Israeli investors in Cyprus at the center of tax audits in Israel

The extensive business activity of Israeli investors in Cyprus is at the center of investigations conducted recently by the Israeli tax authorities, according to statements by the head of Israel's Tax Department, Sai Aharonovitch, included in an extensive report by the country's authoritative economic newspaper, Globes.

Specifically, the issue that the Israeli tax authorities are investigating is whether the Israeli investors should be considered as "permanently resident abroad" or whether they manage their business activities in Cyprus from their permanent tax residence, which, according to the relevant Israeli law, Israel remains.

To this end, the Israeli tax authorities have begun to control the frequency of air tickets from Israel to Cyprus and vice versa, issued in the name of specific investors and businessmen active in the high-tech business sector and real estate market.

An additional reason that caused the interest of the Israeli tax authorities, according to the Globes publication, is the significantly lower corporate income tax applicable in Cyprus (tax scale up to 12,5%) compared to the corresponding Israeli one, which it can reach up to 50% of the taxable income.

The large difference in income tax scales make Cyprus essentially a tax haven for Israeli investors and entrepreneurs. According to the data available to the Israeli tax authorities, it is estimated that a total of 10 to 20 Israeli taxpayers reside in Cyprus (in the free and occupied territories), while it is being investigated how many of them maintain their permanent residence in Israel and are managed by the Israel their business activities on the island – and therefore have to pay the tax corresponding to their incomes derived from Cyprus.

One issue that Globes points out in its report is the lack of a statutory audit framework, a pending issue that makes the detailed audit that the Israeli tax authorities seek to complete difficult.

Finally, the Israeli tax authorities are considering whether the purchase, resale and exploitation by an Israeli taxpayer of real estate located in Cyprus should be considered a "taxable business activity", even though the Israeli investor does not carry out the activity in question professionally .

According to officials of the Israeli tax authority, as well as local legal experts, if it is finally established that Israeli investors in Cyprus maintain Israel as their permanent residence and the center of their vital relations – regardless of whether they employ employees in Cyprus to manage their business activities – they are likely to be taxed at the highest possible rates of up to 50% of their taxable income.

As the Globes newspaper reports in its report, citing the head of the Income Department of the country's Tax Authority, Sai Aharonovitch, written notices have already been sent to Israeli businessmen operating in Cyprus.

Source: KYPE