By LEON HARRISshekel versus dollar 370(photo credit: REUTERS)
Against a background of declining exports, economic growth and tax receipts in Israel, the Knesset passed the Law for Deficit Reduction and Tax Burden Shifting (Legislative Amendments) on August 6. This law affects personal income tax rates and employers’ National Insurance Institute payments.Personal income tax The new law increases the tax rates for middle and higher annual incomes, commencing January 1, 2013, as follows: • NIS 0 to NIS 62,400 per year: 10 percent • NIS 62,400 to NIS 106,560: 14% (unchanged) • NIS 106,560 to NIS 168,000: 21% (unchanged) • NIS 168,000 to NIS 240,000: 31% (instead of 21%) • NIS 240,000 to NIS 501,960: 34% (instead of 33%) • NIS 501,960 to NIS 800,000: 48% (unchanged) • Over NIS 800,000: 50% (due to new 2% surtax).These amounts will be updated slightly for inflation when they take effect in 2013.National Insurance Institute Employers will also start paying higher rates of NII payments (social security). The maximum rate employers pay will increase from 5.9% in 2012 to 6.5% in 2013, 7% in 2014 and 7.5% from 2015.Personal investments In the case of surtax payers with annual income over NIS 800,000, the new law increases the Israeli tax rates on capital-gains tax and land-appreciation tax on inflation-adjusted capital gains, dividends and interest in 2013 onward, as follows: • To 32% (instead of 30%) for shareholders holding 10% or more of any means of control of the company • To 27% (instead of 25%) in other cases.However, in the case of interest income, marginal tax rates (up to 50%) will apply in certain prescribed cases: business income; finance expenses deducted; 10%-or-more shareholders; employees, suppliers and related parties (unless good faith is proven); premature withdrawals from provident or study funds.In the case of residential property in Israel, the 2% surtax will only apply if the selling value exceeds NIS 4 million and no exemption applies.New immigrants The above rates apply to Israeli-source income and gains of new residents (olim) and senior returning residents (who lived abroad more than 10 years), notwithstanding their tax holiday (usually 10 years if they took up Israeli residence on or after January 1, 2007). This tax holiday will apply to foreign-source income and gains instead of the above tax rates.A more limited tax holiday of five to 10 years will apply to foreign-source income and gains of for returning residents who resumed Israeli residence after living abroad more than six years but under 10 years.New and returning residents also enjoy increased personal credit points for up to 3.5 years, which reduce their Israeli tax on Israeli-source income by up to NIS 645 per month.It seems these personal credit points will lapse on September 30, 2012, for returning residents who resumed Israeli residence after living abroad more than six years but under 10 years.Foreign investors The above rates also apply to Israeli-source dividends and interest of foreign residents. Foreign investors should continue to be exempt from Israeli capital gains on Israeli securities acquired on or after January 1, 2009. However, investors resident in one of the 50 countries that have a tax treaty with Israel should check if they are protected from some or all the Israeli tax.Value-added tax In parallel to the above, an order was issued raising the standard rate of VAT from 16% to 17% commencing September 1, 2012.Companies No changes were made to taxes paid by companies; the rates were already increased on January 1, 2012.On that date the standard rate of company tax was increased from 24% to 25% and future legislated reductions were repealed.The tax breaks for “preferred enterprises” in industry and technology remain unchanged. Proposals are still being legislated regarding reduced tax rates for “trapped profits” under the old “alternative benefits” package of tax breaks.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.
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