The Knesset has passed an amendment that will raise various tax rates in 2012.
This is pursuant to the Law for Change in the Tax Burden (Legislative
Amendments), 2011 (Book of Laws 2324, December 6, 2011).
follows peaceful but earnest demonstrations in the streets over the summer,
calling for lower living costs, and recommendations by the Trajtenberg
The measures are similar to the bill sent to the Knesset, but
they include important differences.What are the main new measures?
is an overview of the new tax measures that take effect January 1:
tax: The company tax rate on profits will be increased from 24 percent to 25%,
and future scheduled reductions are repealed.
• Personal income tax: The
top rate of income tax will rise from 45% to 48% on annual income from business
or employment over NIS 489,480 (this will be adjusted shortly for inflation).
Middle-class earners in the NIS 103,929 to NIS 168,840 annual income bracket
will pay 21% tax instead of 23%. The proposed rate of 50% for people earning NIS
1 million was not enacted. Future scheduled tax rate reductions were
• Personal National Insurance Institute (NII) payments (social
security): The upper income limit for NII contributions will be reduced to NIS
489,480 per year which will coincide with the above 48% income-tax
• Working fathers: Working fathers will receive extra “credit
points” (personal tax allowance): one point in the year of birth; two points in
each of the next two years; one point in the year the child reaches three years
old. Each point saves tax of about NIS 209. It apparently doesn’t matter if the
father isn’t married and doesn’t have custody of the children. This is not
chauvinistic because working mothers already receive extra points.
Investment income: The regular tax rate on dividends, interest, loan discount,
capital gains and land appreciation will go up 5% for individuals. The regular
rate will increase from 20% to 25%. The rate for dividends paid to major
shareholders (holding 10% or more) will increase from 25% to 30%. These rates
will generally also apply to foreign investors subject to any applicable tax
treaty. A 30% tax rate will generally also apply to sales of shares in
real-estate entities by major shareholders.
Nevertheless, a 15% tax rate
will continue for income from investments not linked to inflation or a foreign
currency if the taxpayer is not a major shareholder of the payor. Marginal rates
of tax (up to 45% plus NII) will continue to apply to interest income in various
circumstances (expense to payor, recipient is major shareholder, business
income, employment or supplier-customer relationship, etc.).
Transitional measure for savings plans, deposits and certain life policies: The
interest on savings plans and deposits that were “approved and opened” before
the amendment was published (December 6, 2011), will be taxed at the old rates
until the first withdrawal date that is not subject to an early withdrawal
• Transitional measure for certain capital gains: In general,
the new tax rates for capital gains will apply to the pro rata portion of
inflation-adjusted capital gains arising after the rate increase on January 1,
2012, on a time-apportionment (“linear”) basis – but not in the case of publicly
traded securities or units in “exempt” mutual funds (the investor pays tax, not
the fund).‘Virtual sales’
• Investors in publicly traded securities and
“exempt” mutual funds may elect in December 2011 to sell and repurchase them in
an off-market transaction at the old (lower) tax rates; this is sometimes known
as a “virtual sale” or even “bed and breakfast.”
• The deemed sale price
is the closing price at the end of the day in the case of securities and at the
end of the previous day for exempt mutual-fund units. Not all the portfolio
needs to be sold, but the virtual-sale election can only be for all the
securities or units of a particular type (e.g., of a particular company), and
they must all be repurchased. Therefore, you need to have the cash from other
sources to pay the tax arising on the virtual sale.
• Going forward, the
virtual-sale date and price will be treated as the purchase date and cost of
those securities or units for Israeli tax purposes.
• The virtual sale
must be done via a stock-exchange member, which the Israel Tax Authority (ITA)
interprets (in an announcement dated December 7, 2011) to mean a member of the
Tel Aviv Stock Exchange; they must withhold the capital-gains tax and remit it
to the ITA. Pre-2005 capital gains on foreign securities are taxed at 35%, but
it is unclear if such members have the software to collect this tax.
The ITA announcement goes on to clarify that the virtual- sale election is
available to individuals and companies regarding shares and bonds publicly
traded in Israel or abroad, “exempt” mutual-fund units (presumably Israeli only)
and Israeli government bonds.
• The ITA announcement says the
virtual-sale election is not available to securities dealers, nor employees or
service providers who received their securities in consideration for services if
they are subject to a reduced rate of tax by law. The basis for saying this is
unclear if the appropriate tax was paid upon receipt of the securities. Holders
of stock options on the “capital track” (still 25% tax) should seek appropriate
• If foreign mutual-fund units are involved, or a TASE exchange
member is not used, or if you don’t want to repurchase everything you sold
(e.g., to pay the tax arising), consider an actual sale rather than a virtual
sale.Other detailed measures
• Withholding tax hastily introduced on
March 31, 2011, on real-estate deals at rates of 7.5%-15% will be dropped on
April 1, 2013. Proposals to increase these rates were not enacted.
a sale of assets acquired before April 1, 1961, by individuals, the rate of
capital-gains tax or land-appreciation tax will rise according to a prescribed
• Certain pensioners will enjoy a larger exemption for interest
on deposits or savings plans.Comments and tips
• Consult advisers:
Holders of public securities of all types should consult their investment and
tax advisers now about virtual or actual sales in 2011.
• Take dividends
in 2011: Shareholders of public and private companies in Israel and abroad
should consider taking a dividend from their company before the end of the year,
to cash in on the old (lower) tax rates. Suppose a company you control
accumulated a profit after tax of NIS 1m. every year for the last 10 years. If
the company pays you a dividend of NIS 10m. in 2011, the Israeli tax will be NIS
2.5m. (25% of all those years’ profits). If you wait until 2012 to receive the
dividend, the tax will rise to NIS 3m. (30% of all those years’
• Accelerate other income, postpone expenses: Consider also
accelerating interest payments and capital gains where legitimately possible
into 2011. Consider also postponing expenses until 2012.
investors: Foreign (non-Israeli resident) investors who acquired public or
private Israeli securities after January 1, 2009, are generally exempt from
Israeli capital-gains tax, so virtual sales are probably not for them. No
exemption applies in the case of investments related to Israeli real estate or
by a permanent establishment (i.e., trading) in Israel. Foreign investors should
check the provisions of any tax treaty between Israel and their country of
residence and take specialist advice.
• Company versus freelancer:
Operating as a company may still be preferable to operating as a self-employed
freelancer. Tax rates on distributed profits of both will approach 48%, but
there may still be NII savings on dividends, albeit up to a lower-income limit.
And companies confer limited liability.
• Business tax breaks: Israeli
tax breaks remain unchanged for “preferred enterprises” and “privileged
enterprises” in industry, technology or tourism, anywhere in Israel, pursuant to
the Law of Encouragement of Capital Investments, 1959. These can result in
company tax of only 10%-15% and dividend withholding tax of only 15% if certain
conditions are met.
• Immigrants: Immigrants will continue to enjoy an
Israeli tax exemption of up to 10 years on foreign-source income and
gains..As always, consult experienced tax advisers in each country at an
early stage in specific cases.[email protected]
Leon Harris is a certified
public accountant and tax specialist at Harris Consulting & Tax Ltd.