Our clients receive personal service from an Israeli tax specialist who has extensive experience in related legal fields, including litigation. The services I provide in Israeli taxation include:
- Mergers & Acquisitions Tax
- Transaction Support
- Tax Opinions
- Forms of Business Organization
- Real Estate Transaction Tax
- Tax Incentives
- Tax Litigation and Controversy
- VAT Consulting
- Taxation of Trusts
- Taxation of Virtual Currencies
Below you will find a concise overview of the Israeli tax system for 2020. If you are a foreign resident or run a foreign company, you should also read the 2020 overview of International Taxation aspects.
A. Unitary Tax System
Israel is a unitary state so the only separation is between government taxes and few municipal taxes (no supra/sub-national taxes). There are however few "exceptions":
There is an agreement with the Palestinian Authority (the Customs Envelope Agreement) whereby Israel collects Customs for the PA and VAT from Israelis;
Some income tax offsets granted according to the city of residence and a VAT exemptions/zero rate applies in the city of Eilat;
There are also reduced corporate income and dividend tax rates according to the geographical location of "approved plants" (see "Corporate Tax Incentives" below).
B. The Tax Unit
The default tax unit in Israel is the couple (or singles). The income is generally attributed to the registered spouse (as selected, under certain conditions) but with two exceptions - a separate calculation for salary or business income if it is independent on the spouse, and from assets acquired before marriage or inherited.
The tax unit does not include children, but there are fixed offsets for child care (depending on their age and number).
Partnerships (limited and not) are generally pass-through entities for tax purposes (except for certain oil and R&D partnerships).
Companies are separate tax units. However, under certain conditions, it is possible to consolidate reports of industrial companies and for VAT purposes. In addition, there are two types of small companies that are pass-through entities (by the taxpayer choice) - a "house company" that owns just buildings (whose net income or loss is attributed to the shareholders mainly in order to avoid "double" taxation on capital gains) and a "family company" (in which shareholders are relatives) whose net income or loss is attributed to the "representative taxpayer".
There are also anti-avoidance provisions in the ITO, such as CFC, Foreign Occupation Company, and recently also "wallet company" - these company's relevant income is generally attributed to the shareholders.
C. Income Tax
The Tax Base
The Israeli tax system is scheduler. However, there is a "basket clause" in the ITO to ensure that the list of sources is not exhaustive (although some nexus is still required)) and there is taxation on capital gains, gambling and lotteries (so every component of wealth growth is taxed, excluding gifts, inheritance, and personal assets). Assessments are on an annual nominal basis (calendar year but there are exceptions) and most taxpayers (and all companies) have an obligation to submit an annual income report.
Income tax is on a territorial and personal basis (save for some exemptions) and a foreign tax can be credited under certain conditions and limitations. For details see my International Tax Review.
Personal Income Tax Rates
The tax rate for individuals is progressive up to 47%, and additional 3% applies for total income of over 651,601 NIS. The initial rate is 10% but for general passive income the rate starts at 31% (except for persons over the age of 60).
The tax system is dual, so that there are some limited tax rates: from the capital market - 15-30% and on dividends and some capital gains - 25% (for of a significant shareholder (10%) - 30%. In addition, the 3% surcharge applies also to dividends and capital gains (beyond the ceiling) so that the rate can reach to 33%). The tax rate on lottery and gambling is 35% and there is also a levy on employers of foreign workers (up to 20% of the salary paid).
There is no separation between '"capital component" and "salary component" of self-employed businesses income, but there is a tax benefit on the earned personal goodwill component in the sale of the business (limited rate of 25%).
Personal Exemptions, Credits and Grants
There are exemptions (within ceiling limits) from the income of the disabled, from severance pay and withdrawal of education funds (on the profits). Scholarships are also exempt up to a certain amount. Residential rent is exempt up to a ceiling or alternatively charged at a reduced rate (10%) on the turnover.
In addition, there are certain fixed credits (offsets) for residency, marital status, gender, studies, military service, place of residence and new immigrants. There are also tax offsets of 35% from donations (subject to limitations), 15% of shift work salary, and for pension deposits (25%-35%).
Grants (negative income tax) are been given for those with low incomes (from work and for certain populations) in order to encourage employment. There are also tax benefits for gas and oil investors to encourage exploration (annual deduction of their share in exploration expenses).
