Cyprus - Israel Tax Aspects and Implications for International Taxation

1. Created by: Cyprus - IsraelTax Aspects and Implications for International Taxation

2. Extending the chargeable income for Israeli residents. The principles of international taxation according to the Israeli law have gone through a comprehensive change, following the tax reform that came into effect on 1.1.03. In the frame of such reform, the chargeable income for an Israeli resident was extended, by changing from the territorial tax system to the personal tax system. Ben Ari Melamed, c.p.a

3. Origin Rules to Determine the Source of Revenue With the transition to the personal tax system, clear rules were established to determine the location of revenue production. The importance of these rules for Israeli residents is especially relevant regarding foreign tax credit; the credit for tax paid abroad will be given to an Israeli resident, only the same revenue is regarded as a revenue produced outside of Israel. Ben Ari Melamed, c.p.a

4. Source of producing revenue income: • Business income – the location where the business activity takes place. • Occupation income – the location where the service is carried out. • Labor income – the location where the work is carried out. • Interest – the payer's location • Rent – the location where the asset is used. • Dividend – the location of the body of persons paying the dividend. Ben Ari Melamed, c.p.a

5. Tax planning for establishment and operation of a company abroad – is legitimate in Israel Planning the course of a business is one of the basic freedoms in a democratic country, in which a citizen is allowed to sustain the pace at will, under the existent law; and it is natural for him to select actions that have advantageous tax results. Ben Ari Melamed, c.p.a

6. Tax planning for the establishment and operation of a company The issue of legitimate tax planning boundaries is, indeed, a "classic and eternal" question. The boundary separating tax avoidance from tax evasion is often thin. Ben Ari Melamed, c.p.a

7. The legal pending questions regarding tax implications on an Israeli resident who establishes a business abroad • what is involved in establishing and operating an overseas company, that is owned by an Israeli resident ? • What are the reporting and taxation principles that apply to income flow to company owners in Israel, from the foreign company's profits and distribution, abroad ? • Transfer Prices • Aspects of Israeli reporting and taxation, relating to the country where the foreign company is established. • Cyprus as an international business activity center - a lot of these question will be answered by Ofer later on Ben Ari Melamed, c.p.a

8. Cyprus as an international business activity center. Cyprus has always been an ideal place for the establishment of holding companies; in light of Israeli tax reform in 2003 and Cyprus’ joining the European Union (EU) in 2004, the island's attractiveness – as a location for registration and establishment of holding companies – has been significantly upgraded, compared with other financial centers around the world. Ben Ari Melamed, c.p.a

9. Cyprus has a vast business infrastructure with thousands of foreign companies registered (as in tax havens) and many more are added each year. Cyprus is a nice tourist destination, close and well connected to Israel and has an efficient transportation network. Ben Ari Melamed, c.p.a

10. Benefits of using a Cypriot company • Cyprus is a European country which adopted the Euro currency in 2008. • Cyprus (As already mentioned by Marios in his presentation) has the lowest tax rate in Europe (10%) as well as many other tax advantages like: • No tax on the sale of shares. • No tax on dividends received (under certain conditions). • More than 40 Double Tax Treaties. • Owners of foreign companies can remain anonymous while appointing local managers. Ben Ari Melamed, c.p.a

11. Cyprus could serve as a bridge for Israeli companies seeking to trade with countries that often make trade difficult with Israeli companies, or countries with which Israel has no regular trade relations. • Companies that want to export to the EU often encountered obstacles in spite of the trade agreements, because they are outside EU. Cyprus Company Incorporation overcomes this barrier and barriers of giving priority in tenders to EU countries. Ben Ari Melamed, c.p.a

12. Since Cyprus is used to the conduct of foreign companies in its field, the banking system is well - functioning, in satisfying the unique needs of the foreign business community. Therefore, Cyprus offers an excellent center for the establishment of businesses and associations, offering special advantages. Ben Ari Melamed, c.p.a

13. The fact that there is no withholding tax on dividends received from a European subsidiary company in accordance with the EU Parent-Subsidiary Directive, can be used as an effective tool for transferring an income from Europe to Cyprus. Ben Ari Melamed, c.p.a

14. Proximity to Israel Cyprus is 40 minutes flying distance from Israel. This fact makes it very easy in terms of control and management. For example, when there is a need to sign substantive agreements and balance sheets or to hold board meetings – the short distance is very helpful for management and control tests, outside of Israel. Ben Ari Melamed, c.p.a

15. Banking As of 1.2.2003, any citizen of the EU or listed companies in a country that is a member of the EU – do not require the approval of the Central Bank of Cyprus, before they can be incorporated as a company, or to purchase shares there. Cypriot banks receive cash under very clear cash-defined conditions, and only when the source can be checked. Ben Ari Melamed, c.p.a

16. Summary While harmonizing the laws of Cyprus to EU requirements, Cyprus changed its method to create a unique system for holding companies. Whilst the Cypriot legislature has followed the route of many countries in the EU, it has created these benefits even for people who are not residents of the Union, maintaining Cyprus’ attractiveness to international businesses. When comparing Cyprus to the Netherlands or Luxembourg regarding holding activities, it can be argued that Cyprus has more benefits. Ben Ari Melamed, c.p.a

17. There are many advantages to a Cypriot holding company – the option of profit transfer from Europe to a tax haven with no deduction at source through a dividend. According to the rules in Cyprus, there is no taxation in the case of a sale of real estate stocks of a Cypriot Association, until the land is sold. Selling real estate in different countries within and without Europe: - sometimes, it is not possible to charge taxes when selling shares in companies which own real estate in Cyprus. Ben Ari Melamed, c.p.a

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