Treaties for the avoidance of double taxation: The case between Israel and Greece
What is a treaty for the avoidance of double taxation:
Treaties for the avoidance of double taxation are signed between two States with the aim to promote transactions, the exchange of goods and services and the transfer of know-how between them. The signing of this kind of a tax treaty is indicative of the contracting States’ strong will to improve their bilateral relations.
These treaties commonly contain provisions not only for the avoidance of double taxation in its legal form, but also for the awarding of certain privileges in favor of promoting transactions between the two contracting States, while at the same time aiming to eliminate any discrimination in the tax treatment and to establish a solid tax framework for the sake of the bilateral investments of the States.
The Israeli-Greek tax treaty:
The signing of the tax treaty for the avoidance of double taxation between Israel and Greece was signed in Jerusalem on the 24th of October 1995, as a result of the significant improvement of the relations between the two countries at that time. The provisions of this treaty became recently of a considerable importance as the volume of Israeli investments in Greece has increased greatly the last years.
What kind of taxes does the Greek- Israeli tax treaty regulate:
The treaty regulates the income and corporate tax of Greek individuals and companies respectively that are active in Israel. Similarly, it regulates the corresponding taxes of Israeli individuals and companies that are active in Greece, as well as the capital gain and the increase in the real estate value tax for them. The two States have concluded in the above treaty the specific criteria according to which the tax citizenship of individuals and companies will be awarded between them, as well as the criteria which will determine that two undertakings are related (for taxation purposes).
The taxation of real estate income in Greece for Israeli investors:
According to the tax treaty between Israel and Greece the real estate income of investors for investments made in Greece, shall only be taxed in Greece. In Greek taxation, although there has been a specific law provision of 15% of the capital gain of real estate since 2013, it is not yet been activated. This implies that for any profit of individuals from real estate transaction(s) in Greece (for Greeks or foreigners) the tax is 0% on the profit. Particular attention shall be paid to the fact that in case of multiple transactions of individuals (more than 3 per 2 years) the taxation of the income from it will be taxed as income from sole proprietorship, which entails significantly high tax rates ( https://nexuslaw.gr/en/establishing-a-company-in-greece/ ). The tax rates in Greece for rent income (not profit) are significantly higher for individuals (for a yearly income of 0 to12,000 euros it is 15%, for a yearly income of 12,001 to 35,000 euros it is 35% and for a yearly income of 35,001 and more it is 45%).
Regarding the real estate ventures by companies, their profit is subject to the standard corporate tax rate of 22% in all the above cases.
The tax planning of investing in Greece through a local company:
The dividend tax in Greece (5%) is one of the lowest among the EU countries. According to the same treaty this tax shall be paid in Greece, in the case and upon the distribution of the dividend to the Israeli shareholders. In addition to the above dividend tax payable in Greece, the difference resulting from the different tax rates on dividend tax between Greece and Israel is payable in Israel. Of course, in case that an Israeli shareholder will be determined as a Greek tax citizen, this last provision shall not apply.
In Greece the tax on interest in case of a loan injection by a lender (regardless of whether it concerns a secured loan or not) is 15%. The difference between the above interest tax (15%) and corporate tax (22%), along with the fact that on return of the amount of the loan injection there is no dividend tax, allows a margin for efficient tax planning, especially in cases of big transactions. Our law firm has in many cases used stamp tax free solutions to ensure the above gain in favor or our principles. It shall also be noted that according the tax treaty between Israel and Greece an option is provided for the interest tax to be imposed in either of the two countries.
We have to emphasize that in Greece there is 0% capital gain tax for foreigners (companies or individuals) completing share transaction(s), while Greek individuals are taxed with 15% on their gain. The fact that according to the above treaty these transactions shall be taxed in accordance to the Greek taxation framework, the aforementioned rule is offering a unique opportunity to the investor.
Summary:
The Greek tax lawmaker has recently initiated significant incentives for individuals to become tax citizens in Greece ( https://nexuslaw.gr/en/greece-introduces-non-dom-tax-regime-option-efficient-tax-planning-individuals/ ). In cases where investors from Israel keep their local tax citizenship, the treaty between Israel and Greece for the avoidance of double taxation shall apply to them. It is preferable for them in case of small-sized real estate ventures to act as individuals, while in any other case the choice of establishing a local company shall prevail. Additionally, it is to their benefit, in all kinds of ventures, to create SPVs and exit their projects by selling them and not by liquidating their certain assets. In any case the above tax treaty offers a wide range of tax planning options to the investor which our law firm often executes with the goal to maximize the gains of our principles.
