How to do business in Israel in 2021 - opinion

You are probably doing taxable business in Israel if you conduct business activities physically in Israel or operate in Israel via an agent who can commit you. Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.

For 2021, the regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders and 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty.

Preferred income derived by preferred industrial and tech enterprises is liable to company tax of 7.5% in development area A and 16% elsewhere in Israel, without time limit. Dividends are generally taxed at 20%. The resulting combined tax burden on distributed profits is generally 26%-32.8% subject to any tax treaty. Lower rates are possible for certain large enterprises with annual revenues over NIS 10 billion. R&D grants, typically 50%, are also available.

Salaries and business profits of freelancers are subject to income tax at rates ranging up to 50%.

The VAT standard rate is 17%.

Israel has income-tax treaties with 59 countries.

Israel is a party to a FATCA Intergovernmental Agreement with the USA and the OECD Common Reporting Standard. Remittances to and from Israel are subject to tax-compliance checks by the Israeli banks. Israel has free-trade agreements with Canada, Colombia, the European Union, the European Free Trade Association, Mercosur Mexico, Panama, Turkey, Ukraine, the United States and the UK.

National insurance (social security)

National insurance (bituah leumi) rates include:

• Resident employees: 3.5%-12%

• Employers of resident employees: 3.55%-7.6%

• Freelancers: 5.97%- 17.83% (52% is tax-deductible)

• Not working: 9.61%-12% (52% is tax-deductible)

• Payment if no income: NIS 177 per month

The above are subject to any applicable social security (“totalization”) treaty.

New residents and senior returning residents (lived abroad 10 years) are generally exempt from Israeli tax on non-Israeli sourced income for 10 years. The exemption does NOT apply to income for work done in Israel.

Immigrants also enjoy an exemption for five-20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank.

On Israeli-sourced income, new immigrants receive extra personal credits that reduce taxes by NIS 218-NIS654 per month for three-and-a-half years.

Israel’s tax treaties sometimes grant an income-tax exemption for employees resident in those countries but working in Israel. Otherwise, non-residents working in Israel lawfully in their field of expertise for an employer as “foreign experts” who are paid at least NIS 13,300 per month can enjoy a deduction for accommodation expenses and daily living expenses of NIS 330 for up to 12 months, provided they are invited by an Israeli employer that is not an employment agency. But employers may be subject to a foreign workers’ payroll levy of 0% to 20%

A business must register for Israeli tax purposes immediately once the business activity starts

Every year, a business or investor will receive demands to pay VAT, payroll taxes, income tax, and tax installments on profits (mikdamot).

There are strict bookkeeping and customer billing rules. Approved Israeli software or printed books must be used.

Once employees have worked three to six months at a firm, they are entitled to mandatory pension and severance funding. The minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% toward pension funding and 6% toward severance funding. The employee pays 6% toward pension funding.

Home rental income of up to NIS 5,070 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, flat-rate tax of 10%. Companies pay tax at regular rates.

Real estate acquisition tax rates range up to 10%. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,747,865 may be exempt from acquisition tax.

The gain from the sale of an only home in Israel by a resident individual may be exempt from tax provided its value does not exceed NIS 4,495,000. Otherwise, real-estate sales are generally taxed at 25%-50%.

Passive income derived by individuals from securities are taxed at rates of 25%-33%. Traders and companies pay tax at regular rates.

There is no tax in Israel on estates or inheritances, nor on gifts to Israeli residents.

Happy Independence Day!

As always, consult experienced tax advisers in each country at an early stage in specific cases.