Israel Tax & Business Guide - Deloitte

/Home/I-J Countries/Israel (Country Code 972)/Israel Tax Resources

Basic facts
Population 7.1m Inflation 2.1% (2006)
Main languages Hebrew (official), Arabic, English GDP per head US$20,140
Currency New Israeli shekel (NIS) GDP growth 5.2% (2006)*
Economic communities WTO
GDP sources 2.6% agriculture, 30.5% industry, 63.6% services
*Economist Intelligence Unit.
Political environment

Israel is a parliamentary democracy. The Knesset, a 120-seat unicameral parliament, is elected every four years under a proportional representation system.
Foreign trade and investment
Exports US$43.7bn (2006)* Imports US$47.0bn (2006)*
*Economist Intelligence Unit.

Leading exports: Diamonds, electronics, software and chemicals.

Major export markets: The US, Belgium, Luxembourg, East Asian countries and the UK.

Government policy continues to favour capital from abroad.
Business and financing
Business forms Private and public limited companies

Foreign firms may operate through a branch, but most prefer to establish a local subsidiary.

Only firms registered in Israel are eligible for approved status, and branch managers are personally liable for certain company obligations.

Tel Aviv is the business and financial centre.
Labour environment
Unemployment rate 8.4% (2006)* Minimum wage NIS 3,335 (monthly)
*Economist Intelligence Unit.

About 30% of workers are unionised.

Benefits offered by foreign-owned firms reflect their sectoral practices.
Taxation
Corporate tax
Main rate 29% (for 2007)

Resident companies are taxed on worldwide income; non-resident companies are taxed only on Israeli-source income. An entity is resident for tax purposes if it is incorporated in Israel or if management and control of the business are exercised in Israel. The basic rate of company tax on net taxable income is 29% in 2007 (gradually reducing to 25% as follows: 27% in 2008, 26% in 2009 and 25% from 2010).

Tax reliefs are available to Ïapproved enterprisesÓ as well as to international holding companies under the participation exemption regime.
Individual tax
Progressive rates to 49%

Resident individuals are taxed on their worldwide income; non-residents are taxed only on Israeli-source income. An individual is resident if that person's Ïcentre of vital interestsÓ is in Israel during the tax year, taking into consideration the location of the permanent home, family and economic connections, and the location of employment and economic interests. An individual is presumed to be resident if present in Israel for 183 days in a tax year or for 425 days in the current and two previous tax years. The personal marginal tax rates for Ïearned incomeÓ for 2007 are as follows: 10% for income up to NIS 51,240; 21% from NIS 51,241 to NIS 91,200; 29% from NIS 91,201 to NIS 136,920; 35% from NIS 136,921 to NIS 196,560; 36% from NIS 196,561 to NIS 423,240; and 48% for income above NIS 423,241.

The rates of tax on unearned income are 15% on nominal interest payments, 20% on interest payments that are index-linked and 20% on dividends. Individuals classified as Ïsignificant shareholdersÓ will pay 25% tax on dividends and consumer price index-linked interest payments and 20% on unlinked payments.
Capital gains
Generally taxed at 20%/25%

Capital gains are split into a ÏrealÓ and ÏinflationaryÓ element. Corporations are taxed at a 25% rate on gains realised from the disposal of shares (with respect to gains accumulated from January 1st 2003). However, if the seller is a corporate entity subject to the Inflationary Adjustments Law, it will continue to be subject to the corporate tax rate on gains derived from the disposal of traded securities. The inflationary component of gain is exempt from tax for both individuals and corporations.

An individual non-controlling shareholder (as defined) is subject to a 20% tax on real capital gains derived from the sale of shares in the company; the real gain derived by individual controlling shareholders is 25%. Capital gains derived by an individual non-controlling shareholder from the sale of its holding in a company (either domestic of foreign) that is deemed to be a Ïreal estate companyÓ are subject to a 20% capital gains tax. The inflationary element of the gain is exempt (but a 10% rate applies to any inflationary amount accrued up to December 31st 1993). Relief is available for gains on the replacement of business assets. Special rules apply to employee share option or purchase plans.
Indirect tax
Standard rate 15.5%

Value-added tax (VAT) applies to most transactions at the standard rate of 15.5%. Zero-rating applies to exports (subject to certain conditions), services performed in Israel for persons abroad, tourism services to foreigners and certain international transport. Exemptions from VAT include leases of dwellings for less than ten years, deposits with and loans by financial institutions, and the import and export of diamonds. Registration is compulsory for businesses whose turnover is above a certain minimum.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Companies make prepayments of tax based on turnover. Most firms make 12 monthly advance payments at a fixed ratio of the companyÌs turnover. Alternatively, a company may be required to make ten monthly payments, beginning in the second month of the tax year, with each payment at a fixed percentage of the previous yearÌs tax assessment. A tax return is due within five months after the end of the tax year.

Individuals, including foreigners with Israeli income, must file a self-assessment tax return, unless only employment income is received. Tax is deducted at source from employment income.
Additional tax information
Withholding taxes DividendsÛ20% on dividends distributed by Israeli companies to non-controlling shareholders; otherwise the rate is 25%; InterestÛ15%/20%/25%, depending on the type of instrument; RoyaltiesÛ25%. Withholding tax rates may be reduced under the provisions of an applicable tax treaty.
Tax treaties Israel has concluded more than 35 tax treaties.
Dividends Dividends are taxable, except when paid between Israeli companies.
Revenue protection There is an armÌs-length rule.
Groups There is no group taxation except in the case of industrial companies.
Incentives Research and development; approved enterprises; free zones; Eilat free port; new immigrants; international holding companies (Ïparticipation exemption regimeÓ).
Other taxes Import duties, Municipal property taxes, Petroleum royalties, Registration tax on share issues (stamp duty was abolished on January 1st 2006).