Bracha & Co Law office presents below the major fiscal indicators to address when doing business in Israel. – November 2020

By Benny Yona, CPA & David Halbwax L.L.M, International Legal Counsel

The method of taxation in Israel

The method of taxation in Israel is based on the distinction between Israeli residents and non-residents in such way that Israeli residents are taxed on their worldwide income, while non-residents are taxed only on their Israeli sourced income.

Individual taxation

Residency

The notion of residency for tax purposes differs deeply from the citizenship one.

For Israeli tax purposes, an individual is considering as a resident if his “center of life” is in Israel (Whatever his citizenship is). 

To appreciate the center of life concept, the Israeli Tax Administration considers the overall connections with Israel (permanent house, family residence, economic and social connections)

Furthermore, a person is presumed to have his center of life in Israel if he was present

  • 183 days or more, in Israel during the current tax year,
  •  or 30 days or more in Israel during the current tax year and the total duration of his stay in Israel during the current tax year and in the two preceding tax years were, on cumulative basis, 425 days or more. 

Ordinary income

Ordinary Income taxed in Israel includes income derived from employment, business income and passive income such as Interest, dividend and rent. 

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By default, taxation is at progressive rate (see Tax rates table on page 5) unless otherwise stated.

Capital gains

Capital gains derived from the sale of assets are subject to a 25% tax.

The tax for assets purchased prior to 1.1.2012 is calculated on a linear basis.

For the time prior to 1.1.2012 and after 1.1.2003 – 20%

For the time until 1.1.2003 – progressive tax rates will apply.

In most cases non-residents will be exempted from capital gains tax.

 

Capital gain from securities 

Capital gains derived from the sale of securities are subject to taxation like asset.

The standard rate is 25%.

  • If the gains derived by controlling shareholders holding 10% or more of the Israeli payer company’s shares, the tax rate will be 30%.
  • Gains derived from the sale of bonds that the face value is in NIS and not linked to the consumer price index are subject to a 15% rate.

In most cases, non-residents will be exempted of tax payment.

 

Dividends

Dividends is subject to a 25% tax.

However, if the receiver held at least 10% of the shares of the payer company the dividends is subject to a 30% tax. 

Note tax rates may be reduced for non-residents under tax treaty or tax incentive regime.

 

Interest

Interest will be taxed at a rate of 25 %.

Interest derived from Loan, bank deposit or bonds that the face value is in shekels and is not fully linked to the consumer price index are subject to 15% tax.

 

Rental income

Individual landlords of residential homes are eligible, under certain conditions, to select one of the following taxation regimes:

  • Individual landlords are eligible, under certain conditions, for a complete exemption from income tax for rental income from Israeli homes since the monthly rental is not exceeding NIS 5,100 (for 2020). If the rental income is over this amount, a portion of the real income will be taxed.
  • For rental income derived from Israeli residential property, individual landlords are eligible, under certain conditions, to pay tax at the rate of 10% on their gross rental income from homes. 
  • Other rental income will be taxed progressively 

Israeli residents are subject to a 15% tax on rental income from residential property  located abroad.

 

Offsetting losses

Losses derived from an active business operation may be used to offset other taxable income in the same year from any source, or against future active business income and certain capital gains.

Losses from capital may be used to offset other capital gains and in some cases losses from securities from dividend and interest.

 

Inheritance and Gifts relative

Inheritance in Israel is not taxable. In consequence, a testator can pass on his property to his heirs free of tax.

 Gift is considered to be a taxable event. 

However, gift is not taxable for any gift transferred by an individual to one of his family members or a person to whom it was proved that the gift was granted in good faith 

Excluding of any gift taxable in Israel, done to a non- resident which is taxable.

The heir of the asset or the donee will be redeemed when the asset is sold to a third party. The tax will be calculated also for the period of time which the property was held by the testator or the donor.

In case of the testator or the donor is a non-resident of Israel, the heir or the donee  can apply to obtain a pre-ruling from t tax authorities in order to be taxed only for the period during  property was hold.

Tax Rates

The tax rate in Israeli is progressive up to 50%. There are different tax rates for income derived from personal exertion and f from any other source in the state of Israel. 

 Below Income tax table for 2020 in Israeli new shekel (ILS):

income that is derived from personal exertion

Annual income level (NIS) 2020 tax rate]
0 – 75,960 10%
75,961 – 108,960 14%
108,961 – 174,960 20%
174,961 – 243,120 31%
243,121 – 505,920 35%
505,921 – 651,600 47%
over 651,601 50% (including surtax)

Other income sources*

 

* The tax rate below is the default rate and may change as specified above

2020 tax rate
Capital gains 25% 
Interest 25% 
Dividends 25%
Rental income 10%
Inheritance None

Withholding tax

According to Israeli taxation system, tax is deducted from payments that constitute income in Israel.

