The rules are complex. In principle, Israeli resident individuals over 18 must file a tax return unless they are eligible for a filing exemption.
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 2014 tax year, which ended December 31, 2014.
For individuals, the filing deadline is June 30, 2015 for online filers and May 31, 2015 for others. For companies, in principle, the deadline is May 31, 2015.
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.
Online filings are required if you must file a tax return (see below) and you have income from a business, profession or employment. Even if you are required to file online, you must still file the return online as well as the old-fashioned way (on paper).
However, no online filing is needed in the following cases: (1) if you and your spouse have reached retirement age (generally 67 for men, 64 for women), or (2) if your income from a business, employment and agriculture didn’t exceed NIS 81,250 nor did your spouse’s income exceed that amount, nor did your joint income exceed NIS 162,490. Nevertheless, an online return is required if you are a 10%-or-more shareholder in a company, or if you claimed “negative income tax” benefit.
Who has to file a return?
The rules are complex. In principle, the following must file an annual tax return: Israeli resident individuals over 18 must file a tax return unless they are eligible for a filing exemption; So must most trusts with an Israeli connection and beneficiaries who received a distribution in the tax year.
Who is exempt?
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 next paragraph).
• New and senior returning residents who arrived in 2007 or later (“olim”) are exempt from Israeli tax and reporting obligations regarding non-Israeli source income and gains for 10 years after becoming Israeli residents. (Senior returning residents are individuals who lived abroad at least five years and returned to reside in Israel in 2007-09, or lived abroad 10 years if they returned to Israel after 2009.)
• Salary income may fall within the filing exemption if it did not exceed NIS 649,000 in 2014 (for each spouse) and the required tax was withheld at source. 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 337,000 in 2014 (for each spouse) and 10 percent tax was paid thereon.
• 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 337,000 in 2014 (for each spouse); and tax was paid on account unless an exemption applies. Olim - see above.
• Foreign pension income may fall within the filing exemption if any tax due has been paid and it did not exceed NIS 337,000 in 2014 (for each spouse). Olim - see above.
• Interest income may fall within the filing exemption if it is non-business in nature and any tax due was withheld; the income must not exceed in total NIS 643,000 in 2014 if it was taxable.
• 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 1811,560 in 2014 if it was taxable.
• Other income may fall within the filing exemption if it did not exceed NIS 337,000 in 2014 and was any of the following: income from which 48% 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?
Notwithstanding the 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. For olim – see above;
2) If income includes severance pay, or a pension lump sum that the ITA allowed to be spread over more than one year;
3) Sports persons;
4) 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;
5) 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 1,872,000 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 1,872,000 or more. For olim – see above;
6) Anyone who sold Israeli real estate rights;
7) Any couple that made NIS 811,560 in the year;
8) Anyone who carried a reportable (i.e. listed aggressive) transaction;
9) Anyone else asked to file a tax return by an assessing officer.
Taxpayers who are not in employment or business, who do not fall within the two reporting requirements listed in No. 5 above and had an annual income below NIS 17,658 in 2014 will not be subject to file an annual tax return.
Additional reporting requirements apply to anyone who conducts a prescribed reportable tax-planning act (also known as aggressive tax planning).
Do children have to file?
Israeli resident children who were under 18 at the beginning of 2014 must file an annual tax return if they had taxable income of NIS 78,830 or more in the year.
When do foreign residents have to file?
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. In practice, 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 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 advisers in each country at an early stage in specific cases.
firstname.lastname@example.org Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.