Taxation in Israel

Taxation in Israel include income tax, capital gains tax, value-added tax and land appreciation tax. The primary law on income taxes in Israel is codified in the Income Tax Ordinance. There are also special tax incentives for new immigrants to encourage aliyah.

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Following Israel’s social justice protests in July 2011, Prime Minister Benjamin Netanyahu created the Trajtenberg Committee to hold discussions and make recommendations to the government's socio-economic cabinet, headed by Finance Minister Yuval Steinitz. During December 2011 the Knesset reviewed these recommendations and approved a series of amendments to Israel's tax law. Among the amendments were the raising of the corporate tax rate from 24% to 25% and possibly 26% in 2013. Additionally, a new top income bracket of 48% (instead of 45%) would be introduced for people earning more than NIS 489,480 per annum. People who earn more than NIS 1 million a year would pay a surtax of 2% on their income and taxation of capital gains would not be decreased to 20% but remain at 25% in 2012.

Income tax

Filing status

Israeli residents are taxed on their worldwide income, while non-residents are taxed only on their Israeli-sourced income.[1] Income includes employment and business income, and passive income from bank deposits and savings.[2]

An individual is deemed to be resident if they spend 183 days or more in Israel during the current tax year, or 30 days or more in Israel during the current tax year and 425 days or more during the current tax year and the preceding two years.[2]

A single person files a single assessment, while a married couple normally files a joint assessment, but may opt out if the need arises.[2]

A year for tax purposes for individuals is a calendar year and must file their annual tax returns by the 30 April of the following year.[3]

Tax rates

The basic rates of income tax are as follows (according to the Israeli Tax Authority). Taxes are charged based on annual income; salaries in Israel are usually discussed at the monthly rate so these are included for convenience.

Annual income level (NIS) Monthly income level (NIS) 2019 tax rate[4]
0 – 75,720 0 - 6,310 10%
75,721 – 108,600 6,311 - 9,050 14%
108,601 – 174,360 9,051 - 14,530 20%
174,361 – 242,400 14,531 - 20,200 31%
242,401 – 504,360 20,201 - 42,030 35%
504,361 - 649,560 42,031 - 54,130 47%
over 649,560 over 54,130 50%
Other income sources 2014 tax rate
Capital gains[1] 25-32%
Interest[1] 25-32%
Dividends[1] 25-32%
Inheritance[5] None

Corporate tax

Filing status

A corporation is deemed to be subject to Israeli taxes if its activities are managed and controlled within the State of Israel or established under its laws.[6] A domestic corporation is subject to taxation on its worldwide income. A foreign corporation with an Israeli subsidiary is only taxed on income derived from, accrued or received in Israel, while a non-resident company without a subsidiary is only taxed on income sourced in Israel.[6]

A year for tax purposes is a calendar year, however businesses may request a different schedule. Businesses must file their annual tax returns five months after the end of their year.[3]

Tax rates

The corporate tax rate in Israel was 25% as of January 1, 2016,[7] decreased to 24% on January 1, 2017, and to 23% on January 1, 2018.[8]

Value-added tax

Value-added tax (VAT) in Israel, is applied to most goods and services, including imported goods and services. From 1 October 2015 the standard rate was decreased to 17%, from 18%.[9][10] It had been raised from 16% to 17% on 1 September 2012,[11] and to 18% on 2 June 2013.[12]

Certain items, such as exported goods and the provision of certain services to non-residents are zero-rated. VAT on imported goods is levied on value plus customs duty, purchase tax and other levies.[13][14]

Multinational companies that provide services to Israel through the Internet, such as Google and Facebook, must pay VAT.[15]

Electronic filing of VAT is mandatory.[16]

National insurance (Social Security)

Current rates of national insurance for employees, including health insurance and Bituah Leumi contributions (as of January 2020, in NIS)[17]

up to 6,331 monthly salary6,331–44,020 monthly salary 
Employee's share 3.50%12.00% 
Employer's share 3.55%7.60%[18]

Additionally self-employed individuals pay between 9.82% and 16.23%.[17]

Stamp duty

Historically, Israel had a stamp duty on signed documents.[19] Documents and duties were regulated by the 1961 "Stamp Tax on Documents" (Law 5731-1961),[20] the 1965 "Stamp Tax on Documents Regulations",[19] and subsequent Additions.[19] Documents below a certain value could be self-stamped at a postal-bank; in 2004, this threshold value was raised from 62,500 NIS to 125,000 NIS.[19] As of 2006 this tax is no longer collected.[21]

Israel has no other stamp-based taxes.[22]

