In some countries, including the US and the UK, virtually everyone has to file
an annual tax return. Here in Israel, to make things easier for some, not
everybody has to do so. Here is an overview of the requirements for the 2010 tax
year, namely the year ended December 31, 2010.
When is the filing
The filing deadline is May 31 for online filers and for businesses
required to keep double-entry books and April 30 for other
Time extensions for filing can be requested from the Israel
Tax Authority if you have a good reason.
Alternatively, most accounting
firms are allowed to spread out the filing of their clients’ tax returns over a
longer period, without providing reasons, according to a special arrangement
between the ITA and the Institute of Certified Public Accountants in
Israel.Who must file online?
Online filings are required from you if you
are required to file a tax return (see below) if any of the following also apply
in the year: if you have income from a business, employment, agriculture; if you
sold a nonexempt Israeli real-estate interest and didn’t pay tax at the maximum
rate; if you are a 10%-or-more shareholder in a controlled foreign company (see
below); if you carried out a reportable tax planning act (see below); or if the
ITA requested it. Even if you are required to file online, you also must still
file old-fashioned way (on paper).
Notwithstanding the above, no online
filing is needed in the following cases: (1) if your income from a business,
employment and agriculture didn’t exceed NIS 76,710 – nor did your spouse’s
income exceed that amount, nor did your joint income exceed NIS 153,420; or (2)
if you and your spouse have reached retirement age (generally 67 for men, 64 for
women); or (3) you are a 10%-or-more shareholder in an Israeli company; or (4)
you claimed a “negative income tax” benefit.Who has to file a tax
The rules are complex. In principle, Israeli resident individuals over
18 must file a tax return unless they are eligible for a filing exemption. These
rules apply even if you don’t need to file online.Who is exempt from
Residents will be EXEMPT from filing a tax return if all their income in
the tax year was salary income or rental income, or foreign income, foreign
pension income, interest income, securities income, or other income or a
combination thereof – but only if a number of conditions are met, as summarized
below. (Certain people must always file an annual tax return as described in the
• New and senior returning residents are exempt from
Israeli tax and reporting obligations regarding non-Israeli source income and
gains for 10 years after becoming Israeli resident. (Senior returning residents
are individuals who lived abroad at least five years and returned to reside
Israel in 2007-09, or lived abroad 10 years if they returned to Israel after
• Salary income may fall within the filing exemption if it did not exceed
NIS 613,000 in 2010 (for each spouse) and the required tax was withheld at
In addition, such “salary income” should be one of the following:
employment income; pension paid by an employer or a provident fund; severance
pay paid upon death or leaving an employer; a lump sum paid instead of a
pension; income realized by an employee from shares or share options, pursuant
to a plan approved under Section 102 of the Income Tax Ordinance (regardless of
which alternative was adopted: capital gain or salary income).
If you had
more than one employer in the year, the tax withholding needs to be according to
instructions obtained from the local tax office.
• Rental income may fall
within the filing exemption if it was from renting out residential accommodation
in Israel; the required tax was paid; it did not exceed NIS 318,000 in 2010 (for
each spouse); 10% tax was paid thereon by January 30, 2011; and it and no
expenses, losses, exemption or credit was claimed.
• Foreign income may
fall within the filing exemption if it was accrued or derived outside Israel or
if it relates to foreign securities or Israeli company securities publicly
traded on an exchange outside Israel; it did not exceed NIS 318,000 in 2010 (for
each spouse); and tax was paid on account unless an exemption
For example, new and senior returning residents (who lived
abroad five or 10 years, depending on the date they returned) enjoy a 10-year
tax and reporting exemption for foreign income and gains.
pension income may fall within the filing exemption if any tax due has been paid
and it did not exceed NIS 318,000 in 2010 (for each spouse). New and senior
returning residents (who lived abroad five or 10 years) enjoy a 10-year tax and
reporting exemption for foreignsource income, including foreign
• Interest income may fall within the filing exemption if it
relates to interest, discount income, inflation indexation or exchange gains
that are nonbusiness in nature and accrued or derived in Israel from a savings
plan, deposit, provident fund, publicly traded bond, State of Israel bond or
makam (short-term bond).
The filing exemption only applies if the income
is exempt or any tax due was withheld; the income must not exceed in total NIS
613,000 in 2010 if it was taxable.
