The extensive business activity of Israeli investors in Cyprus is at the center of investigations being conducted by Israeli tax authorities in recent times, according to statements by the head of Israel’s Tax Department, Shai Aharonovitz, included in extensive reports by the country’s reputable economic newspaper, Globes.
Specifically, the issue being investigated by Israeli tax authorities is whether Israeli investors should be considered “permanent residents abroad” or whether they manage their business activities in Cyprus from their permanent tax residence, which, according to Israeli law, remains in Israel.
For this purpose, Israeli tax authorities have begun to monitor the frequency of air tickets from Israel to Cyprus and vice versa, issued on behalf of specific investors and businessmen operating in the high-tech and real estate sectors.
An additional reason that has sparked the interest of Israeli tax authorities, according to the Globes report, is the significantly lower corporate income tax in Cyprus (tax scale up to 12.5%) compared to the corresponding Israeli tax, which can reach up to 50% of taxable income.
The substantial difference in income tax scales essentially makes Cyprus a tax haven for Israeli investors and businessmen.
According to data available to Israeli tax authorities, it is estimated that there are a total of 10 to 20 thousand Israeli taxpayers residing in Cyprus (in the free zones and the occupied territories), while investigations are underway to determine how many of them maintain their permanent residence in Israel and manage their business activities on the island from Israel – and therefore must pay tax on their income derived from Cyprus.
An issue highlighted by Globes in its publication is the lack of a legislative framework for control, an outstanding issue that complicates the detailed scrutiny sought by Israeli tax authorities.
Finally, Israeli tax authorities are considering whether the purchase, sale, and exploitation of real estate in Cyprus by an Israeli taxpayer should be considered as “taxable business activity,” even if the Israeli investor does not engage in said activity professionally.
As officials of the Israeli tax authority, as well as local legal experts, state, if it is ultimately determined that Israeli investors in Cyprus maintain Israel as their permanent residence and center of their financial affairs – regardless of whether they employ staff in Cyprus to manage their business activities – they are likely to be taxed at the highest possible tax rates, up to 50% of their taxable income.
As reported by the newspaper Globes, citing Shai Aharonovitz, head of the Income Department of the Tax Authority, written notices have already been sent to Israeli businessmen operating in Cyprus.
