Israel tax highlights - 2012


Dr. Avi Nov, Adv.

February 2012

Residence of a company:

A corporation is considered an Israeli resident for tax purposes in one of these conditions:

1. The corporation was incorporated under Israeli law; or

2. The corporation is managed and controlled from Israel.

See also: New Israeli Case on Control and Management

Standard company tax rate:

Following Israel Tax Reform: Trajtenberg Proposals, the standard Israeli corporate tax rate is now 25% (raised from 24%). This rate applies to the undistributed profits of the company.

Investment Incentives:

In some cases, a reduced rate of tax is payable or an exemption granted, mainly to industrial companies. For more details, see: Israel's 2011 Investment Incentives for industrial companies.

Other Incentives and Benefits:

· Accelerated Depreciation.

· Exemptions from Import Taxes (for exported goods).

· Deferred VAT Payments (for exporters).

· Various Export Financing Guarantees and Insurance.

· Employment Incentive Payments.

· R & D grants, financing and tax incentives.

Dividends:

Following Israel Tax Reform: Trajtenberg Proposals, dividends paid to a foreign resident are taxed in Israel at a rate of 25% or 30% if the shareholder owns more than 10% of the Israeli company. However, many Israeli tax treaties set a lower withholding tax rate. Dividend between two Israeli companies is tax exempt.

Interest:

The rate paid on interest earned by a company is 25%. However, many Israeli tax treaties set a lower withholding tax rate.

Capital Gains:

The same tax rates as applied to dividends.

Non-residents are exempt from capital gain tax on sale of shares of Israeli companies bought from 1.1.2009 onwards, subject to certain terms.


Residence of an Individual:

The main test that is used to determine residency of an individual is the "center of life" test. A number of auxiliary qualitative criteria are applied,

to demonstrate the family, economic and social relations representing the individual’s “center of life”. Including, inter- alia, the following:

1. The location of permanent home (even if he does not reside therein).

2. The location of actual home of himself and members of his family, i.e. actual place of residence.

3. The location of fixed or permanent business or work.

4. The location of active material economic interests.

5. The location of activity in organizations, associations or institutions.

For more details, see: Israeli Residence for tax purposes.
 
Tax rates:
 
The monthly income-tax rates for employment and freelance income are as follows:

On income up to NIS 5,200 - 10 percent

On income of NIS 5,201 to NIS 8,880 - 14%

On income of NIS 8,801 to NIS 14,430 - 21%

On income of NIS 14,431 to NIS 21,780 - 30%

On income of NIS 21,781 to NIS 41,830 - 33%

On income above NIS 41,830 - 48%

Social Security tax:

The current monthly social security rates for Israeli residents, including the health levy, are as follows (No tax to monthly income exceeding NIS 41,850):

Resident employees: rates from 3.5% to 12%
Employers of resident employees: rates from 3.45% to 5.90%
Nonresident employees: rates from 0.04% to 0.87%
Employers of nonresident employees: rates from 0.49% to 0.77%
Self-employed individuals: rates from 9.82%-16.23%
Not working: rates from 9.61% to 12%
Payment if no income: NIS 160

New residents and returning residents:

Tax exemption for 10 years on income and capital gains derived outside Israel by new residents and returning residents (lived abroad 10 years) who arrived after January 1, 2007.

Value Added Tax (VAT):

From 1.1.2010, the new standard VAT rate in Israel is 16%.

Some transactions are subject to VAT at the rate of 0%, such as:

· Exported goods

· Fresh fruit and vegetables

· Hotel services and car rentals to tourists who pay in foreign currency

· Sale of intangible assets to non‐residents

· Transportation of cargo and passengers to and from Israel

· Insurance premiums

· Certain services rendered to non‐residents.
 
Property taxes

Propertytransactions in Israel have two main taxes. The first tax is called Purchase Tax, which may apply to the purchaser. The second tax is the Capital Gains Tax, which is imposed on a seller in case of profit gained resulting from a sale.

As regards to the Capital Gains Tax, there are very generous tax exemptions for sale of residential homes. The main Capital Gains Tax exemption allows an individual to sell residential property once every four years with a full tax relief.


Inheritance and Gift taxes

Israel has no inheritance tax and neither a gift tax.


Taxation of non-residents:

Non-resident are subject to tax on income from sources in Israel, which is income accrued or derived in Israel. However, some of Israel's tax treaties exempt non-resident from Israeli tax. Generally, the treaty exemption is conditional on the employee being present less than 183 days in Israel in the tax year and employed by a non-Israeli resident employer who does not charge the individual's remuneration to a Permanent Establishment (as defined in the Treaty) in Israel.

Transfer Pricing:

According to Section 85A of the Israeli Tax Ordinance where there is a special relationship between the parties to an international transaction, as a result of which the price of the transaction results in a smaller profit than would have been realized if the transaction price had been set on arm’s length terms, the transaction must be reported and taxed on the basis of its fair market value. For more details, see: Israeli Transfer Pricing Regime.

Participation Exemption:

Corporations that are classified as Israeli Holding Companies are entitled to a tax exemption status. For more details, see: Israel Holding Company – Participation Exemption.

Israel's Double Taxation Treaties:

Special tax rates apply under Israel's tax treaties with approximately 50 countries.

A treaty for the avoidance of double taxation has been signed between Israel and Malta, and a treaty for the avoidance of double taxation has been initialed between Israel and Panama. These treaties will enter into force on completion of ratification proceedings in the two countries. See: Israel Tax Treaties with Malta and Panama
 
Tax Information Exchange Agreements:
 
Israel's Double Tax Treaties include provisions for the exchange of information for tax purposes. Treaty partners may make a request for information for tax purposes to the Controller of Income Tax.
 
 Dr. Avi Nov Law Offices, Israeli & international tax law 
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion
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