Israel – Tax System

Investment Basics :

Currency :- New Israeli Shekel (NIS)

Foreign Exchange Control :- There are no foreign currency restrictions.

Accounting Principles / Financial Statements :- Accepted accounting principles according to the Israeli accounting standards board / IFRS apply. Financial Statements must be prepared annually (quaterly in case of Public Company).

Principal Business Entities :- These are the public & private limited liability company, partnership (registered & non-registered) & branch of a foreign corporation.

Corporate Taxation :

Residence -  A corporation is deemed to be resident in Israel if its activities are managed & controlled by Israel or if it is organized under the laws of Israel.

A foreign Corporation managed & controlled by a new Israeli resident or a senior returning resident (i.e. an individual who spends 10 years abroad) generally will not be classified as an Israel resident company for 10 years.

Basic -  Israeli resident conpanies are subject to tax on worldwide profits & gains, with a credit granted for overseas taxes paid. A non-resident company is subject to tax only on Israeli-source profits, which include income derived from an Israeli permanent estabilishment (PE) or income accrued & produced in Israel, as well as capital gains from the sale of Israeli assets.

Taxable Income – An Israeli resident Corporation is subject to corporate income tax on its worldwide income, and to capital gains tax on worldwide capital gains.

Taxation of Dividends -  The tax rate on dividend distributed by an Israeli resident company to another Israeli company is 0%, provided the dividends arise from income produced oraccrued in Israel. The tax rate on dividends from income produced abroad or from dividends received from abroad, is 25 %; a tax credit will be granted for tax withheld. Alternatively, the gross dividend will be subject to the regular corporate tax rate, with a direct & an indirect foreign tax credit if the Israeli company qualifies for the indirect tax credit mechanism.

Dividends distributed by a “preferred enterprise” are taxed at 20% rate. Dividends distrbuted by an approved / benefited enterprise generally are taxed at a 15 % rate if the distribution id made from profits attributable to the approved / benfitted enterprise, or at reduced rate of 4% on the alternative incentive track. Dividends distributed from a revaluation of assets will be taxed as a sale of the assets, and thus will be subject to capital gains tax, levied on the diffrence between the original purchase price of the assets & the gross amount distributed.

Capital Gains – The capital gains tax rate depends on the purchase date and the nature of the asset. The general capital gains tax rate for a corporation is the standard corporate tax rate. The Inflationary component of the gain is exempted from tax.

An Israeli resident is subject to capital gains taxon the disposal of its asset, regardless of whether the assets are located in Israel. Capital gains derived from the sale, exchange, transfer or other, diposition of tangible and intangible capital assets located in Israel or constituting a direct or an indirect ownership interest of assets in Israel are treated as Israeli-source income & are subject to capital gains tax, regardless of whether the seller is a resident of Israel for Israeli tax purposes. Shares & the other securities of Israeli companies, or shares & other securities of non – Israeli companies holding their main assets in Israel, also may be treated as Israeli assets.

Persons who are not residents for Israel for tax purposes are exempt from Israeli capital gains tax on gains from the sale of shares traded on the Tel Aviv stock exchange, unless the gain is attributable to a PE the seller maintains in Israel.

A broad exempting from capital gains tax applies to gains derived from the sale of sevurities in Israel or Israeli-related companies acquired on or after 1^st January 2009 by all non-residents, regardless of whether the non-residentis eligible for benefits under a tax treaty, The exemption does not apply  (1) to shares of companies whoes assets consist primarily of real estate located in Israel; (2) if the shares sold were purchased from a related party or by way of certain tax – deferred reorganizations; (3) if the shares were held through a PE; or (4) if the non-resident selling entity is 25 % or more controlled by Israeli resident.

Losses :-  Trading or business losses may be offset against income from any source in the same year. Losses may be carried forward indefinitely to be offset against business income & business capital gains. Losses may not be carried back.

Rate :-  The Basic tax rate for companies is 25%. An Israeli company classified as a preferred enterprise is taxed depending on where its facilities are located.

