Your taxes: Withholding taxes on overseas remittances

Until now, Israeli banks have been obliged to withhold tax, generally at a rate of 25 percent.

January 7, 2014 23:20
1 minute read.
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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.

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An exemption 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.

What 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 that payment.

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.

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