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Cyprus – Israel: Road to Success?


The Republic of Cyprus is considered a new entrant in the sector of Oil and Gas exploration and exploitation. The latest studies demonstrate a noteworthy quantity of geophysical data and even though Cyprus is a newcomer, a number of international Oil and Gas companies have already employed Cyprus to construct tax efficient structures and take advantage of the geographical position of the island as well as the expert professional services provided in all areas. Taxand Cyprus discusses the regulations in the oil and gas industry and what they mean for companies looking to invest between Cyprus and Israel.

As soon as the successful bidder obtains the necessary license, exploration for gas will take place offshore in blocks provided by the Republic of Cyprus, The Government of Cyprus has presented detailed guidelines as to the procedures to be followed regarding licensing rounds and biddings. At present, Cyprus has sanctioned only one Production Sharing Contract which permits Noble Energy International Ltd to explore Block No. 12. The Cyprus Energy Office has declared a second licensing round anticipated in 2011 for another 12 offshore blocks.

An Oil and Gas company in Cyprus will benefit from the corporate taxation at 10%, the lowest in the European Union and if the Oil and Gas exploration site is considered a permanent establishment (PE), no withholding taxes can be levied on exploration and extraction depending on the relevant Double Tax Treaty. Cyprus applies the International Financial Reporting Standards (IFRS) so as to apply a universal reporting language which allows Oil and Gas companies to have analogous information.

The IFRS permits users to have a common ground and more than one hundred countries apply the IFRS, amongst them Cyprus. Reports have been issued by the International Accounting Standards Board and the Financial Accounting Standards Board to address the Oil and Gas Industry. Topics stated include exploration and evaluation, depletion, depreciation and amortisation, impairment testing and reversal of impairment.

  • No Capital Gains Tax with the exception of real estate located in Cyprus
  • Tax losses can be carried forward indefinitely and can also be surrendered as group relief. Mergers, takeovers and other re-organisations can take place within groups with no tax consequences
  • Added commercial value and monetary benefits due to the ability to register for EU VAT in Cyprus
  • Unilateral tax-relief for foreign tax suffered is given to all Cypriot companies. Interest deduction is provided for borrowing costs
  • A wide Double Tax Treaty Network as well as the EU Directives for advantageous tax planning
  • No withholding taxes, in most cases
  • No thin capitalisation rules, in most cases
  • Absence of strict Controlled Foreign Company Legislation

The Declaration of the EEZ Law in 2004 defined the exclusive economic zone of the Republic of Cyprus, the outer limit of which shall not extend beyond 200 nautical miles from the baselines from which the breadth of the territorial waters is measured. When an overlap occurs between two neighbouring territories, the issue will be resolved by an agreement signed by the Republic of Cyprus and the other State. Cyprus has signed a number of agreements with nearby countries: Cyprus - Egypt (2003), Cyprus - Lebanon (2007), and Cyprus - Israel (2010).

The Government of Cyprus is of the opinion that the EEZ agreement with Israel is one of the most important agreements signed recently, both on economic and political level. Israel has also embraced the agreement with much enthusiasm, emphasising how it respects the tight links and connections between the two neighbours.

In 2009, a natural gas reserve was discovered in Israeli territories, turning Israel into a natural gas titan; Cyprus expects to follow the same route. Since Block No. 12 and the Leviathan natural gas field are close to each other, the Israeli and Cyprus Governments are examining the idea of a joint venture for gas exploration in the area, a strategy that could maximise their success.

Taxand's Take

It is highly probable that the two jurisdictions will embark on a joint venture to draw valuable investors for the growing gas industry. Each party offers benefits to the other. Israel is able to shelter the reserves and offshore establishments and offers a capital market for Gas corporations. Cyprus on the other hand, has strong international links, EU support, and flexible tax regime. This could be the beginning of the road to a long-lasting political and economical friendship.

Your Taxand contacts for further queries are:
Anna Zafirova
T. +357 22 699 222

Georgia Papa
T. +357 22 699 222

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