Any payment to a non- resident is subject to withholding tax at a rate of 25%.

The withholding tax does not consider for tax purposes art agreements and in some cases also exempt income, which is still subject to withholding tax. 

To reduce the rate of withholding tax or get an exemption demand can be applied to the Israel Tax Authority (ITA).

 

National Insurance (Social Security)

National insurance is required by law for Israel resident.

Employers and employees are obliged to pay national and health contributions; employee contributions are withheld by the employer. Note that every individual is subject to health care.

Current rates of national insurance for employees and employers, including health insurance and Bitouah Leumi contributions are as follows:

up to 6,331 monthly salary 6,331-44,020 monthly salary
Employee’s share 3.50% 12.00%
Employer’s share 3.55% 7.50%

Self-employed individuals pay between 5.97% to17.83% and 52% of National Insurance amount paid is tax deductible.

No National Insurance liability applies to monthly income exceeding NIS 44.020.

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Corporate taxation

A domestic corporation is subject to corporate income tax on revenue generated in Israel and worldwide.

A non-domestic corporation is subject to corporate income tax on revenue generated in Israel only if it is a non-resident company for tax purposes.

Corporate Residency

A non-domestic corporation residency is determined if its activities are managed and controlled within the State of Israel.

 

Tax Rates

Corporate income tax standard rate in Israel is 23%.

Capital gains tax rate for a corporation is equal to the standard corporate tax rate

However, there are some exceptions prescribed by the law.

 

Corporate Dividends

A dividend distributed between Israeli companies is not taxable.

Dividend distributed between Israeli and foreign companies is taxed at 25% or 30% as above.

Corporate tax benefit – Encouragement of Capital Investments Law

The Encouragement of Capital Investments Law is intended to encourage investment in Israeli industry.

 Its goals: to stimulate capital investment in areas of national priority, to promote economic initiatives through prioritizing advanced and innovative industries and strengthening development areas. 

All this is intended to improve the economy’s production capacity, to improve the business sector’s ability to compete in the international competitive environment and to create the infrastructure for new and sustainable workplaces. To this end, the Law provides benefits in form of grants and tax breaks.

 An Israeli company classified as preferred enterprise can reduce their tax rate up to 7.5%.

Non-residents benefits 

Non-residents are taxed only on income generated in Israel.

The tax rates will be like Israeli residents.

However, there are special rules that may apply to non-residents to lower their tax liability in Israel. Such rules enable them to have deductions such as some of their personal expenses and so on.

Moreover, if a non-resident is coming from a state that has a tax treaty with t Israel, he might be entitled to the reduced tax rates set in the tax treaty by applying to the tax authorities in Israel.

 

Immigrant tax benefits

New immigrant and returning residents are entitled to a 10-year tax exemption for certain types of foreign-source income. (See article on our website “Content & limits of the tax exemption measures for new immigrants and returning residents”).

 

Tax Reporting and Tax returns

A year for tax purposes for individuals is a calendar year Ending December 31st.

Individuals must file their annual tax returns by the 30 April of the following year.  

You can request a tax refund up to 6 years later.

In accordance with the rules of the Israeli tax authorities, the refund can only be received in a bank account in Israel.

Our office provides the entire tax refund service to non-residents.

 

Real Estate Taxes 

There are 4 types of real property taxes in Israel which are:

  •  acquisition tax (mas rechisah) paid by the purchaser when purchasing a residential property
  • property betterment tax (mas shevach) which is similar to capital gains tax, is paid by the seller for the property he sold unless the property is residential and meets certain conditions
  •  renter income tax (mas hachnasa) paid by the landers when receiving money from renters when the rental income exceeds a certain amount
  •  a municipal tax (arnona) which applies to building according to their location in municipal boundaries and based on their size in net square meters.

Acquisition tax

Regarding acquisition tax, purchaser of real property is subject to  6% tax.

When the asset is a residential apartment, the purchaser is subject to purchase tax at progressive rates ranging from 0% to 10%.

For an Israeli resident purchaser with no other home, the first NIS 1,744,505 is exempt from tax.

The municipal tax 

The municipal tax is calculated by the municipality and based on different criteria: the type of the building, the purpose or use of the building (commercial or residential), its location, the presence of shared spaces (elevators, parking spots, stairs). The municipal tax rate fluctuates from city to city.

Value-added tax (VAT)

Value-added tax in Israel, is applied to most business revenue in Israel from goods and services, including imported goods and currently imposed at standard rate of 17%.

Some categories of goods and services such as exported goods, tourism services provided to non-residents, fruits and vegetables sales are subject to zero VAT rate. Financial services, diamonds and precious metals are also activities exempted from VAT.

For financial institutions a 17% tax based on payroll and profits is imposed in lieu of VAT.