A number of important changes to payments we make into the National Insurance Institute (Bituach Leumi) system, or social security, took effect at the beginning of 2008. The upper income limit for national insurance payments has been raised from NIS 35,760 to NIS 36,760 per month. Minor changes have been made to the national insurance rates. In the case of residents, national insurance contributions are payable at rates ranging up to: employers, 5.43 percent; employees, 12.00%; self-employed, 16.23%; and non-employment income, 16.05%. In the case of non-residents, national insurance contributions (for maternity, work injury and bankruptcy) are expected to be payable at rates ranging up to: employers, 0.87%; employees, 1.64%, self-employed 1.5%. These are low rates and the coverage is correspondingly low, so check that you and your family have comprehensive private health coverage. Some 52% of national insurance contributions paid in a tax year on self-employment and non-employment income are deductible for income tax purposes in that year. This may reduce the effective maximum payment by nearly 3%. What about international double payments? Israel has entered into social security "totalization agreements" with Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Italy, the Netherlands, Poland, Sweden, Switzerland, the UK and Uruguay. So if you travel to or from one of those countries you should be protected from double national insurance payments. If you travel to or from another country, such as the US, you may face double payments and should check out what can be done under the domestic laws of each country. So what are the main national insurance changes this year? First, if you enjoy passive income as well as income from other sources, the passive income may now be subject to national insurance payments. Previously, this was not the case if the passive income was less than 50% of total income or if you enjoyed income from three sources - passive, employment and business/professional. However, a number of useful exemptions and exceptions from national insurance payments will now be available to individuals if certain conditions are met. First, passive income not exceeding 25% of the national average salary (approximately NIS 22,500 per year) will not be subject to national insurance contributions. Second, dividend income will now be exempt from national insurance payments unless the company is a "family company" or a "house property company" (see below). Previously, dividends to "material shareholders" who owned 10% or more of the paying company were liable to national insurance payments on dividends received from those companies. Third, interest and discount income will be exempt from national insurance payments, except in the following cases: the income is business income for the recipient; borrowing costs are claimed as an expense; the recipient is a "material shareholder"; the recipient is an employee of the company or supplier of goods or services to it or is related to it unless the interest is on arm's length terms; the interest is paid by an education prematurely or a provident in certain cases; or any other case the Finance Minister may prescribe in regulations. Fourth, rental income will be exempt if you elect to pay tax on gross income (instead of net income) at the rate of 10% in the case of Israeli residential rental income or 15% in the case of foreign rental income (after deducting depreciation) of any type. But if you prefer to pay full Israeli taxes (up to 47% in 2008) on net income after deducting borrowing and other costs or claim a foreign tax credit, you will also be liable to pay national insurance too. Fifth, passive income not from employment or self-employment will be exempt from national insurance payments if they are exempt from income tax (except early pension income or other income the Finance Ministry may prescribe in regulations). This means a double exemption (from income tax and national insurance payments) in various cases, such as: (1) new and returning residents who enjoy an exemption for five-10 years on passive income from investments they held abroad before they took up Israeli residence; (2) Israeli residential rental income not exceeding NIS 4,320 per month; (3) foreign currency exchange gains. On the other hand, the national insurance rules have now been tightened in the case of a "family company" or a "house property company." These are "pass though" companies where the shareholders are taxed on their income instead of the company - similar to subchapter S corporations and LLC's in the US. Commencing in 2008, the income of these companies will be deemed to be distributed to the shareholders as a dividend at the end of each year and subject to national insurance payments accordingly. Previously, it was possible to put off the national insurance liability by not distributing income of the company. As always, consult experienced tax advisors in each country at an early stage in specific cases. [email protected] Leon Harris is an international tax partner at Ernst & Young Israel.