An Israeli company classified as an approved or a benefited enterprise is entitled to reduce tax rate of between 0 % & 25 %, with the period of benefits depending on whether the company’s facilities are located & whether certain conditions are satisfied. The benefits will be revoked if profits deriving from the benefited income are distributed.

Qualified companies may be eligible for both reduced corporate tax rates & grants from the  investment center.

There are no basic diffrences in the tax regime as applied to different forms of business organizations. However, partnerships are transparent for tax purposes.

Surtax & Alternative Minimum Tax :- No

Foreign Tax Credit :- Israel grants a direct tax credit on foreign taxes paid on Non Israeli source income. An Indirect tax credit is granted in certain cases.

Participation Exemption :- A special tax regime applies to Israeli holding companies that invest in foreign corporations. An eligible corporation is entitled to an exemption from tax on dividends received from a qualified foreign subsidiary & on capital gains derived from the sale of shares in such a ,subsidiary, as well as a full exemption from tax on financial income derived from investments in the Israeli Capital market. In addition, dividends paid by the holding company to a non-resident shareholder are subject to a 5 % withholding tax, rather than the nornal 25 % or 30 % tax.

Incentives :- Various programmes are available eg. Foreign investment incentives, a holding company regime & R&D incentives.

With- Holding Tax :-

Dividends :-  Dividends paid to a non-controlling foreign resident are subject to a 25 % withholding tax, otherwise the rate is 30. These rates may be reduced under a tax treaty or incentives regime.

Dividends distributed by a preferred enterprise are taxed at a 20% rate. Dividends distributed by an approved/benifitted enterprise generally are taxed at a 15 % rate if the distribution is made from profits attributable to the approved enterprise, or at a reduced rate of 4% on the alternative incentive track.

Interest :- Corporate Income Tax (currently 25%, reduced from 26.5% as from 1^st January 2016) will be imposed if the recipient of the interest is a ‘body of persons’ , although the rate may be reduced under a tax treaty. A 0% withholding tax applies to interest on certain bonds.

Royalties :- A 25 % withholding tax is levied on royalty payments to nonresidents. The rates may be reduced under a tax treaty.

Branch Remittance Tax :- There is no specific Tax on the remittance of profits; however, in case of an approved enterprise, a branch may be subject to a tax rate of 15 %, in addition to the corporate income tax.

Others :- Other payments to non – Israeli corporations are subjected to withholding tax at a rate of 25 %, & a 25% rate applies to non-israeli individuals, The rate may be reduced under a tax treaty.

Other Taxes on Corporations :-

Capital Duty / Stamp Duty :- No

Payroll Tax :- Payroll tax is levied only on non-profit organizations, at a rate of 7.5 % of wages, & financial institutions, at a rate of 17 % of wages.

Real Property Tax :- Property betterment tax is applicable to the sale of real property,. The principles of the property. The principles of the property betterment tax are similar to those of the capital gains tax. The betterment is calculated from the date of purchase untill the date of sale, & the amount of betterment is subject to the corporate tax rate at the date of sale.

Social Security :- National Insurance is required by law (covering allowances & stipends), Some employers pay part or all of employees compulsary contributions to the national insurance scheme.

Other :-  The purchase of real property is subject to a purchase tax of 6 %, When the asset purchased is a residential apartment, the purchase is subject to tax at progressive rates ranging from 0% - 10%.

A purchase tax is levied on certin imports or local industrial production & is collected from local manufacturers 15 days after the end of the month in which the goods are sold. Importers are required to submit the collected tax when the goods are released from customs.

Anti – Avoidance Rules :-

Transfer pricing :-  The transfer pricing rule, which are based on the OECD guidelines, apply to transactions between an Israeli resident & its related non-residents. A hierarchy of transfer pricing methodologies applies, with preference given to transaction-based methods over profit-based methods. Documentation requirements mandate that the taxpayer attach the statement to the annual tax return & provide a detailed transfer pricing study at the request of the tax authorities. An advance pricing agreement may be obtained.

