International tax planning – between Malta and Cyprus

International tax planning – between Malta and Cyprus

Written by

Eli Alice, CPA
December 7, 2011

As those who deal a lot with international activity, we are often required to establish an international company structure for Israeli clients who are interested, each for their own reasons, in managing their international activity indirectly through an Israeli company. Many Israeli investors have found it appropriate in recent years to invest abroad through various international holding companies, with Cyprus being considered a favorite by many Israelis.
The tax treaty that was signed in July of this year between Israel and Malta (but has not yet entered into force) opens up a new possibility for Israelis to operate as a company abroad and may be a worthy replacement for neighboring Cyprus.
Making investments abroad through a Cypriot company has many advantages. Among other things, the advantage of a Cypriot company in the relatively low corporate tax rate applied to its business income (usually 10%), tax exemption in Cyprus on certain incomes originating outside Cyprus and, among other things, on dividend and interest income from subsidiaries and exemption from withholding tax when distributing dividends and when paying interest and royalties to foreign companies. In addition, Cyprus is one of the European Union members that allows investors operating in EU member states through a Cypriot company to benefit from EU directives. These directives grant, among other things, exemption from withholding tax when distributing dividends And when interest payments are made between companies resident in EU countries and other exemptions are different if the conditions stipulated in the directives are met.
The location of Cyprus in the center of the Mediterranean Sea and within "touching distance" of about an hour's direct flight from Israel allows many Israelis to deal relatively easily with the managers of the local companies in Cyprus.
Although Malta is more distant from Israel and its accessibility to Israelis is less, Malta may have an advantage precisely in the tax aspect since, being a country that has signed a tax treaty with Israel (upon its entry into force), holding a local company may not be considered as "reportable tax planning" that requires a special report to the tax official under The submission of the personal report may sometimes turn on a "red light" before the assessor when he reviews the tax reports submitted to him. On the other hand, dissolving a Maltese company usually involves long legal procedures while dissolving a Cypriot company is usually a simple procedure.
Similar to Cyprus and if certain conditions are met, a Maltese company defined as a holding company may benefit from a "participation exemption" provided in Malta which grants tax exemption on dividend income (and other income) in its hands. In addition, in accordance with domestic law, no withholding tax is imposed in Malta when distributing dividends as well as when paying interest and royalties. In this regard, it should be noted that in September 2010, Malta announced a substantial change in the taxation of patent royalties under certain conditions. The main innovation is that the tax exemption given on royalty income will apply regardless of the geographic location where the research and development of the patent was done. However, unlike the low corporate tax in Cyprus, Malta has a relatively high corporate tax of 35% applied to the business profits of local companies. At the same time, when it comes to business activity outside of Malta, special tax benefits are available which constitute a tax refund when distributing the dividend of up to 30% of the profits, which means a low effective tax of 5%.
In addition to being members of the European Union entitled to benefit from the provisions of the European Union directives, Cyprus and Malta have signed more than fifty treaties to prevent double taxation that may ease the tax burden when making investments and providing services around the world.
It is important to emphasize that the establishment of a company in a foreign country is not sufficient for the purpose of avoiding tax liabilities in Israel for the company, and it is necessary to take care of the ongoing consultation of both a lawyer and an accountant specializing in international transactions to ensure that the management and control of the company is done outside of Israel, otherwise the company will be considered, for tax purposes, a company taxable in Israel.