Israel – Cyprus Tax Treaty

Business activity in Cyprus

Today the economy of Cyprus relies significantly on tourism from Europe, amounting to millions of tourists every year. The island also attracts ‘marriage tourism,’ with many couples visiting to overcome obstacles they may face when planning to get married.

Beyond tourism, the 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 2022), is a very significant consideration for many international companies, in determining their location in Cyprus.

Many Israelis invest in real estate in Cyprus and purchase holiday apartments, residential apartments, and business real estate in Cyprus. Specific information on real estate investments in Cyprus and other countries can be found on our website on the Tax on Real estate abroad page.

Our offices have business relationships with lawyers and accountants in Cyprus and we provide our clients with professional assistance regarding establishing a business, opening a bank account in Cyprus.

Bilateral agreements between Cyprus and Israel

Several agreements were signed between Israel and Cyprus:

1. The East Med gas pipeline agreement (concerning the establishment of a gas pipeline that will allow the transfer of gas from Israel to Greece through Cyprus)
2. Agreement for scientific-technological cooperation
3. The Economic Waters Demarcation Agreement
4. Agreements to encourage and protect investments
5. Free Trade Area Agreement

It should be emphasized that Israel and Cyprus have not yet signed a treaty to prevent double taxation, but these days both countries are really working on formulating the treaty.

Reciprocal Promotion and Protection Of Investments

In 2003, a bilateral agreement between Israel and Cyprus entered into force, the purpose of which is to provide legal protection for the activities of investors and investments from non-commercial risks. Also encouraging mutual investments by Israelis in Cyprus, and vice versa, by creating a comfortable and safe investment climate.

To read the agreement in English click here.

Applicability of the MLI

Cyprus and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Cyprus and Israel signed the MLI in 2017. Israel ratified it in 2019 and Cyprus in 2020.

When establishing a treaty to prevent double taxation between countries, it’s important to note that the MLI takes precedence, and its provisions are decisive. Therefore, if countries wish to adopt different policies, they must negotiate a separate treaty and make reservations regarding specific clauses in the MLI.

Residency for tax purposes in Cyprus

Residence of an individual

An individual who stayed in Cyprus for more than 183 days in the tax year in question will be considered a resident of Cyprus for the purpose of paying tax.

That is, an individual may be considered a tax resident if they stayed in Cyprus for more than 60 days and less than 183 if the following conditions were met:

1) They did not stay in another country for more than 183 days in the same tax year.

2) They have a residential connection to Cyprus, whether they own an apartment in Cyprus or whether they rent an apartment.

3) They have a business connection to Cyprus, whether they own a business in Cyprus or whether they are employed as an employee.

4) They are not recognized as a tax resident in any other country.

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

Residency of a company

A company residency will be determined according to the test of management and control, that is, if the control of the company and its management originate in Cyprus, the company will be liable to tax in Cyprus.

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

The tax system in Cyprus

The Cyprus Tax Authority is called “The Cyprus Tax Department“.

Click here for the official website of the Cyprus Tax Authority.

Income taxation: 0%-35%

Taxation of companies and branches: 12.5%

VAT: 19%

Capital gains tax: 20%

Withholding Tax

Inheritance tax and estate tax in Cyprus

Transfer prices

In June 2022, transfer pricing legislation was passed in Cyprus, incorporating the OECD transfer pricing guidelines for multinational enterprises and tax authorities. The new legislation states that the transfer pricing rules will apply to transactions between related parties (legal entities and individuals).

Regarding legal entities, the new law establishes detailed rules regarding the meaning of the term “related parties” with the intent to capture various relationships in which a situation of “control” exists. The main rule is that when one legal entity participates in the share capital of another legal entity through a direct or indirect shareholding of at least 25%, both parties are considered related.

There is an exemption from this rule when the cumulative controlled transactions do not exceed 750,000 euros per tax year.

Relocation

The short distance of Cyprus from Israel, the cheap living costs, the circumstances that facilitate obtaining a work permit, establishing a business and permanent residency, make it a very attractive destination for relocation. In addition, since Cyprus is part of the European Union, Israelis who hold European citizenship can live there without restriction.

Cyprus encourages the immigration of individuals to its territory by tax incentives. Thus, in accordance with the new provisions of the Cypriot Income Tax Law, an individual who immigrated to Cyprus is entitled to a 50% tax exemption for an annual salary exceeding 55,000 euros for a period of up to 17 years. The exemption reduces the maximum tax rate that can apply to a rate of 17.5%.

It should be noted that the law is very new and will only apply to an employee whose employment began after January 2022, and who has not been defined as a resident of Cyprus for the past 10 years.

For more on the subject, read the following article under the author of incentive laws in Cyprus.

Click here for the official website of the Cypriot Ministry of the Interior.

Real estate taxation in Cyprus

Even those who are not citizens or residents of EU countries can purchase real estate in Cyprus. The purchase involves the payment of stamp duty of 0.5%, in addition to 0.5% of the value of the property each year. Pool tax is linked to the value of the property, and its maximum rate is less than 10%.

From the sale of a residential apartment, a profit of up to 83,000 euros is tax-free. If the apartment is rented, the rent will be included in the amount of the individual’s income. The maximum income tax rate is 35% for annual income over 60,000 euros, and there is an exemption from income tax for annual income below 19,500 euros.

Profits up to 83,000 euros from the sale of a residential apartment in Cyprus are exempt from tax. In case the residential apartment is rented out – Taxable income rate an individual resident of Cyprus is subject to income tax rate will be up to 35% to a salary level of above 60,000 euros per year, at the same time there is an exemption from tax on annual income of up to 19,500 euros.

As with any purchase that should generate income for its owner, all the tax angles in the country where the property will be purchased must be carefully examined.

For more information on real estate rental taxation abroad, click here.

Transfer of funds from Israel to Cyprus

In accordance with Section 170(a) of the Income Tax Ordinance in Israel, certain money transfers from Israel to Cyprus require the approval of an assessor on behalf of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into euros, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of business entities in Cyprus

Business activity in Cyprus can be carried out within the framework of different types of business entities, the most prominent of which in Cyprus are:

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 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 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 (VCIC) – 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 (CySec) to operate as a collective investment fund (CIF). Such a company can be both public and private, depending on the type of collective investment fund (CIF) that will take such variable investment company (UCITS, AIF, AIFLNP, RAIF). 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

The incentives in the new tax legislation in Cyprus are part of the Cyprus government’s strategy to attract businesses and talented people from abroad to Cyprus.

According to the new provisions of the law, an exemption of 50% of taxable income for the first job in Cyprus will be given to employees with an annual income exceeding 55 thousand euros for 17 (!) years, and this in accordance with section 8(23a) of the new legislation.

Those who do not meet the conditions for the 50% exemption, can benefit from 20% or 8,550 euros (whichever is lower) on the compensation for their first job in Cyprus for 7 years, in accordance with section 8(21a) of the new legislation.

It is very important to note that even those who started their work in Cyprus before the introduction of the provisions and previously claimed an exemption according to these sections, may be entitled to extend the duration of the exemption according to section 8(23a) up to 17 years.

Additionally, in Cyprus the corporate tax is extremely low (12.5% ​​as of 2022), which encourages many international companies to establish their location in Cyprus.