In some countries, such as the US or 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 2005 tax year, namely the year ended December 31, 2005. When is the filing deadline for the 2005 tax return? The general deadline for individuals and for businesses required to keep double entry books is May 31, 2006. In most other years, non-business taxpayers are required to file by April 30, but the 2005 return deadline was extended to May 31, 2006, according to an announcement of the Israel Tax Authority. Additional time extensions can be requested from the Israeli 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 Israeli Tax Authority and the Institute of Certified Public Accountants in Israel. Who has to file a tax return? The rules are complex. In principle, Israeli resident individuals aged over 18 must file a tax return unless they are eligible for a filing exemption. Resident individuals may therefore be EXEMPT from filing a tax return if all their income in the tax year was salary 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. "Salary income" may fall within the filing exemption if it did not exceed NIS 539,000 in 2005 (for each spouse) and the required tax was withheld at source. In addition, such "salary income" should be one of the following: income paid by an employer; pension paid by an employer or a provident fund; severance pay paid upon death or leaving an employer; a lump sum paid instead of a pension; income of an employee from shares or share options pursuant to a plan approved under Section 102 of the Income Tax Ordinance (regardless of which alternative was adopted - capital gain or salary income). If you had more than one employer in the year, the tax withholdings need 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 280,000 in 2005 (for each spouse); and no expenses, losses or credit was claimed. Foreign income may fall within the filing exemption if: it relates to foreign securities or Israeli company securities publicly traded on an exchange outside Israel; it did not exceed NIS 280,000 in 2005 (for each spouse); and tax was paid on account attached to a short tax return, unless an exemption applied. For example, new and returning residents enjoy a five-year exemption for foreign source dividends, interest, rent and royalties and a 10-year exemption for foreign capital gains, but these exemptions only apply to income and gains from pre-arrival assets. Short tax returns are special forms obtainable from your tax office and filed at a local bank or post office accompanied by the requisite tax payment (usually 15% for foreign securities in 2005). Foreign pension income may fall within the filing exemption if: any tax due has been paid; and it did not exceed NIS 280,000 in 2005 (for each spouse). Interest income may fall within the filing exemption if: it relates to interest, discount, inflation indexation or exchange gains; it was accrued or derived in Israel from a savings plan, deposit, provident fund, publicly traded bond, State of Israel bond or "Makam" short-term bond; it is exempt or any tax due was withheld; and it did not exceed in total NIS 534,000 in 2005 if it was taxable. Securities income may fall within the filing exemption if: it relates to the sale of securities traded on the stock exchange, or a sale of "Makam" short-term bonds; it is exempt or any tax due was withheld; and it did not exceed in total NIS 1,540,000 in 2005 if it was taxable. Other income may fall within the filing exemption if it did not exceed NIS 280,000 in 2005 and was any of the following: income from which 49% tax was withheld even if you are eligible for a lower rate - or at least 30% tax was withheld if so approved by the Tax Authority (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. Notwithstanding the above, Israeli resident individuals must generally file an annual personal tax return if they fall into any of the following categories: * Holders of a 10% or more interest in a privately held corporation, directly or indirectly. This does not apply in the first or second year after the taxpayer became an Israeli resident if the corporation is a foreign corporation formed when the taxpayer or his spouse were foreign residents, provided no other Israeli residents are 10% shareholders in it and the couple do not hold 10% in any Israeli resident company. * A married couple not entitled to claim separate tax calculations e.g. because their income is not from independent sources. * If income includes severance pay or death benefit or a pension lump sum that the Tax Authority allowed to be spread over more than one year. * Sportsmen. * An individual that was required to file a tax return in the previous year. * If the individual conducted a taxable real estate transaction (directly or via a real estate entity) in the year unless tax was paid at the maximum rate. * If the taxpayer settled a trust in the tax year or received one or more distributions totaling at least NIS 100,000 (in 2005) from a trust. * Holders of 10% or more of a passive "controlled foreign corporation" or a "foreign professional corporation" as defined in the tax law. * Holders of any interest in a foreign entity that is not publicly traded on any day in the year - including the holdings of your spouse and children under 18. * Holders of foreign bank accounts or foreign assets worth at least NIS 1,554,000 on any day in the 2005 tax year - including the holdings of your spouse and children under 18. However, the last two reporting requirements do NOT apply if: (a) the taxpayer and his spouse and children all became new residents or returning residents within the last five tax years. This may take many retired, new immigrants out of the tax reporting net if they live off passive income and/or salary within the abovementioned limit, unless they are required to report for other reasons listed above. The last two reporting requirements also do not apply to taxpayers not in employment or business if their annual income did not exceed NIS 14,418 in 2005. This will benefit a number of low income earners. Do children have to file an Israeli tax return? Israeli resident children who were aged under 18 at the beginning of 2005 must file an annual tax return if they had taxable income of NIS 58,470 or more in the year. When do foreign residents have to file an Israeli tax return? 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, the Israeli banks are required to withhold tax from most payments to foreign residents at rates of up to 25% - 31%. It is necessary to apply upfront to the Tax Authority 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 the Israeli banks if the appropriate forms are filled out when remitting funds to Israel. Which companies have to file tax returns? Briefly, any entity that has income that is taxable in Israel must file an annual Israeli tax return, accompanied by audited financial statements. The author is an International Tax Partner at Ernst & Young Israel.