Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.
By LEON HARRISCalculating taxes(photo credit: INGIMAGE)
If you conduct business activities physically in Israel, or operate in Israel via an agent who can commit you, you are probably doing taxable business in Israel. Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.Business tax ratesFor 2019, regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, and 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty.Preferred income derived by preferred industrial and tech enterprises is liable to company tax of 6%-7.5% in development area A, and 6%-16% elsewhere in Israel, without time limit. Dividends are taxed at 4%-20%. The resulting combined tax burden on distributed profits is 9.76%-32.8%, subject to any tax treaty.Salaries and business profits of freelancers are subject to income tax at rates up to 50%.The VAT standard rate is 17%.International agreementsIsrael has income tax treaties with 57 countries.Israel is a party to a FATCA Intergovernmental Agreement with the USA, and the OECD Common Reporting Standard. Remittances to and from Israel are subject to tax compliance checks by the Israeli banks.Israel has free trade agreements with Canada, Colombia (draft), Egypt, the European Union, the European Free Trade Association, Jordan, the South American trade bloc Mercosur, Mexico, Turkey and the USA.National Insurance (Social Security) National Insurance (Bituach Leumi) rates include:• Resident employees: 3.5%-12%• Employers of resident employees: 3.45%-7.5%• Freelancers: 5.97%- 17.83% (52% is tax deductible)• Not working: 9.61%-12% (52% is tax deductible)• Payment if no income: NIS 175 per monthThe above is subject to any applicable social security (“totalization”) treaty.OlimNew residents and senior returning residents (lived abroad 10 years) who took up Israeli fiscal residence from January 1, 2007, are generally exempt from Israeli tax on non-Israeli source income for 10 years. The exemption does NOT apply to income for work done in Israel for a foreign firm.Olim also enjoy an exemption for five-20 years regarding interest on patach foreign-currency time deposits of three months or more at an Israeli bank.On Israeli-source income, new immigrants receive extra personal credits which reduce taxes by NIS 218-NIS 654 per month for three and a half years.Foreign expatriates in IsraelIsrael’s tax treaties sometimes grant an income tax exemption for employees resident in those countries but working in Israel.Otherwise, non-residents working lawfully in Israel, in their field of expertise for an employer as “foreign experts,” and who are paid at least NIS 13,300 per month, may enjoy a deduction for accommodation expenses and a daily living expenses deduction of up to NIS 330 for up to 12 months, provided they are invited by an Israeli employer that is not an employment agency. But employers may be subject to a foreign workers’ payroll levy of up to 20%Tax registrationsA business must register for Israeli tax purposes immediately after the business activity starts, even before revenues are expected. If you wait until after the year-end, you will probably be fined.Pay tax as you goEvery year, a business or investor will receive demands to pay VAT, payroll taxes, income tax, and tax installments on profits (mikdamot).Essential paperworkThere are strict bookkeeping and customer billing rules. Approved Israeli software or printed books must be used.Employees and freelancersOnce employees have worked three-to-six months at a firm, they are entitled to mandatory pension and severance funding. The minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% toward pension funding and 6% toward severance funding. The employee pays 6% toward pension funding.Real estateHome rental income of up to NIS 5,090 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, flat rate tax of 10%. Companies pay tax at regular rates.Real estate acquisition tax rates range up to 10% generally. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,696,750 may be exempt from acquisition tax.The gain from the sale of an only home in Israel by a resident individual may be exempt from tax provided its value does not exceed NIS 4,508,000. Otherwise, real estate sales are generally taxed at 25%-50%.SecuritiesPassive income derived by individuals from securities are generally taxed at rates of 25%-33%. Traders and companies pay tax at regular rates.Estates, inheritances and gifts There is no tax in Israel on estate or inheritances. There is also no tax on gifts to Israeli residents.As always, consult experienced tax advisers in each country at an early stage in each specific case.The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. Leon@h2cat.com
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