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 to charity.

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%.

The donation 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.

For 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 below.

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 certain employees

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 the employer.

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 Israel

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.

As for 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 University.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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