Israel has just improved its withholding- tax system for foreign firms that
supply services to Israelis.
Until now, Israeli banks have been obliged
to withhold tax, generally at a rate of 25 percent, from most overseas
remittances unless the remittances relate to imported goods.
or a reduced withholding rate may be obtained from the Israel Tax Authority in
some cases; for example, when a tax treaty applies or when the payments are for
services that are rendered entirely abroad.
The result can be an
unpleasant surprise for foreign businesses supplying services to Israelis; they
only get 75% of the money they were expecting.
It’s not too bad if they
can credit the 25% Israeli tax against tax in their home country. But often they
can’t; 25% tax on their revenues is usually far more than 25% of their profits.
So they pay more in Israeli tax than they can credit back home.
happens if the Israeli payor or his bank don’t withhold the 25% tax? If the
Israeli payor is in business, that payor may be denied an expense deduction for
In recent years, it became easier to beat the system.
Credit-card payments and PayPal payments were one way. More recently, online
banking gave another way. And payments of $60,000 per year are usually allowed
out of Israel without withholding tax if the service providers, including
agents, declare that the services were rendered entirely abroad by service
providers abroad. But it wasn’t clear whether this $50,000 limit applied to the
payor or to the recipient.
Finally, the ITA succumbed to good sense. On
December 25, it announced that in 2014, no tax need be withheld from payments of
up to $250,000 per year for each recipient.
In practice this means that
foreign residents can receive $250,000 per year from Israeli residents for
services rendered entirely abroad, without 25% tax being withheld. This should
be good for cross-border service activity.
As always, consult experienced
tax advisers in each country at an early stage in specific cases.