Where tax applies, it is due at rates
of 15% (instruments unlinked to the rate of inflation or an exchange rate), or
20% (linked instruments), or up to 45% (in 2010, if interest expenses are
claimed; or the lender holds 10% or more of any means of control of the
borrower, an employee or service provider, or is related to the
• Securities income may fall within the filing exemption if it
relates to the sale of securities traded on a stock exchange in Israel or
abroad, or a sale of makam short-term bonds; it is exempt or any tax due was
withheld; and it must not exceed in total NIS 1,752,000 in 2010 if it was
• Other income may fall within the filing exemption if it did
not exceed NIS 318,000 in 2010 and was any of the following: income from which
46% tax was withheld even if you are eligible for a lower rate, or at least 30%
tax was withheld if so approved by the ITA (to get any lower rate, you must file
a tax return); income that is exempt from tax, provided it is not business,
professional or salary income.
Who must always file?
above, Israeli resident individuals must generally file an annual personal tax
return if they fall into any of the following categories:
1) Holders of a 10% or
more interest in a privately held entity, directly or indirectly.
does not apply to new and senior returning residents for 10 years, as outlined
2) A married couple not entitled to claim separate tax
calculations; for example, because their income is not from independent
3) If income includes severance pay upon leaving an employment
or death, or a pension lump sum that the ITA allowed to be spread over more than
4) Sports persons.
5) An individual who was required to
file a tax return in the previous year, unless this was because he or she was a
residential property landlord.
6) If the individual, or the individual’s
spouse or child under 18, held at any time in the year any of the following: any
right in a foreign-resident entity that is not publicly traded on a stock
exchange; or other foreign assets if their value on any day in the year was NIS
1,768,000 or more; an account at one or more foreign banking institutions if the
total balance in all foreign banking institutions on any day in the year was NIS
1,768,000 or more. This does not apply to new and senior returning residents for
7) If the individual conducted a taxable real-estate
transaction (directly or via a real-estate entity) in the year unless tax was
paid at the maximum rate, or if the tax was spread over more than one
8) With regard to trusts, annual tax returns are required from: the
trustee of an Israeli Residents’ Trust or an Israeli Residents’ Testamentary
Trust, the latter having at least one Israeli resident beneficiary (on Form
1327); but if a settlor or beneficiary are elected to be “assessable or
chargeable,” or a “representative settlor/ beneficiary,” they file the return
instead of the trustee (on Form 1301); the trustee of a trust that has income or
an asset in Israel (Form 1327).
The finance minister is empowered to
exempt trustees from filing annual tax returns if all their income is exempt
from Israeli tax. In various other cases it may be enough to file a trust notice
form instead of a tax return. Trusts are complex and specific advice is strongly
recommended in each case.
9) Holders of 10% or more of a
passivecontrolled foreign corporation (CFC) or a foreign professional
corporation (FPC), as defined in the tax law. This reporting requirement shall
not apply to new and senior returning residents for 10 years, as outlined
10) Anyone else asked to file a tax return by an assessing
Taxpayers who are not in employment or business, who do not fall
within the two reporting requirements listed in No. 6 above and had
annual income below NIS 16,605 in 2010 will not be subject to file an annual tax
return. This will benefit a number of low-income earners.
reporting requirements apply to anyone who conducts a prescribed reportable
tax-planning act (also known as aggressive tax planning).Do children
have to file an Israeli tax return?
Israeli resident children who were under 18
at the beginning of 2010 must file an annual tax return if they had taxable
income of NIS 73,460 or more in the year.
When do foreign residents have
to file an Israeli tax return? In principle, foreign resident individuals who
derived taxable Israeli source income in the year must file an annual Israeli
tax return. However, they may be EXEMPT from filing a tax return if the required
tax was withheld and the income is one of the following: a business or
profession conducted in Israel for no more than 180 days in the year: salary,
pension, annuity, interest, dividend, rent, royalties.
Israeli banks are required to withhold tax from most payments – typically 25%.
It is necessary to apply upfront to the Israeli payor’s tax office to apply any
more beneficial provisions in a bilateral tax treaty or the domestic Israel law.
No tax is withheld on patach foreign- currency bank deposits for five to 20
years at Israeli banks if the appropriate bank forms are filled out when
remitting funds to Israel.
Which companies have to file? Briefly, any
entity that has income that is taxable in Israel must file an annual Israeli tax
return, accompanied by audited financial statements.
As always, consult
experienced tax advisors in each country at an early stage in specific
Leon Harris is an international tax specialist at
Harris Consulting & Tax Ltd.