Thin Capitalization :- No

Controlled Foreign Companies :- A foreign company that is ‘controlled’ by Israeli shareholders & that has accumulated undistributed passive profits taxed at a rate lower than 15 % will be considered a controlled foreign company (CFC). In such a ase, the israeli controlling the CFC will be treated as if it had received its proportionate share of the profits as dividends. Upon the distribution of profits, the Israeli controlling shareholder will be eligible for a deduction in the amount of the gross national dividends that were subject to Israeli tax, in addition to a tax credit for foreign tax paid.

Disclosures Requirements :-  The tax payer generally must disclose all facts relevant for taxation, especially with respect to transactions with related parties.

Others :- The Israeli tax authorities can challenge artificial transactions.

Compliance for Corporations :-

Tax Year :- The tax year begins in January. Taxpayers may apply for a special tax year, but the application will be approved only in special circumstances.

Consolidated Returns :- The filling of a consolidated return generally is not permitted; each company in a group is required to file its own return. However, if certain conditions are satisfied, qualified ‘industrial companies’ may file a consolidated tax return.

Filling Requirements :- Companies must file an annual tax return later than 5 months following the end of the tax year. The tax authorities determine advance tax payments, with some tax payers required to pay tax according to their monthly turnover.

Penalties :- Penalties apply if advance payments are overdue or if tax pay returns are filled late. The balance of any tax due is payable as of the beginning of the following tax year. Overdue tax is subject to an annual 4 % interest rate untill paid in full.

Rulings :- A taxpayer may request a ruling on the tax consequences of a proposed transaction.

Personal Taxation :-

Basis :- Israeli residents are taxed on their worldwide income. Non-residents are taxed only on israeli source income.

Residence :- An individual is resident in Israel if his/her ‘center of vital interests’ is in Israel. The number of days spent in Israel and overseas also affects residence status: an individual will be deemed to be resident id he/she has spend 183 days or more in Israel or if during the current year, he/she spends 30 days or more in Israel and the total duration of his/her stay in Israel in the tax year and in the two preceding tax years, on a cummulative basis, amounts to 425 days or more.

An Israeli resident who spends two consecutive year abroad and whose center of vital interests in the two subsequent years was located abroad will be deemed to be a foreign resident as from the date the individual chooses to leave Israel.

Filing Status :- A married couple, living together, may opt for separate tax assessment in certain circumstances; otherwise, they may file jointly.

Taxable Income :- All income from employment and/or a vocation is taxable, including the value of fringe benefits & cos-of-living allowances. Passive income from bank deposits & savings, both in Israel & overseas, also is taxable.

New Israeli residents & senior returning residents are entitled to a tax exemption for certain types of foreign-source income for a period of 10 years as from the date of immigration/return to Israel. The benefit period may be extended for a minimum of an additional 10 years period, provided certain investment criteria are fulfilled and approval is obtained from the minister of finance.

Capital Gains :- Real gains derived from the sale of shares in a publicly traded company are subject to a 25 % tax rate if derived by non-controlling shareholders; otherwise the rate is 30 %. Gains derived from the sale of bonds, commercial securities or loans that are not linked to the CPI generally are subject to a 15% tax.(however, a controlling shareholder that holds more than 10 % of the Israeli payer company’s shares will be taxed on both the real & the inflationary component of gains at a rate of 20%)

The tax rates on capital gains on all other assets range from 20% upto the individuals marginal tax rate, depending on the date of acquisition & the type of asset (the minimum tax rate for the sale of shares of nonpublic traded companies  by an individual holding more than 10 % of the company’s shares is 25%)

The inflationary component of gains accrued as from 1^st January 1994 is exempt from tax. The inflationary components of gains accrued before 1^st January 1994 is subject to a 10 % tax.

Deductions & Allowances :- Deductions are granted for pension fund contributions, and individuals are entitled to various personal allowances & credits.

