In search of new revenues.. Tel Aviv targets Israeli businesses in Cyprus Economy

In light of the financial crisis that Israel is experiencing as a result of the increasing expenses to support the military operations in the Gaza Strip, which has continued for its sixth month, Tel Aviv has begun searching for new resources, including imposing taxes on Israeli investors who have stopped or reduced their business in Israel and headed to neighboring Cyprus.

The Israeli Tax Authority proceeded to pursue the properties and businesses of Israelis in Cyprus to impose taxes on them, according to the Israeli newspaper “Globes”.

According to the newspaper, the need to compensate for the shortfall in revenues, and as part of the campaign of the Director of the Israeli Tax Authority, Shai Aharonovitch, against tax evasion and the parallel economy, the Tax Authority set its sights on Israelis who operate companies in Cyprus and do not report their income on the basis that they or the companies in question. Resident on the island, while actually living in Israel.

Israeli orientation

Globes quoted a high-ranking source in the tax authority as saying: “We are focusing on activity in Cyprus because of the tendency of Israelis to move there, buy real estate and establish companies on the island.”

In recent years, Cyprus has become an attractive destination thanks to the tax policy that has earned it the title of “one of the last tax havens in the world”, among other reasons. The Corona pandemic, followed by the dispute over the government’s judicial reform program, has strengthened the trend towards moving to Cyprus, as well as… Investor fears after the Al-Aqsa flood operation launched by the Palestinian resistance against the occupation army on the seventh of last October.

The newspaper quoted sources as saying that the Israeli Tax Authority has begun examining Israelis’ relations with Cyprus. Among other things, it verifies how often business people travel to the island, how often they leave and enter Israel, and verify information regarding offshore companies affiliated with Israelis or former Israelis.

The corporate tax rate in Cyprus is 12.5% ​​(and in certain cases it can drop to 2.5%), with no tax on dividends, making the country a popular and legitimate tax haven for Israeli residents, with geographical proximity and taxes on registered foreign companies. In Cyprus, doing business abroad is also low, and property prices there have attracted many investors.

It is estimated that between 10,000 and 20,000 Israelis live in Cyprus, while many others have not moved there to live, but are active there in technology companies, investment, real estate, and foreign exchange trading.

The newspaper quoted tax lawyers as saying: “They were recently consulted by owners of companies and commercial institutions in Cyprus, who were concerned about receiving various requests from the tax authority, such as declaration of assets and income there.”

No tax agreement

Globes quoted Henriette Fuchs, partner and head of the international tax department at Yaron Eldar, Baler & Schwartz, as saying that Cyprus has concluded about 65 tax agreements that provide for the reduction of withholding taxes on dividends, interest and pensions from abroad, and Israel has not yet concluded an agreement with Cyprus to cancel Double taxation, or exchanging information about investments between the two countries.

Residents of Israel are subject to tax on all their income, and foreign residents are subject to tax in Israel only on income arising in Israel. As for foreign companies, they are exempt from tax on income produced abroad, even if they are wholly owned by Israelis, but the law includes provisions to combat tax planning (planning To avoid paying the tax) determines when the Israeli owners will be taxed, one of which is that when the control and management of the company is from Israel, the company is not entitled to the exemption.

Real estate business

The Israeli Tax Authority tracks its citizens who carry out real estate business in Cyprus, own a number of income-generating properties, or buy and sell real estate and benefit from rental income or appreciation in value, according to the newspaper.

She adds that if it turns out that they did not give up their Israeli residency, they may be arrested for running a business abroad, and not just buying a property for investment, in which case the tax rate could reach 50%.

It quoted an unnamed source in the tax authority as saying: “We feel that a lot of people are running real estate companies there. We are checking whether they are reporting income as required.”

Last month, the British Financial Times newspaper quoted the Accountant General in the Israeli Ministry of Finance, Yali Rotenberg, as saying that Israel plans to borrow $60 billion this year, freeze government employment, and increase taxes, after its military spending doubled as a result of its war on the Gaza Strip.

The newspaper pointed out that Israel's war on the Gaza Strip caused huge losses in its economy, which shrank by about 20% on an annual basis in the last quarter of 2023.