Relocation from Israel to Cyprus

In recent years, Cyprus has become an increasingly popular destination for Israelis considering relocation, whether for employment, investment, studies, retirement, or improved quality of life. The advantages of moving to Cyprus are proximity to Israel, low cost of living compared to Israel and other European countries, a friendly tax system, relaxed Mediterranean lifestyle, warm weather, a Jewish community, and more. However, relocating to Cyprus requires thorough planning and a comprehensive understanding of the legal, financial, and tax implications associated with the move. This article outlines the key considerations to address before making the move.

The 5-Step process for relocating from Israel to Cyprus

1. Assess employment opportunities and living costs.
2. Consider terminating Israeli tax residency, taking into account matters such as exit tax.
3. Obtain an appropriate visa or residency.
4. Review your tax obligations under both Israeli and Argentine law, including potential double taxation and available reliefs.
5. Plan fund transfers and banking.

The following sections explain the main tax, legal, and financial considerations for Israelis relocating to Cyprus.

Key Considerations When Relocating from Israel to Cyprus

The relocation process consists of several essential steps.

First, a thorough review of employment opportunities in Cyprus, the cost of living, which varies between cities such as Nicosia, Limassol, and Paphos, the local tax system, educational options for children, available healthcare services, and other important factors.

Second, consider whether you wish to terminate your Israeli tax residency and the numerous implications that come with it. It is important to plan how you will manage your finances and assets, as well as arrange for private health insurance. In Cyprus, a public healthcare system called GESY is available to its residents. However, non-EU residents, such as Israelis coming to work in Cyprus, are, in most cases, not eligible for public health insurance. Therefore, private health insurance, if not already taken, is advised upon arrival to ensure complete and immediate healthcare.

In addition, you must arrange your legal status in Cyprus – obtaining the appropriate work permit, temporary or permanent residency, visa, or citizenship, as applicable. Non-EU citizens typically require a visa or residence permit to stay long-term, while EU citizens can reside with fewer formalities (a “yellow slip” is required). Cyprus also offers visas through employment, study, high income and more.

Tax Aspects of Relocation to Cyprus

When moving to a foreign country, the question of post-move tax obligations in Israel arises. The answer usually depends on whether you have terminated your Israeli tax residency.

Termination of Tax Residency

One of the main issues in the relocation process is determining your residency for tax purposes. In Israel, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on income sourced in Israel

If you intend to settle in Cyprus for the long term, it may be preferable to sever your residency from Israel (for both income tax and National Insurance). Note that Israelis who sever their residency are required to pay an “exit tax” on certain assets.

According to Section 1 of the Israeli Income Tax Ordinance, residency is determined based on the center of life test, and a rebuttable presumption based on the number of days you stayed in Israel, as follows:

• The center of life test – This is a substantive test, in which all personal, family, economic, and social ties are examined. These include a permanent place of residence, a place of economic activity, a location of economic interests, and more.
• Days test – An individual is considered an Israeli resident if they spent 183 days or more in Israel during a single tax year. A person may also be considered a resident if they spent 30 days or more in Israel during the current tax year. This applies when their total stay in Israel is 425 days or more over the current and two preceding years. This presumption can be rebutted if the individual proves that, despite their stay in Israel, their center of life is not in Israel.

Anyone who meets the days test, i.e., is considered an Israeli resident under this test, must file Form 1348 – “Declaration of Residency”. This form is attached an annex to the individual’s tax report. Its purpose is to declare the termination of Israeli tax residency and to describe the circumstances demonstrating that the individual’s center of life is no longer in Israel.

It is important to note that terminating tax residency is usually not a one-time event but an ongoing process. The Israeli Tax Authority (ITA) may review your residency status even years after leaving. Therefore, it is recommended to keep detailed documentation of all actions indicating the transfer of your center of life to [Country Name], and to avoid creating new ties to Israel.

These days, a dramatic bill to amend the Income Tax Ordinance regarding the definition of Israeli residency for tax purposes has been submitted to the Knesset.

According to the proposal, there will be absolute presumptions that determine the number of days defining an individual as an Israeli resident. These presumptions cannot be rebutted. The “center of life” test will serve only as a secondary tool in cases not covered by these presumptions.

As a result, there may be situations where an individual who has terminated their residency in Israel will still be considered an Israeli resident for tax purposes. This can happen when the number of days spent in Israel in subsequent years is high enough to meet the residency threshold.

To view the draft bill, click here.

Exit Tax

Israelis leaving Israel may be required to pay an “exit tax” on certain assets. This tax is intended to capture the unrealized capital gains of assets held by Israeli residents.

According to Section 100A of the Income Tax Ordinance, an individual who ceases to be an Israeli resident is deemed to have sold their assets on the day before terminating the tax residency (“Exit Day”). The tax is calculated on the notional gain between the original purchase price and the value on the exit day. Note that some assets, such as real estate, may be exempt from this tax.

There are various methods for calculating and paying exit tax liability, each with different implications for the taxpayer. The timing and structure of these payments can significantly impact the overall tax burden. It is highly recommended to consult with an international tax expert before departing Israel to develop a tax strategy that best aligns with your specific circumstances and financial goals.