Rates :- The income tax rates are progressive upto 48 %. An additional 2 % surtax is levied on annual taxable income exceeding approximately NIS 810,720. The surtax is not applicable to certain types of income.

Other Tax on Individual :-

Capital Duty/Stamp Duty & Capital Acquisitions Tax :- No

Real Property Tax :-  Property betterment tax is applicable to the sale of real property. The principles of the property betterment tax are similar to those of the capital gains tax. The taax regime uses a linear tax model that taxes the real bettermentof different rax rates, depending on the dates on which the betterment was accrued. Betterment accrued from the date of purchase upto 7 November 2001 is subject to the marginal individual tax rates, betterment accrued from8 November 20011 to 1^st January 2012 is subject to the marginal individuals tax rates upto 20 %; & betterment accrued after 1^st January 2012 is subject to the marginal individual ta rates upto 25% (30% if the sellerholds more than 10% of a real estate company).

If the asset is a residential apartment, all real bettermentaccrued before 1^st January 2014 is exempt, and all subsequent betterment is subject to the marginal individual tax rates upto 25 %.

The purchaser of real property is subject to a purchase tax of 6%. When the asset purchased is a residential apartment, the purchaser is subject to purchase tax at progressive rates ranging from 0% to 10%.

In certain cases (especially when real property is sold), the municipal authorities may impose a ‘betterment levy’ at a rate of 50 % on the betterment. The real property has gained as a result of actions of the local municipal authorities. The bettrment levy paid may be deducted from the betterment subject to the property betterment tax.

Social Security :- National Insurance is required by law (covering allowances  stipends for pensioners, widowers, disability, maternity, hildren’s allowances, industrial accidents, military service pay and unemployment). Some employers pay part or all of employees compulsor contributions to the national insurance scheme. In addition, every individual is subject to health care tax.

Compliance for Individuals :-

Tax Year :- Calander Year

Filing & Payment :- An individual must file an annual tax return no later than 30 April of the following year. An extension of the deadline or an exemption from filing may be granted in certain cases.

A new Israeli resident or a senior returning resident will not be subject to the reporting requirements in Israel on income derived from or accrued outside Israel, or sourced from assets outside Israel for the 10 Year benifited period.

Penalties :- Penalties apply if advance payments are overdue or if tax returns are filed late. The balance of any tax due is payable as of the beginning of the following tax year.Overdue tax is subjet to an annual 4 % interest rate (both the interest & principal are linked to the CPI) untill paid in full.

Value added Tax :-

Taxable Transactions :- VAT applies to most goods & services, and imports.

Rates :- The standard VAT rate is 17 %. Certain items are subject to a 0% rate, including exported goods, intangible goods & the provision of certain services to non residents (ie. Tourism services), the transport of cargo to and from Israel, the sale of goods & services to the Eilat free-trade zone and the sale of fresh fruit & vegetables.

Payroll tax, which is levied on non profit organizations at a rate of 7.5 % of wages and on financial institutions at the rate of 17% of wages, is imposed in lieu of the VAT for these type of entities.

Registration :- An Israeli Company,  or a foreign company conducting business in Israel, generally must register for VAT purposes, A non registered foreign company operating in Israel generally must register with 30 days. Additionally, a foreign company registered in Israel or a non registered foreign company that carries on an activity or business in Israel must appoint a local representative for VAT purposes  within 30 days for commensing its domestic activities, and must notify the VAT office closest to its place of business.

Filing & Payment :- The dealer will collect output VAT on the goods, services or assets it sells. The VAT collected will be transferred to the VAT authorities once a month or once every two months, whichever is determined to be more appropriate by the authorities based on the annual turnover projection (once a month if the annual turnover is greater than approximately NIS 1.5 million). The dealer may offset the output VAT paid in the course of doing business.

The annual revenue threshold to qualify as an ‘exempt dealer’ under the VAT law is NIS 79,482, Such dealers are exempt from output VAT and receive relief from filling periodic VAT returns (other than the annual declaration reporting the annual turnover). Exempt dealers are not entitles to recover their input VAT.