New immigrants and returning citizens

New immigrants and returning citizens are entitled to various benefits granted by the Tax Ordinance. These benefits were extended in 2008 in commemoration of Israel's 60th anniversary to try further to provide incentives for Jews to make Aliyah. A returning citizen is someone who has either resided overseas for at least 10 years; or resided overseas for 5 years and returned to Israel during 2007-2009; or were considered foreign residents on January 1, 2007. Special benefits also exist for returning scientists, and entrepreneurs. The law was introduced in order to persuade many Israelis, who had made yerida (left the state of Israel) to return.[23] These tax benefits are offered to new immigrants who made Aliyah after January 1, 2007 as follows:

10-year exemptions for companies

Returning residents or new immigrants who own and manage a foreign company that is active abroad, or own its shares, will no longer be automatically subject to Israeli taxes. Thus, the company will be able to continue generating tax-free revenues, so long as these revenues are not generated in Israel.[17]

10-year exemption for earnings from abroad

Returning residents or new immigrants, and the companies that are under their direction, are not obliged to report earnings that benefit from exemption. Only income from activities in Israel and from Israeli investments and assets that is generated following Aliyah or return to the country is subject to reporting and taxation according to regular tax laws.[17]

10-year expansion of tax benefits

Returning residents and new immigrants are exempt from taxes for 10 years on income generated outside Israel. This covers all income, active or passive, such as interest, dividends, pensions, royalties and rental of assets. All income, whether from the realization of assets and investments abroad or from regular income abroad, is exempt from tax.[17]

Pension benefits

New immigrants are exempt from paying taxes on their pension. Returning residents are exempt from paying taxes on their pension for ten years.[17]

Tax benefits for new immigrants

New immigrants are entitled to tax deductions as follows:[17]

  • During the first 18 months – 3 tax credit points.
  • During the following year – 2 points.
  • During the third year – 1 point.

On interest from foreign currency deposits

New immigrants are entitled to exemption from paying tax on interest on foreign currency deposits for 20 years, so long as the source of those deposits is capital they possessed prior to their immigration, and which was deposited in an Israeli banking institution.

An adjustment year

New immigrants and returning residents can fill in an application form for an adjustment year. During the year they will not be considered to be Israeli citizens for tax purposes. At the end of the year, if they remain in Israel they are entitled to all the benefits that are part of the new tax reform.[17]

References
  1. Your taxes: Tax rates for 2014 - Retrieved 9 September 2014
  2. Israel Highlights 2014 Archived 2014-09-11 at the Wayback Machine Section - "Personal Taxation", page 2
  3. Taxation and Investment in Israel 2012 Section - "3.7 Administration", page 12
  4. Tax brackets 2019 (Hebrew) - Israel Tax Authority
  5. Israel Highlights 2014 Archived 2014-09-11 at the Wayback Machine Section - "Other taxes on Individuals", page 2
  6. Taxation and Investment in Israel 2012, page 9
  7. Knesset gives final approval to corporate tax cut
  8. "Israel approves new innovation box regime and reduces tax rates". taxinsights.ey.com. Retrieved 2017-10-16.
  9. Israel Lowered the Value-added Tax, but Consumers May Have Little to Celebrate
  10. Israel – VAT rate reduced to 17%
  11. Taxation and Investment in Israel 2012 Section 5.1, page 15
  12. VAT hits 18% high for third time in Israel's history
  13. Israel Highlights 2014 Archived 2014-09-11 at the Wayback Machine Section - "Value added tax", page 3
  14. "Imported Goods Taxes and Levies 2020". Zipy 2020-7-29.
  15. Israel to Levy New Taxes on Google, Facebook in Policy Shift
  16. VAT/GST electronic filing and data extraction Section - "Is electronic filing of periodic VAT/GST returns mandatory or optional?", p. 11
  17. Immigration to Israel: Israeli Tax Ramifications and Benefits - Retrieved 9 September 2014
  18. "Israel - CountryPedia - Papaya Global". CountryPedia - Papaya Global. Retrieved 2020-04-26.
  19. Department of Customs & VAT (5 May 2004). "Notice to the Public: Stamp Tax". The State of Israel. Retrieved 27 November 2017.
  20. Stamp Tax on Documents: Law 5731-1961, a full text English translation incorporating all changes up to and including September 1, 2003, Haifa: Aryeh Greenfield-A.G., September 2003, LCCN 2004418547, OCLC 54429051, OL 3361544M
  21. Taxation and Investment in Israel 2012: Reach, relevance and reliability (PDF), Deloitte Touche Tohmatsu Limited, p. 14
  22. "Israel Corporate - Other taxes". PwC Worldwide Tax Summaries. PricewaterhouseCoopers. 4 April 2017. Retrieved 27 November 2017. Stamp taxes. There are no stamp taxes imposed in Israel.
  23. New Israeli Tax Incentive for Foreign Residents
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