Against the background of the increasing attractiveness of Cyprus as a relocation and investment destination for Israelis, the Israel Tax Authority recently launched an operation to identify assets, income, and companies of Israelis on the neighboring island on which the Tax Authority believes tax should be paid in Israel.
"Globes" has learned that because of the need to make up a revenue shortfall, and as part of the Israel Tax Authority director Shay Aharonovich’s campaign against tax evasion and the black economy, the Tax Authority has set its sights on Israelis who run businesses in Cyprus and don’t report their income on the grounds that they or the companies in question are Cyprus residents, while in fact they have not relinquished Israeli residency.
"We are focusing on activity in Cyprus because of the trend of Israelis moving there, and buying real estate and forming companies on the island," a senior Israel Tax Authority source told "Globes".
In recent years, Cyprus has become an attractive destination, among other things thanks to a taxation policy that has earned it the title of "one of the last tax havens in the world." The Covid-19 pandemic, followed by the dispute over the government’s judicial overhaul program, strengthened the trend of relocation to Cyprus, and the Swords of Iron war has also persuaded many Israelis to move there.
Sources inform "Globes" that the Israel Tax Authority has started to examine Israelis’ ties with Cyprus. Among other things, it is checking how many times businesspeople fly to the island, how many times they exit and enter Israel, and cross-checking information on offshore companies belonging to Israelis and former Israelis. The data are part of information sharing arrangements with several countries, and they expose the Israeli link to a Cypriot company via chains of companies around the world.
The rate of companies tax in Cyprus is 12.5% (and in certain circumstances it can drop to 2.5%), with no tax on dividends, making the country a popular, and legitimate, tax shelter for Israeli residents, with the convenience of geographic proximity. Taxation of foreign companies registered in Cyprus and doing business outside it is also low, and real estate prices there have attracted many investors. It is estimated that somewhere between 10,000 and 20,000 Israelis live in Cyprus, while many more have not moved there to live, but are active there in businesses engaged in fintech, investment, real estate, and foreign exchange dealing.
Tax lawyers inform "Globes" that they have recently been consulted by worried owners of companies and businesses in Cyprus who have received various kinds of approaches from the Israel Tax Authority, such as demands for declarations of assets and income there.
Adv. Henriette Fuchs, a partner and head of international taxation at Yaron-Eldar, Paller, Schwartz & Co. (YEtax), says that she is receiving more and more calls from Israelis in Cyprus who have recently been approached by the Tax Authority. She explains that the attraction of Cyprus from a taxation point of view starts from the fact that annual income of up to €19,500 is tax free. "Income above this level is subject to tax at progressive rates from 20% to 35%, with the highest rate falling on income over €60,000."
"A person who lives in Cyprus and is not a resident, like many Israelis, is not liable to tax on income from abroad. In addition, there is no tax on profits on the sale of investments or shares, bonds, and similar financial instruments, including options. An employee who was a foreign resident and moves to Cyprus and works at a Cypriot company is entitled to an exemption from income tax on their salary in Cyprus for ten years," she adds.
No tax treaty
Cyprus is a party to some 65 tax treaties that provide for reduced withholding taxes on dividends, interest, royalties, and pensions from overseas. Israel does not yet have such a treaty with Cyprus, the result being that the Israel Tax Authority has no information on assets and income of Israelis there. "There are discussions between the countries and good intentions but these have yet to mature into a treaty to prevent double taxation. We are pretty much in the dark when it comes to information from Cyprus, and we want to emerge from it so that Cyprus will not be used as an illegitimate tax haven," the Israel Tax Authority source said.
"We believe that there are several companies registered in Cyprus, control and management of which are from here, and concerning which the material decisions are made in Israel," he says. "If I have a company with three programmers in Larnaca, but I live in Petah Tikva and only fly there a couple of times a week, it may be that this is an Israeli company, because in practice I manage it."
Israeli residents are liable to tax on all of their income, wherever it arises. Foreign residents are liable to tax in Israel only on income arising in Israel. Foreign companies, even if they are entirely owned by Israelis, are exempt from tax on income produced overseas, but the law includes anti-tax planning provisions that define when the Israeli owners will be taxed, one of which is that when control and management of the company are from Israel, the company is not entitled to the exemption. The Ministry of Finance recently published a bill to tighten these provisions, but it has not yet been enacted.
Tax lawyer and accountant Adv. Daniel Paserman of Gornitzky GNY says, "Even if these companies are not managed from Israel, it can still be argued that they have a substantial presence in Israel in the light of the involvement of Israeli resident shareholders. It would be advisable for such Israeli controlling shareholders to regularize their affairs properly vis-a-vis the Israel Tax Authority."
Real estate as a business
In addition, the Israel Tax Authority is examining Israelis who conduct real estate business in Cyprus, holding a number of income producing properties, for example, or buying and selling properties and benefitting from rental income or rising values. If it turns out that they have not stopped being Israeli residents, they may be caught as running a business overseas, and not just buying a property for investment, in which case the rate of tax could reach 50%.
"The feeling is that many people are running real estate businesses there. We are checking whether they are reporting the income as required," the Tax Authority source said.
Published by Globes, Israel business news - en.globes.co.il - on March 18, 2024.
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