The following is an overview of recent Israeli tax developments affecting companies and individuals. Tax treaty with Lithuania: Commencing January 1, 2007, Israel has a new tax treaty in force with Lithuania that may be helpful if you have any investments there. Under the treaty, withholding tax rates on payments between residents of the two countries are limited, as follows: dividends - 5% withholding tax on payments to Israeli 10%-or-more corporate shareholders, 15% in other cases; interest - 10% withholding tax generally (zero for government guaranteed loans); royalties - 10%; use of equipment - 5%. Capital gains are exempt in the "source" country in certain cases, but taxed in the taxpayer's country of residence. Budget arrangements law: On January 11, 2007, the budget arrangements law for 2007 was published, having already cleared the Knesset. It includes various tax and other amendments, mostly effective from January 1. Some of the more notable amendments are summarized below. Charity: Corporate and personal taxpayers will continue to enjoy a 35% tax credit regarding contributions to approved charitable institutions. Also, the maximum amount of charitable contributions allowed for this credit has been almost doubled from NIS 2,218,000 in 2006 to NIS 4 million commencing in 2007. However, as before, the donations may not exceed 30% of taxable income for Israeli tax purposes. Also unchanged are the special provisions in Article 15A(2) of the US-Israel tax treaty, whereby a tax credit is available if up to 25% of taxable income is contributed to US "friends of" Israeli charitable institutions, with no monetary cap. Losses: If an individual closes a business or profession after ringing up losses, the losses may be offset against that person's employment income in subsequent years. This is conditional upon there being no other business or professional income in the year of offset, among other things. This applies to losses generated in 2007 onwards. Income Tax Installments: Israel has a well developed system for collecting monthly tax installments from businesses. Tax Assessing Officers are now empowered to increase tax installments during a tax year if they have reasonable grounds to believe that increased activity will result in a tax liability 20% higher or NIS 500,000 higher than in previous years. Previously, the threshold was 40% higher than in previous years. Rental income: Residential rental income of an individual is exempt if it doesn't exceed NIS 4,000 per month in 2007. In prior years, this threshold was reduced substantially and stood at NIS 3,830 in 2006. Rental income exceeding the limit reduces the exemption on a shekel-for-shekel basis, i.e. by one shekel for each shekel received over the limit. It is important to check that the lease only allows residential use of the home concerned. If a tax liability does it exist, you generally may choose between paying income tax at a rate of 30%-48% of net rental income or 10% of gross rental income, subject to detailed rules. Home purchase: The exemption from acquisition tax (mas rechisha) now applies to the first NIS 557,420 of the value of a home. The exemption was due to lapse at the end of 2006 but has been extended to the 2007 tax year. It is unclear if new residents may enjoy both this exemption and a concessionary rate of 0.5% in the period from one year before arrival to seven years after arrival in Israel. VAT offenses: A loop-hole has been plugged that previously prevented the Tax Director from re-opening VAT assessments after a criminal conviction. Program For Reducing Social Inequality and Stimulating Employment: Ambitious proposals put forward in January 2007 by the Minister of Finance, have been widely reported. Briefly, the proposals call for the gradual implementation of the following measures: (1) Higher taxable values ("shovi shimush") for employer-provided automobiles, (2) Negative income tax for lower-paid employees, (3) compulsory pension plans for employees, (4) enhanced enforcement of the minimum wage, (5) kindergarten vouchers for working mothers. It remains to be seen what finally will be legislated. Various issues arise - for example, higher taxes on employer-provided automobiles will not be popular among those affected in the private and public sectors. And the UK experience with negative income tax was just that - negative - as substantial overpayments by the UK government apparently could not be recovered. It appears this was mainly because the overpayments were based on the preceding year's income and recipients did not feel the need to report any improvement in their circumstances. So tight monitoring procedures will probably be needed. email@example.com The writer is an International Tax Partner at Ernst & Young Israel.