Double Taxation Treaty between Israel and Cyprus

Currently, there is no double taxation treaty between Israel and Cyprus. In the absence of such a treaty, the primary right to tax is generally granted to the country where the income is earned or where the asset is located, while the country of residence retains a secondary right to tax that income.

This means that Israeli residents working in Cyprus are required to report all of their worldwide income, including income earned in Cyprus, to the Israeli tax authorities. When doing so, they may be eligible to claim a tax credit for taxes already paid in Cyprus.  

How will Terminating Tax Residency Affect Income Taxation?

If the move to Cyprus is temporary, you remain an Israeli tax resident and cannot terminate your residency status.  This means you are liable for Israeli tax on your worldwide income and must report all income, including income earned in Cyprus, to the ITA.

If tax residency is not terminated, you may still be able to claim a tax credit in Israel for taxes paid in Cyprus.

If the move to Cyprus is permanent and you have terminated your Israeli tax residency, you will only be liable for Israeli tax on income sourced in Israel, while all other income will be subject to tax in Cyprus.

For more information on the termination of residency, click here.

National Insurance

An Israeli resident living abroad is required to pay National Insurance (Bituach Leumi) contributions. However, once tax residency is terminated, there is no obligation to pay National Insurance, and the individual is no longer entitled to health or social security benefits in Israel.

There is currently no social security agreement between Israel and Cyprus. As a result, individuals relocating to Cyprus are required to obtain private health insurance in Cyprus. Additionally, the absence of such an agreement may result in dual national insurance obligations. Therefore, if you plan to immigrate to Cyprus, it is important to formally terminate your Israeli residency status for national insurance purposes to avoid double payments.

Tax System in Cyprus

In Cyprus, you will be considered a tax resident if you remain in Cyprus for 183 days or more within any single tax year. Alternatively, under a ’60-day rule’, you will be a tax resident if you stay in Cyprus for at least 60 days, are not a tax resident of any other jurisdiction, have not resided in another country for more than 183 days in the tax year, and have a permanent home and some occupation in Cyprus.

Cyprus employs a progressive personal income tax regime. Income up to €19,500 is tax-free, and the upper income levels are taxed at income tax rates ranging from 20% to 35%, the highest being for income exceeding €60,000.

Capital gains tax is charged only on profits in respect of the sale of immovable property (land) located in Cyprus or shares in a company holding such immovable property. The rate of Capital Gains Tax in Cyprus is 20%.

Cyprus offers a tax exemption on foreign income under certain conditions, making Cyprus an attractive place for investors outside Cyprus.  

The corporate tax rate in Cyprus is 12.5%, which is particularly low compared to corporate tax rates in Europe, thus providing Cyprus with an advantage for establishing businesses and foreign investment. Another advantage of Cyprus is the absence of an inheritance tax or estate tax. Cyprus is one of the few European countries that does not impose a tax on inheritances and estates.

In addition, if you meet the residency conditions specified above, meaning you are considered a resident for tax purposes in Cyprus, in most cases, you are entitled to a residency status called “NON-DOM”, which grants those eligible significant tax benefits. For example, tax exemption on dividends and interest for 17 years.

Transferring Funds from Israel to Cyprus

You should review the various options for transferring funds abroad – bank transfers, international credit cards, etc. Each option has its advantages and disadvantages in terms of fees, transfer times, exchange rates, amount limits, and regulations. Pay attention to reporting requirements for authorities and banks, following anti-money laundering laws and international regulations (FATCA, CRS). It is also advisable to open a bank account in Cyprus in advance.

According to Section 170(a) of the Ordinance, when a payment from Israel to a foreign resident constitutes taxable income, withholding tax applies. Therefore, transfers of funds that do not constitute taxable income may not be subject to tax but could still require prior approval from the ITA.

For more information, see the article “Transferring Funds from Israel Abroad.”

Opening a Bank Account in Cyprus

Opening a bank account at a local branch in Cyprus is generally limited to residents. In general, applicants are required to provide documentation such as a valid passport, proof of residential address, and evidence of their financial standing.

For more information on this subject, read the article “Opening a bank account in Cyprus“

Returning to Israel

When returning to Israel, it is important to carefully assess the potential implications. If you have terminated your tax residency, you may qualify for benefits as a regular  or veteran returning resident, depending on the duration of your stay abroad. These benefits can include tax exemptions on income and capital earned outside Israel.

You should also take into account the waiting period of up to six months for the renewal of National Insurance (Bituach Leumi) health coverage, as well as possible benefits available through the Ministry of Aliyah and Integration.

In short, relocation to Cyprus offers many opportunities, but it is a complex process that requires professional planning, personal guidance, and a thorough understanding of all legal and tax aspects. It is recommended to consult with international tax experts to ensure early and comprehensive planning for a smooth and successful transition to your new life in Cyprus.

The firm of Nimrod Yaron & Co. has extensive experience advising on international relocation and Israeli tax residency termination. For an initial consultation, click here.

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