Losses
Capital losses are offset against capital gains and the balance is carried forward ) indefinitely(. Current losses from business or trade can be offset against any profit. The remainder will be carried forward) indefinitely( and offset only against similar income or capital gains occurred in the business.
D. Corporate Tax
The Israeli tax system is "classic" and due to the limited tax rate on dividends, some equivalents exist between sole traders (high earnings) and companies (disregarding National Insurance and the timing aspect). The statutory corporate tax rate is the lowest ever - 23%. The tax rate is flat and there is no different rate for small companies. capital gains are taxed at corporate tax rate. Dividend from a subsidiary is tax-exempt unless it is from a non-resident company.
Calculating Company's Income
The income tax reporting is done, generally, on an accrual basis, with the exception of few (which do not have inventory) that report on cash basis. Adjustments are made to the audited financial statements as, for example, certain expenses are not allowed the same way (e.g. depreciation rates).
Loss offset rules are the same as those described above (apply equally to individual and company). However, in accordance with our Supreme Court's rulings, a change of control of the company may negate the right to offset carry-forward losses (or part of them) unless the nature of the company's operations is maintained.
Tax Incentives
The effective corporate tax rate is lower mainly due to exemptions under Investments Laws. These are intended to encourage production, foreign investment, export, innovation, employment and development of the periphery. As a result, there are tax benefits in the form of accelerated depreciation, grants, lower corporate tax rates, and lower dividend tax rates for the shareholders. The activities entitling to the benefits are production and development (including software), some hotels for foreign tourists and buildings for residential rent. Giant companies of strategic importance receive greater tax benefits, as do R&D companies and companies with foreign investments (shareholders). The tax rates vary according to the above by the taxpayer's choice.
Withholding Taxes
There is a broad duty to withhold tax at source (from "assessable" payments - Income and capital gains - within Israel and to non-residents). This obligation generally applies to those with a certain minimal revenue and therefore mainly to medium and large companies.
E. Wealth and Capital Taxation
General
There is no estate tax (was canceled in 1981) and no gift tax or inheritance tax in Israel. Moreover, there is a postponement of the tax event (capital gain) in these grants. Therefore, as far as "assessable" asset is concerned, the recipient of the gift / inheritance "enters the shoes" of the grantor / deceased regarding the date and value of the acquisition of the asset (the main exception is a gift to a foreign resident. In addition, the postponement does not apply to VAT or real estate taxes (except for a gift for a relative and inheritance under certain restrictions)).
There is also no AWT in Israel and in fact there is no tax on the value of specific assets (municipal taxes are calculated by area). However, there is a progressive purchase tax on the purchase of real estate (in Israel) or "real estate company" shares (with some exemptions). From an administrative point of view, the ITA occasionally sends demands for a capital declaration, but only to check the accuracy of the income reports.
Capital Gains
Capital gains tax apply to any right or movable property (excluding for personal use) and to real estate abroad. There is linear calculation on the capital gain in accordance with the limited tax rates that were changed in 2003 (up to maximum marginal tax rate), in 2012 (up to 20%) and from 2012 (up to 25%). The inflationary part to 1993 is taxable at a rate of 10% and the (relative) inflationary part since 1994 is exempted. There are also reduced tax rates for an asset acquired before 1960. For capital gain from )private company) shares purchased before 2002 there is a reduced rate on the amount equal to the accumulated profits of the company in 1996-2002. A substantial shareholder is liable to tax at an additional 5% (on the part from 2003). Capital gains from traded securities are subject to different tax rates.
These are limited tax rates, so that in practice, people over the age of 60 and those with low income can pay less even on the "marginal" part of the gain (the minimum 31% tax on passive income applies only up to the age of 60). In addition, the capital gain can be spread for up to four years (in order to reduce the marginal tax burden), and there is also the possibility of rollover relief for business assets.
In general, a tax event occurs when an asset leaves the taxpayer's hands. However, there is also an Exit tax for individuals and companies (step up on the date of immigration or deferred to the sale date (or deferred CGT)), and tax events arising from restructuring of companies and transfers of assets can also be deferred when it comes to joint control (under some terms and conditions).
