tax at the private level, as the alternative would be to pay up to 35% income tax plus social contributions on your LP.

Outside Cyprus, however, this calculation changes. If you do not want Cyprus residency, you can probably get more tax advantages from the fiscally transparent LP than from the Cypriot Limited. Naturally, an LP is not suitable as a holding company in the same way as a US LLC. For this purpose, the Limited would be more advisable.

For those operations that can be carried out outside Cyprus by tax-exempt persons (e.g. perpetual travellers), the LP is a strong suit and is highly recommended. However, like the LLC, an LP is not interesting for companies that need a real place of business with local employees. Anyway, the growing niche of remote digital entrepreneurs finds in this construction a perfect vehicle to operate income tax-free with an EU legal form.

Comparable legal forms also exist in other EU countries: Malta’s and Ireland’s LPs are more or less the same. Even countries that one would not imagine – such as Denmark, the Netherlands or Sweden – have fiscally transparent partnerships. However, as a rule, you will not be able to obtain a VAT number in these countries, which considerably reduces their operational advantages. Therefore, within the EU, we have chosen Cyprus, as it offers the best starting conditions for fiscally transparent partnerships.

The partners of a Cypriot LP can use it tax-free as long as they have no tax domicile or establish it in a tax-free country, and as long as they work with self-employed or tax-exempt employees. This is, in fact, a very interesting option for many entrepreneurs today, although many tax companies and their managers can barely imagine it from their perspective. This is precisely why there are hardly any offers for setting up a Cypriot LP and benefiting from its many advantages – by far the most sold and offered is the constitution of the ordinary Limited!

Create your own Cypriot LP with Denationalize.me!

We at Denationalize.me would like to offer you a new LP incorporation service in Cyprus. Of course, we can also assist you with the incorporation of a Cypriot Limited through our local partners or help you with the application for non-dom status. However, even with tax havens like Cyprus, what we ask ourselves at Denationalize.me is, why pay 12.5% tax when you could pay 0%?

Law firms around the world see tax optimisation as a mere business, whereas for us it is a vocation: we strive to offer you the best options to build a profitable business around the world with as little tax and as many advantages as possible.

Taxes are not the only thing to consider. Instead of facing major disadvantages and operational hurdles with companies in Panama or Dubai, we provide you with attractive options such as the US LLC or, in circumstances where this is not possible, the Cypriot LP.

The tax-free Cyprus Limited Partnership is available for only €5000 through Denationalize.me. This includes, in addition to accounting and auditing, the application for a VAT number, your returns and all administration costs. We offer you our many years of experience in the market: for only €5000 you will get a completely tax-free EU company that will take you where LLCs do not reach – although there are few places and circumstances where LLCs do not deliver.

In most cases, it’s better to form an LLC with us: the formation is less complicated, and you will save €3,000. You would be freed from accounting and have access to a variety of interesting bank accounts for your company, not to mention the potential anonymity and recognised accounting.

However, if you are not satisfied with what an LLC can offer you because of your specific circumstances and needs, do not give up on your goals and stay in your home country: with the Cypriot LP you can overcome the few disadvantages that affect the LLC if you are willing to compromise on the higher price and bureaucracy. If you opt for an LP, you will remain completely income tax free.

Whether with a US LLC or a Cypriot LP, you can register your company through Denationalize.me and, of course, if you are not sure which option is best for you, we will be happy to guide you and help you create the optimal plan in a consultation.