Tax and Legal Implications of Engaging Freelancers for Businesses in Cyprus

1) What are the tax risks for businesses when hiring freelancers instead of full-time employees?

In Cyprus, hiring freelancers instead of full-time employees can seem cost-effective, but it carries significant tax and legal risks. If a freelancer is treated like an employee in practice—fixed hours, direct supervision, or integration into the business—the authorities may reclassify them as an employee. This can lead to back payments for income tax, social insurance contributions, and employment benefits, plus fines.

2) How do tax authorities determine whether a freelancer arrangement should be reclassified as employment?

In Cyprus, tax authorities determine if a freelancer should be treated as an employee by looking at the reality of the working relationship. Key factors include the level of control over how and when work is done, integration into the company, exclusivity, provision of tools, financial risk, and the right to subcontract.

3) What are the employer’s withholding or reporting obligations when working with freelancers?

In Cyprus, when working with genuine freelancers (independent contractors), the employer generally does not withhold income tax or social insurance contributions—freelancers are responsible for their own tax filings and social insurance payments.

4) Are withholding taxes applicable when engaging cross-border freelancers?

For cross-border freelancers, WHT is not automatic—it depends on where the services are performed and whether a tax treaty applies, and careful documentation is essential to avoid unexpected tax liabilities.

5) How do double taxation treaties impact taxation of payments to foreign freelancers?

Double taxation treaties (DTTs) between Cyprus and other countries can reduce or eliminate withholding taxes on payments to foreign freelancers. They determine which country has the right to tax the income and often allow the freelancer to be taxed only in their country of residence or at a reduced WHT rate in Cyprus. To benefit from a DTT, the freelancer must provide a tax residency certificate from their home country, and the business must follow the treaty’s reporting requirements. Essentially, DTTs help avoid the same income being taxed twice and can lower the Cyprus tax burden on cross-border payments.

6) What compliance documentation should businesses maintain when working with freelancers?

Businesses in Cyprus should keep a freelance contract, invoices, proof of the freelancer’s tax registration, payment records, and evidence of the freelancer’s autonomy. For cross-border freelancers, also retain tax residency certificates to support reduced withholding tax under double taxation treaties. This documentation helps prevent misclassification and tax issues.

7) What compliance requirements must companies meet when engaging freelancers?

When engaging freelancers in Cyprus, companies must verify freelancer status, keep clear contracts and payment records, ensure taxes and social insurance are handled by the freelancer, and collect tax residency certificates for foreign freelancers to comply with withholding tax and reporting rules.

8) What are the legal and contractual best practices for structuring freelancer engagements to minimize tax risks?

To minimize tax risks, businesses should use clear contracts outlining deliverables and autonomy, avoid employee-like benefits, pay via invoices, clarify IP and liability, address cross-border tax rules, and keep thorough records to demonstrate the freelancer’s independence.

Author: Cleo Loizou Kyriakidou