Corporate Tax in Cyprus and Transferring Profits to Israel: 15% from 2026, Dividends, Withholding Tax and What Happens in Israel

For years Cyprus attracted Israeli entrepreneurs and companies thanks to a 12.5% corporate tax, no withholding tax on dividends and geographical proximity. The tax reform that took effect on 1 January 2026 changed part of the picture. This guide explains what the tax in Cyprus is today, what happens when the profits are transferred to Israel, and which tax traps are worth knowing in advance.

1What is the corporate tax rate in Cyprus in 2026?

15% in 2026: according to PwC Tax Summaries and BDO, from 1 January 2026 corporate tax in Cyprus is 15% on taxable profit, compared with 12.5% until 31 December 2025. The rate applies to a company that is tax resident in Cyprus, and to the profits of a permanent establishment of a foreign company in Cyprus.

The reform laws were published in the Official Gazette on 31 December 2025 and took effect on 1 January 2026. The main changes for companies:

2What special tax regimes exist in Cyprus?

The main ones are the IP Box, the enhanced deduction for research and development and the tonnage tax for shipping, according to PwC Tax Summaries as of November 2026. The benefit under each depends on substantive conditions and is not automatic.

• IP Box: a deduction of up to 80% of qualifying profit from qualifying intellectual property, so that at a 15% rate the effective tax rate is about 3%. The benefit is subject to the nexus test for research and development expenditure.
• Enhanced R&D deduction: an additional 20% deduction on research and development expenditure in the years 2025 to 2030.
• Tonnage tax for shipping: applies until 31 December 2029, and a dividend from profits taxed under this regime is not taxed at any stage of distribution in Cyprus.
• Transfer pricing: a local file obligation for transactions with related parties above annual thresholds (5 million euros for the sale of goods, 10 million euros for financing and 2.5 million euros for other transactions).

3What should you know about VAT in Cyprus?

According to PwC Tax Summaries, as of November 2026 the standard VAT rate in Cyprus is 19%, alongside reduced rates of 9%, 5% and 3%, and a zero rate for exports and certain basic goods. The registration obligation applies when turnover in the previous 12 months exceeds 15,600 euros, or when it is expected to exceed it within the next 30 days.

• Intra-Community acquisitions from the EU: a registration threshold of 10,251.61 euros per calendar year.
• Services from abroad under reverse charge: a threshold of 15,600 euros in any 12 consecutive months.
• Intra-Community supplies: no threshold, registration is required from the first transaction.

4Does Cyprus withhold tax on a dividend to an Israeli shareholder?

As a rule, no. Cyprus does not withhold tax on dividends or interest paid to non-residents, so a dividend from a Cypriot company to an Israeli shareholder, individual or company, is usually paid without withholding in Cyprus. This is the position according to PwC Tax Summaries, as of November 2026.

Israel is not a low-tax jurisdiction and is not on the EU blacklist, so the exceptions usually do not apply to an Israeli shareholder. But if the dividend passes through an intermediate company in another country, the status of that country must be checked.

5Is there a tax treaty between Israel and Cyprus?

No. As of November 2026 there is no double taxation treaty between Israel and Cyprus, and Israel does not appear in Cyprus's list of treaties. This means: there are no treaty withholding rates, no rule deciding dual residence, and no agreed definition of a permanent establishment. Double taxation is relieved only through a foreign tax credit under the Israeli Income Tax Ordinance.

For an overview of all relevant tax treaties, see Israel's tax treaties by country.

6How is a dividend from a Cypriot company taxed in Israel?

Yes, the dividend is taxable in Israel: in 2026, 25% for an individual, 30% for a substantial shareholder and 23% for an Israeli company, according to PwC Tax Summaries. An Israeli resident is taxed on worldwide income, including a dividend from a Cypriot company. The rate depends on the identity of the recipient: an individual, a substantial shareholder or an Israeli company.

When there is no withholding in Cyprus, there is no direct foreign tax to credit against the Israeli tax on the dividend. The indirect credit, for the corporate tax paid by the Cypriot company, is available to a receiving Israeli company in certain conditions. The decision on how to hold the Cypriot company, directly or through an Israeli company, is a material tax decision to be made with an Israeli accountant.

