Under the recent Amendment 147 to the Income Tax Ordinance, previously legislated reductions in regular Israeli company tax rates have been further improved, and we can look forward to a rate as low as 25% by 2010.
In addition, the standard rate of dividend withholding tax will be reduced in 2006 from 25% to 20% for shareholders who hold less than 10% of a company. The 25% dividend withholding tax rate continues for 10%-or-more "material shareholders."
The following table summarizes these changes.
Regular Israeli tax rates for companies
Under 10% shareholders 10%-or-more shareholders
Year Company Dividend Combined Dividend Combined tax ratewithholding Israeli withholding Israeli taxes
tax taxes tax
2005 34% 25% 50.5% 25% 50.5%
2006 31% 20% 44.8% 25% 48.25%
2007 29% 20% 43.2% 25% 46.75%
2008 27% 20% 41.6% 25% 45.25%
2009 26% 20% 40.8% 25% 44.5%
2010 and 25% 20% 40% 25% 43.75%
The 43.75% rate in 2010 for profits by companies to their 10%-or-more shareholders is intentionally similar to the upper tax rate of 44% planned then for employed and self-employed individuals.
What tips can we offer? First, it may be worth postponing the accrual of income, where possible, until the next tax year.
Furthermore, even lower tax rates apply to "Privileged Enterprises" and "Approved Enterprises" in the industrial, technology and hotel. This is according to a separate amendment passed on March 29, 2005 to the Law for The Encouragement of Capital Investments, 1959, which revamps the Israeli tax incentives for future industrial and hotel investments.
Consequently, companies in industry or tourism can now choose between:
â€¢ Tax holiday package for a "Privileged Enterprise": Tax exemption applies to undistributed profits for 2-15 years depending on location and foreign ownership. Low company tax rates (10%-25%) apply to distributed and subsequent profits. The total period of tax benefits is 7-15 years.
â€¢ Grant/low tax package for an "Approved Enterprise": Fixed asset grants (up to 32%) and low company tax rates (0% to 25%) for 7-15 years.
Dividend withholding tax also applies at a rate of 4% or 15%, depending on the package selected.
The resulting combined Israeli taxes may now range from 0% to 36.25% without waiting for the year 2010.
The tax holiday package can be elected for a "Privileged Enterprise" if certain conditions are met, without needing to obtain approval. This reduction in bureaucracy will be welcome.
In particular, a minimum qualifying investment must be made in fixed assets in industry or in a hotel in Israel - only NIS 300,000 ($66,000 approx) over three years for new start-ups. In addition, Privileged Enterprises and Approved Enterprises must be competitive and not overly dependent on the market of any one country - in practice, this translates into a 25% export requirement in all industries except biotechnology and nanotechnology.
There is an optional advance ruling procedure if investors wish to check eligibility for Privileged Enterprise benefits.
Large investments (NIS 600 million-900m. = $137m.-206m. approx.) in Privileged Enterprises by large groups in certain areas of Israel may qualify for an exemption from company tax for both retained and distributed profits as well as an exemption from dividend withholding tax. This only applies to groups with annual revenues exceeding NIS 13billion-20b. ($3b.-4.6b. approx.)
Taxpayers may claim Privileged Enterprise status for new and expanded enterprises with a year of the election of 2004 or thereafter, unless the Investment Center granted Approved Enterprise status by December 31, 2004. Companies that have not yet activated an Approved Enterprise under the old law should reconsider their options.
The writer is an international Tax Partner at Ernst & Young Israel