Real-Estate Appreciation Tax
The tax rates are similar to those applying to capital gains, but there are exemptions for residential apartments (the profit from the sale of the sole apartment of the seller is exempted under certain conditions and for a seller with several dwellings the tax (linear calculation) applies only to the relative period commencing from 2014 at a limited rate of 25%). There is also an exemption for replacing two apartments in an expensive third and an exemption on the sale of building rights to a contractor as part of a plan to strengthen old buildings. There are also other exemptions on lands (such as on expropriation compensation).
F. VAT
VAT at 17% is imposed mainly on import, and on income from business related goods and real-estate or services in Israel. Financial institutions and non-profit institutions are exempt, but there is an alternative tax on the added value of the entity (wages and / or profit).
Zero rate VAT (input tax can be offset) applies mainly on exports, services abroad and to foreigners, tourism, fruits and vegetables, cargo transportations and strengthening of buildings against earthquakes according to a specific approved plan. The same applies (under certain conditions) to certain structural changes in jointly controlled companies as well as transfer of assets as a result of liquidation.
There is an exemption from VAT in the city of Eilat and from imports at a small value. A trader with a small turnover of up to 99,000 NIS is also exempt from VAT and so is diamonds trade (under certain conditions), residential rent and more.
Similar to the income tax, the VAT liability is usually on an accrual basis (but on a monthly or bi-monthly basis) with the exception of relatively small businesses. Large taxpayers report now on-line in order to reduce tax frauds.
G. National and Health Insurance
The tax applies to self-employed persons and employees (up to a certain income ceiling) at a total rate of up to 19.6%. The tax is not imposed on capital gains, dividend interest and residential rents in Israel (and all rents abroad). The tax is progressive (two thresholds - 60% of the average wage and (around) 4 times the average wage). There are exemptions and reduced rates (such as new immigrants and the elderly). For employees – part of the tax is imposed on the employer directly and part on the employee (with withholding tax obligation).
H. Local Taxes
Property Tax ("Arnona")
The municipal property tax burden in Israel is high. The tax rates are determined each year by each of the many local authorities independently (but a national law establishes a uniform ceiling), it is imposed only on built-up areas and there are different tariffs for citizens and businesses (for businesses 5-6 times higher). The tax is calculated only by area (and not by value). The calculation (of the built-up area) is not uniform and so are the rules for granting exemptions.
Municipality Betterment Levy
This is another local tax but the tax rate is fixed by a national law as 50% of the value of betterment of real estate property following the approval of a plan or use by the local committee. The date of payment (not the tax event) can be postponed to the date of sale of the property (there are few exemptions and discounts).
I. Customs
Israel is party to trade agreements with many countries, as well as to multilateral agreements. Customs in Israel are imposed on value or by quantity or combined (AD valorem, specific, mixed and compound) on customs items that sometimes vary seasonally. There is an exemption for personal import up to $ 500.
J. Excise Taxes
The tax applies to a limited number of products, mainly on fuel, vehicles, tobacco and alcohol. The tax also applies to the purchase of a limited number of luxury goods (and luxury cars). The method of calculating the tax varies according to different items, similar to customs.
K. Environmental Taxes
There are no ETS in Israel but, as mentioned, there is a high excise tax on vehicles and fuel.
Excise on Fuel and Diesel
It is a fixed tax (also exists (at a reduced rate) on gas and other fuel compounds). Factories, taxi drivers, buses, trucks and others are entitled to refunds of part of the diesel excise tax. The tax rate from the consumer price of fuel and diesel is high (around 50%). In addition, since there are many leasing vehicles in Israel, steps have been taken to cancel the rollovers of car fleets and to reduce the annual depreciation.
Excise on vehicles
The excise tax rate on (standard) vehicles is 83%, but there are credits according to the level of pollution (by a special formula updated each year embodying the pollutant values), and for safety accessories. Excise taxes rates are significantly lower for electric vehicles and hybrids and, in addition, there is a reduced value of use for tax purposes (for employees) in respect of these vehicles (instead of adding 2.48% per annum as notional income like every other employee with company car).
Solar Energy
There is an exemption for income from production of solar energy (on a small scale) and also accelerated depreciation of the solar panels.
You are welcome to contact us for further details and professional service on any of the above issues.
