By LEON HARRISmoney(photo credit: REUTERS)
It’s perfectly possible to make money in Israel and keep most of it. According to the OECD, Israeli tax revenues amounted to 31.2% of GDP in 2016, which was better than the OECD average of 34.3%At the macro level: 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.Business tax rates: For 2018, the regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, 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 in the case of foreign investors.Preferred income derived by preferred industrial and tech enterprises is liable to company tax of 6%-7.5% in development area A, 6%-16% elsewhere in Israel, without time limit. Dividends are taxed at 4 %-20%. The resulting combined tax burden on distributed profits is 9.76%-32.8%, subject to any tax treaty.There are also tax breaks for: capital gains of foreign-resident investors; trust-owned vehicles (TOVs); agriculture; approved rental buildings; oil and gas exploration and production; movie productions. R&D grants typically range up to 50% or 60% in a development area and up to 100% financing in designated incubators.Salaries and business profits of freelancers are subject to income tax at rates ranging up to 50%. The VAT standard rate is 17%.International agreements: Israel has income-tax treaties with 55 countries.Israel is a party to a FATCA Intergovernmental Agreement with the US, the OECD Multilateral Instrument for BEPS Tax Treaty Related Measures 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, Egypt, the EU, EFTA, Jordan, Mercosur, Mexico, Turkey and the US.Israel offers R&D grants – typically up to 50% – and has international collaboration agreements with dozens of countries and multinational groups.National Insurance Institute (social security): The National Insurance Institute (Bituach Leumi) rates are as follows: • Resident employees: 3.5%-12%; • Employers of resident employees: 3.45%-7.5%; • Nonresident employees: 0.04%-0.87%; • Employers of nonresident employees: 0.49%-2.55%; • Freelancers: 5.97%-17.83% (52% of the NII amount paid is tax deductible); • Not working: 9.61%-12% (52% of the NII amount paid is tax deductible); • Payment if no income: NIS 172 per month.No NII liability applies to monthly income exceeding NIS 43,370.The above is subject to any applicable social-security (“totalization”) treaty. Israel has such treaties with 20 countries.New and returning residents (olim): New residents and senior returning residents (lived abroad 10 years) who took up Israeli fiscal residence since January 1, 2007, are generally exempt from Israeli tax on non-Israeli-source income for 10 years.Olim also enjoy an exemption for five to 20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank.On Israeli-source income, new immigrants receive extra personal credits that reduce taxes by NIS 216-NIS 648 per month for three and a half years.Foreign expatriates in Israel: Israel’s tax treaties sometimes grant an income-tax exemption for employees resident in those countries but working in Israel.Otherwise, nonresidents working in Israel lawfully in their field of expertise for an employer who are paid at least NIS 13,200 per month may enjoy a deduction for accommodation expenses and a daily living-expenses deduction of up to NIS 320 for up to 12 months as “foreign experts,” 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%-20% Tax registrations: A business must register for Israeli tax purposes as soon as the business activity starts.You start with the VAT registration. In Israel, you cannot legally bill your customers until you are registered for VAT purposesPay tax as you go: Every year, the business taxpayer will receive booklets for paying VAT, payroll taxes, income tax and tax installments on profits (Mikdamot). These installments are generally due regularly on the 15th or every other 15th of the month (not VAT in the case of exempt dealers). Lateness results in penalties. Persistent lateness (three or four times) can result in a prohibition on doing business with the government and public companies.Essential paperwork: There are strict bookkeeping and customer-billing rules; approved Israeli software or printed books must be used – not Excel, Word, QuickBooks or Sage.In practice, smaller business typically outsource the accounting and tax reporting to an accountant or bookkeeper.Employees and freelancers: Once employees have worked three to six months at a firm, they are entitled to mandatory pension and severance funding. The stipulated 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.“Study funds” (Hishtalmut) are also common but not mandatory; the employer usually pays 7.5% of gross salary, and the employee pays 2.5% up to prescribed limits. The employer deducts his cost for tax purposes, and the employee is exempt and can use the money for any purpose if no withdrawals are made for six years.A similar study-fund arrangement is available to the freelancers (self-employed); they can contribute 7% and deduct 4.5% as an expense within prescribed limits.Commencing in 2017, the self-employed must contribute 4.45%-12.55% of income into a pension-unemployment fund within certain limits.Approved share-option plans are popular, as employees may pay only 25% tax if various conditions are met. International plans should have an Israel annex.Be sure to consult an Israeli lawyer about labor law and employment contracts among other things.Consult experienced legal and tax advisers in each country at an early stage in specific cases.leon@hcat.coThe writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
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