Your taxes: Tax rates for 2014

People are often surprised to learn that Israeli tax rates are not the highest in the world.

By LEON HARRIS
Money Shekels bills 521 (photo credit: Courtesy)
Money Shekels bills 521
(photo credit: Courtesy)
People are often surprised to learn that Israeli tax rates are not the highest in the world. According to the OECD, Israeli tax revenues amounted to 31.6 percent of GDP in 2012, which was better than the OECD average of 34.6%. Here are the Israeli tax rates for the 2014 tax year (calendar year).
Individuals
On active (earned) income from employment or a business, resident and nonresident individuals in Israel pay income tax at graduated rates ranging from 10% to 50%.
The annual active income brackets for 2014 are: 10% on the first NIS 63,360; 14% on NIS 63,361 to NIS 108,120; 21% on NIS 108,121 to NIS 168,000; 31% on NIS 168,001 to NIS 240,000; 34% on NIS 240,001 NIS 501,960; 48% on NIS 501,960 to NIS 811,560. For total taxable income and capital gains above NIS 811,560 in 2014, a 2% surtax applies, making the maximum income-tax rate 50%.
Nonresidents may be protected from Israeli tax by any applicable income-tax treaty; this should be checked out.
Flat rates ranging from 25% to 32% apply to most passive income from dividends, interest and capital gains.
On other passive income such as rental income, there are graduated rates ranging from 31% to 50%, but various exceptions exist. Israeli residential rental income of up to NIS 5,080 per month per person/couple is exempt.
National Insurance Institute
Individuals also have National Insurance Institute (social security) obligations. In the case of employment income of resident employees, the employee pays up to 12% and the employer pays up to 6.75%. In the case of employment income of nonresident employees, subject to any social-security treaty, the employee pays up to 0.87% and the employer pays up to 2.12%. National Insurance Institute coverage is limited, so private medical coverage is needed.
In the case of business income, self-employed (independent contractors) resident individuals make National Insurance Institute payments at rates ranging up to 16.23%, but 52% of the national insurance paid is deductible for income-tax purposes.
In the case of nonwork income, resident individuals make National Insurance Institute payments at rates ranging up to 12%, but 52% of the national insurance paid is deductible for income-tax purposes. There is no national insurance due on capital gains or most dividends.
No national insurance is due on monthly income above NIS 43,240, which equates to NIS 518,880 per year.
Combined tax hit: individuals
The maximum combined income-tax and National Insurance Institute rate is 48% to 50% above NIS 518,880.
But there is a narrow annual income bracket of NIS 501,960 to NIS 518,880 where the combined rate can reach about 60%.
Value-added tax
The standard Israeli VAT rate is currently 18%. Businesses with annual revenues below NIS 79,482 in 2014 are usually “exempt dealers,” except in certain professions. Exempt dealers don’t need to charge customers any VAT and cannot recover VAT on their expenses.
Company tax
The standard rate of company tax in Israel in 2014 is 26.5%. Dividends are taxed at rates ranging from 25% to 32%, resulting in a combined tax burden on distributed corporate profits of 45% to 50%. This is subject to any tax treaty in the case of foreign companies and investors.
Preferred enterprises in industry and technology pay company tax of 9% in development area A and 16% elsewhere, and the withholding tax on their dividends is 20% in 2014. The resulting combined tax burden on distributed tax-break profits is therefore 27.2% to 32.8% subject to any tax treaty in the case of foreign investors.
Real estate
Buying Israeli real estate: Acquisition-tax rates on Israeli property are 0% to 10% for an only home; 5% to 10% for other homes.
Foreign investors not eligible for the lower single-home rates unless they are certified homeless by the tax authority of their home country, or they become Israeli residents within two years (the old 0.5% rate for olim has been repealed)
Selling Israeli real estate: On January 1, 2014, the tax system for Israeli property sales changed, and exemptions will be scaled back. The tax rate for individuals is generally 25%. For Israeli home sales an exemption is available if various conditions are met, including: (1) the sale is the seller’s only home (the seller can disregard a one-third interest and certain inheritances); (2) the exemption will be possible once every 18 months, for a home held for 18 months; (3) the seller is an Israeli resident (or certified homeless in the foreign country of residence); (4) there will be no exemption to the extent the sales value exceeds NIS 4.5 million.
For a home bought before 2014, a transitional rule will apply to the sale of two homes in 2014-2017. This will enable an exemption on the pre-2014 pro rata portion of gain that would have been exempt under the old once-every- four-year rule, on up to NIS 4.5m. of sale value.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.