7What is a controlled foreign company (CFC), and why is Cyprus particularly sensitive?

Cyprus is particularly sensitive because the foreign tax rate test under the Israeli CFC rules is 15% or less, and Cypriot corporate tax in 2026 is exactly 15%, according to PwC Tax Summaries. Under Israeli law, an Israeli resident who holds 10% or more of the means of control of a foreign company may become liable to tax on his share of undistributed profits, if most of the company's income is passive (interest, dividends, rent, royalties, capital gains) and the foreign tax rate on it does not exceed 15%, subject to further conditions.

Cypriot corporate tax is exactly 15%, so even after the reform a Cypriot company with mainly passive income may meet the tax rate test. In addition, certain income is exempt in Cyprus, so the effective tax rate may be lower. A holding company or an income-producing real estate company in Cyprus should check this point in advance.

8Salary or dividend: which is better for an Israeli director?

There is no single answer. A salary or director's fees are usually convenient as an expense in Cyprus, but are taxed in Israel as employment income at marginal tax rates of up to 47%, plus surtax. A dividend is taxed twice: 15% corporate tax in Cyprus and then 25% or 30% in Israel.

• Where the work is performed: work performed in Cyprus may be taxable in Cyprus. The personal income tax brackets in Cyprus in 2026: 0% up to 22,000 euros, then 20%, 25%, 30% and 35% above 72,000 euros.
• Cypriot social insurance: an employee in Cyprus is liable to social insurance contributions of 8.8% from the employee and 8.8% from the employer in 2026, and to additional contributions to the health system (GHS) and employer funds.
• The company's residence: an Israeli director who makes all decisions from Israel may make the company an Israeli resident, and then all its profits may become liable to Israeli corporate tax.
• No treaty: double taxation of salary is avoided only through a credit under Israeli law, not under a treaty article.

9When does an Israeli company create a permanent establishment in Cyprus?

Cypriot law defines a Permanent Establishment of a foreign company in a way that largely follows the 2014 OECD Model Convention: a fixed place of business, such as an office, a branch or a building site for a certain period, or a dependent agent who contracts on behalf of the company. Where there is a permanent establishment, its profits are subject to corporate tax of 15% in Cyprus.

In Israel, an Israeli company is taxed on all its profits, including the profits of the permanent establishment, and may claim a credit for the Cypriot tax under Israeli law. Since there is no treaty, there is no agreed definition of a permanent establishment between the countries, and the exposure is examined under Cypriot law alone.

10What does a comparison between holding methods look like?

In the illustration below, holding through an Israeli company that elects corporate tax with an indirect credit, or operating through a branch, leaves 77 out of 100, compared with 59.5 to 63.75 for a direct dividend to an individual. The following table is an arithmetical illustration only, for a profit of 100 euros before tax in a Cypriot company that is fully distributed, before surtax and before expenses. It does not take into account the CFC rules, dual residence or special exemptions, and is not a substitute for an accountant's calculation.

11What steps are recommended before transferring profits to Israel?

Before any distribution, check tax residence, CFC exposure and the holding structure, and only then take the decision and report in Israel. These are the steps in order:

1. Check the Cypriot company's tax residence in both countries, according to its actual place of management.
2. Check whether the company may be treated as a controlled foreign company (CFC) under Israeli law.
3. Decide, with an Israeli accountant, whether to hold the company directly or through an Israeli company.
4. Make sure the company has filed financial statements and a tax return in Cyprus, and that the distributable profit is approved.
5. Adopt a board resolution on the distribution and document the payment.
6. Report the dividend and the holding in the foreign company in Israel, and claim a foreign tax credit where entitled.

This guide is general information correct as of November 2026, and is not tax advice. Every structure requires a specific review with an Israeli accountant and a Cypriot tax adviser.

More on doing business in Cyprus: Setting up a company in Cyprus · An Israeli company operating in Cyprus · Commercial disputes and litigation in Cyprus · Comparison of 8 countries · All guides for companies and businesses

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