Israel – Cyprus Tax Treaty

Business Activity in Cyprus

Cyprus is a popular choice for businesses due to its strategic location, low corporate tax rate of 12.5%, and business-friendly environment. It offers various company structures and a simple registration process that takes only a few days. The country’s legal system is based on English Common Law and aligned with EU standards, providing reliability and transparency.

Cypriot economy relies on local agriculture and the export of goods. Exports from the Turkish part mainly include vegetables and fruits, while exports from the Greek part mainly include potatoes, wine, clothing, leather products, and medicines.

Between Israel and Cyprus, there are active and strong trade relations also because of the discovery of the gas quarries in the common economic territory of the two countries, as mentioned. The low corporate tax in Cyprus (12.5% as of 2024), is a very significant consideration for many international companies, in determining their location in Cyprus.

Bilateral Agreements between Cyprus and Israel

International Investment Agreement

Reciprocal Promotion and Protection of Investments

The Reciprocal Promotion and Protection of Investments (RPPI) was signed on the 13^th of October, 1998 and went into effect on the 16^th of June, 2003. The RPPI is an agreement between Israel and Cyprus that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the transfer of funds. 

To read the agreement in English, click here.

Applicability of the MLI

Both Cyprus and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.

Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. Also, Cyprus affixed its signature to the MLI on June 7, 2017, and its provisions became effective as of the 23^rd of January, 2020. 

Residency for Tax Purposes in Cyprus

Residence of an Individual

An individual is considered a tax resident in Cyprus tax resident if they spend more than 183 days in Cyprus in a calendar year.

An individual is also qualified as a Cyprus tax resident under the 60-day rule if, during the tax year, they:

• Do not spend more than 183 days in total in any other single country
• Are not a tax resident of any other country
• Spend at least 60 days in Cyprus
• Have specific ties to Cyprus, such as work, business, or property

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

A company is a Cyprus tax resident if it is managed and controlled in Cyprus. From 2023, any company incorporated in Cyprus is automatically considered a tax resident unless it is a tax resident in another country.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Cyprus

Cyprus Tax Authority is called the Tax Department.

Income Taxation: 0% to 35%

Taxation of Companies and Branches: 12.5%

VAT: 19%

Capital Gains Tax: 20%

Withholding Tax

Inheritance Tax in Cyprus

Cyprus does not apply an inheritance tax.

Relocation to Cyprus

The island country of Cyprus, at the crossroads of Europe, the Middle East, and North Africa, adapted itself to become a leading center for finance, shipping, and technology and a major investment center for venture capitalists. Investment in Cyprus has several benefits including a strong economic ahead and the potential for the acquisition of a highly skilled talent pool around the world. The country offers its citizens direct access to the EU market, which can be a good foundation for expansion beyond borders. Thanks to the right regulatory framework and a solid support network of business services, Cyprus ensures a stable and supportive environment for growth. Furthermore, the competitive cost of doing business is also enhanced by the appealing and simple as seen tax regime †one of the key factors in making Cyprus an attractive location for companies.

As of 2023, Cyprus has about 300 Jews. The Jewish community there has recently grown, with many members being Israelis, as well as Russians and British Jews.

Real Estate Taxation in Cyprus

In Cyprus, the Department of Land and Surveys levies transfer fees for immovable properties on their market value. The transfer fee is 3% of the amount of the properties up to €85,000, which is €2,550. Where properties are worth between €85,001 and €170,000, the percentage rises to 5% which costs €4,250 (37.9% of €11,000). This leaves an accumulated fee of €6,800 for the entire covered value range. For properties with a value e €170,000, the transfer is 8% of the value.

It is important to note that no transfer fees are required if VAT applies to the purchase of the property. In the case, where transfer fees are not exempt from VAT, these are cut in half. In particular, some debt-for-asset swap agreements may fall into an exemption on transfer fees under certain conditions.

A 1% of the market value of the property registration fee is additionally levied for mortgage registration. In restructuring cases, transfer of property and mortgage registrations are free from any transfer tax and mortgage registration tax.

Transfer levy also is applied to the disposal of a non-movable property. Ever since 22 February 2021, a 0.4% levy has been in force on all disposals of immovable property within the control of the Republic of Cyprus. As of 18 November 2022, this levy was extended to include disposals of shares in companies that directly or indirectly own immovable property.

Transfer of Funds from Israel to Cyprus

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax. 

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more. 

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us. 

For more information on money transfers abroad, click here. 

Types of Business Entities in Cyprus

1. A private limited liability company by shares – This is the most common type of company in Cyprus. The liability of the investors in such a company is limited, according to the company’s articles of association, to the amount of shares they own. Such a company must have a minimum of one shareholder and a maximum of fifty, and it cannot offer its shares to the public.
2. A public company with limited liability by shares – Same here, the liability of the investors in such a company is limited, according to the company’s articles of association, to the amount of shares they own. The minimum number of shareholders in a public company must be at least seven, and it may invite the public to subscribe to its shares and may be listed on the stock exchange because it is public. The minimum (issued) capital of a public company must be 25,629 euros.
3. A limited liability company with no share capital – Such a company has no share capital, and its partners act as guarantors and not as shareholders. According to the statutes, their liability is limited to the amount they have committed to transfer in favor of the company’s debts in the event of liquidation.
4. A company limited by guarantee with share capital – Such a company has a share capital and according to its articles of association, the liability of its partners is limited on the one hand to the amount of shares they own, and on the other hand to the amount that the partners have committed to transfer in favor of the company’s debts in the event of liquidation. Such a company can be both public and private, and if the company is public, it can offer its shares to the public.
5. Variable Capital Investment Company – What is special about this type of company is that according to the company’s articles of association, the shares have a variable value instead of a nominal value. Such a company can only be incorporated after obtaining a license from the Cyprus Securities Authority to operate as a collective investment fund. Such a company can be both public and private, depending on the type of collective investment fund that will take such a variable investment company.

The number of partners in a private company can range from a minimum of one shareholder to a maximum of fifty shareholders. In a public company, there is only a requirement for a minimum of one shareholder.

Incentive Laws in Cyprus

Cyprus provides a variety of tax incentives making it a very competitive destination for business. It exempts foreign dividends, foreign profits from foreign ventures, and sales profits of financial assets from taxes. Moreover, there is no withholding tax on payments such as dividends, interest, and royalty apart from certain cases and thus Cyprus is a suitable center for managing companies. In addition, the country benefits from favorable tax agreements and a low corporate income tax rate of 12.5% on interest income, which has been instrumental in attracting financing companies. Companies can also benefit from the Notional Interest Deduction applicable to new equity added after 2014 by applying a notional interest expense equal to government bond yields.

Cyprus has an advantageous Intellectual Property (IP) box that offers the possibility of deducting 80% of the revenues received from qualifying IP activities (e.g., patents, software) if at least an adequate amount of related R&D is conducted.

The country also provides a range of investment fund vehicles with the benefit of tax relief, such as Capital Gains Tax is not charged on fund unit gains, other than when a fund vehicle holds Cyprus property. Profits from productions in Cyprus for the audiovisual sector are exempt from corporate income tax to a given limit, and investments in audiovisual infrastructure are eligible for tax deductions. To conclude, financial support to approved innovative SMEs with a maximum tax deduction of 50% of the taxable income per year up to €150,000 per year.