On Yom Kippur we are reminded that penitence, prayer and charity may avert the
severe decree. The Israeli tax law has recently been amended to encourage giving
Higher donation limits
This tax year you can donate more and
get an Israeli tax break. Section 46 of the Income Tax Ordinance allows Israeli
and foreign individuals a 35 percent tax credit if they donate at least NIS 180
to a national fund or a public institution (charity) approved by the Finance
Ministry and the Knesset Finance Committee. In the case of companies, the tax
credit is equal to the company tax rate, currently 25%.
limit for Israeli tax purposes is the lower of: (1) NIS 9 million in 2012 (up
from NIS 4,351,000 in 2011); or (2) 30% of taxable income for the year. Unused
donations can be carried forward three tax years.
It is unclear if the
NIS 180 minimum applies to each donation or to total donations in the tax
year. The Israeli tax year is the year ended December 31.
example, if an individual makes a donation of NIS 1,000 to an Israeli charity
that has been approved as mentioned above under Section 46, the Israeli tax
credit should reduce the tax bill by NIS 350. Keep the receipt from the charity.
The tax credit is claimed on the taxpayer’s Israeli tax return, but see
If the taxpayer claimed an R&D participation deduction under
Section 20A of the Income Tax Ordinance, total participations and donations are
limited to 50% of taxable income.
New charitable credit procedure for
On July 11, the Israel Tax Authority (ITA) announced a new
procedure for giving employees their Section 46 tax credit month by month
against the tax on their salary (Operating Instructions 7/2012). According to an
ITA press release, this follows an instruction on July 14, 2011, from the Prime
Minister Binyamin Netanyahu, to government ministries to make proposals for
promoting philanthropy in Israel.
The new procedure s voluntary for
employers who apply to their tax office directly or via an accountant/tax
adviser who is connected to the “Shaam” network of the ITA. Various conditions
must be met, as detailed in the ITA pronouncement.
In particular, the
employer must have employed at least 50 employees on average in the 12 months
preceding the employer’s application to apply the procedure. The credit is
granted via the payroll. Employers must receive and hold the original
receipts from the charity for donations made by the employees and must check
that the charity is approved under Section 46 (via their accountant/tax adviser
or via the ITA website: www.misim.gov.il).
The employer must be compliant
with the bookkeeping and tax-reporting requirements and must keep detailed
records of employee donations. The employer must note on the original donation
receipts that the tax credit has been given, using a stamp for this purpose.
Maximum donations under this procedure are NIS 25,000 per employee, but they are
subject to the Section 46 limits as well.
Comments on the new procedure
This procedure speeds up the tax-credit procedure for employees and may avoid
the need for them to file an annual tax return and wait for a tax refund some
months after the end of the tax year. But it creates additional bureaucracy for
Furthermore, the employer needs to employ more than 50
employees, which rules out employees of small- to medium-sized firms. It is
unclear what happens if the employer has less than 50 employees but is part of a
larger corporate group based in Israel or abroad.
US citizens resident in
Special rules apply to US citizens resident in Israel under the Israel-US
tax treaty. To get both a US tax deduction and an Israeli tax credit not
exceeding 25% of Israeli source income, they should donate to any organization
created or organized under the laws of Israel (and recognized under Section 46
of the Israeli Income Tax Ordinance), if and to the extent such contributions
would have been treated as charitable contributions had such organization been
created or organized under the laws of the United States.
US-source income, they may claim a US deduction and Israeli tax credit for a
donation not exceeding 25% of US-source income to any organization constituting
a charitable organization for the purpose of the revenue laws of the US, if and
to the extent such contributions would have been treated as charitable
contributions had such organization been a charitable organization for the
purpose of the income-tax laws of Israel.
These are often referred to as
“friends of Israel” organizations; for example, American Friends of Hebrew
As always, consult experienced tax advisers in each country
at an early stage in specific cases.
Leon Harris is a
certified public accountant and tax specialist at Harris Consulting & Tax