www.pwc.com/globalmobility International Assignment Services Taxation of International Assignees Country Israel Human Resources Services International Assignment Taxation Folio
Last updated: June 2014 This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Menu
Country: Israel Introduction: International assignees working in Israel 4 Step 1 Understanding basic principles 5 Step 2 Understanding the Israeli tax system 8 Step 3 What to do before you arrive in Israel 13 Step 4 What to do when you arrive in Israel 15 Step 5 What to do at the end of the year 16 Step 6 What to do when you leave Israel 18 Step 7 Health and social security contributions 19 Step 8 Other matters requiring consideration 21 Appendix A Individual income tax rates 22 Appendix B Typical tax computation 23 Appendix C Double income taxation agreements 25 Appendix D Israel contacts and offices 27 Additional Country Folios can be located at the following website: Global Mobility Country Guides Human Resource Services 3
Introduction International assignees working in Israel When an international assignee accepts an employment contract or is assigned by his/her foreign employer to work in Israel, he/she is often relatively uninformed about the tax and other consequences of this move. The aim of this folio is to assist both the foreign employee as well as the employer in dealing with the Income Tax, National Insurance, Health Tax and other issues that are related to employment in Israel. This folio is not intended to be comprehensive, but deals with the most important elements and reflects the law at 1 January 2014. It should be noted that laws and interpretations in Israel are still subject to relatively frequent changes, without much prior notice. More detailed and specific upto-date advice should always be sought before any decisions are made. Further information may be obtained from any one of the contacts listed at the end of this folio. 4 Human Resources Services
Step 1 Understanding basic principles The scope of taxation in Israel An international assignee working in Israel is likely to be subject to Israeli taxation, either as an Israeli tax resident or as a non-israeli tax resident. Israeli tax residents are taxed on their worldwide income, regardless of the source of such income. In contrast, non-israeli tax residents are subject to Israeli taxation only on Israeli source income. Employment income of Israeli tax residents is subject to Israeli Income Tax, National Insurance and Health Tax. Non-Israeli tax residents are not subject to Health Tax. The relevant tax treaty should be examined to verify if the individual might be exempt from Israeli tax obligations (See Tax treaties section (later in Step 1)). The tax year The tax year corresponds to the calendar year (i.e., January 1 to December 31) for individuals. Husband and wife Married couples are permitted to file separate or joint returns. In the latter case, a separate calculation may still be obtained for tax on income from personal exertion in any business or vocation or from employment, provided the income is from independent sources. Determination of residence An Israeli tax resident is defined as an individual whose center of vital interests is in Israel. In determining the individual s center of vital interests, his/her family ties, economic connections, and social contacts are taken into consideration, including: the location of the permanent home (in certain cases, even if the home is temporarily occupied by another person); the place of residence for the taxpayer and family; the location of regular or permanent employment; the place of active or substantive economic interests (i.e., assets and investments); and the place where there is involvement in organizations, societies and various institutions. The following are refutable presumptions (by either the tax officer or the taxpayer) regarding the determination of an individual s center of vital interests : any individual who has been present in Israel during a particular tax year (calendar year) for 183 days or more, shall be presumed to have a center of vital interests located in Israel and is presumed to be an Israeli tax resident that year; any individual who: o o has been present in Israel during the tax year for 30 days or more and has been present in Israel for a Human Resource Services 5
o total of 425 days or more during that tax year and the two previous tax years (in aggregate) shall be presumed to have a center of vital interests in Israel (and is consequently presumed to be an Israeli tax resident) in such tax year. A foreign tax resident is generally defined as anyone who is not an Israeli tax resident. The definition of a foreign tax resident in the Israeli Income Tax Ordinance ( ITO ) also includes an individual who has met the following tests: The person has spent outside of Israel at least 183 days in both the tax year in question and in the following year; and The person's center of vital interests was not in Israel in the following two years (third and fourth). Notwithstanding the above presumption tests, an individual may still contend that he/she is not an Israeli tax resident by demonstrating that his/her center of vital interests is not in Israel. Generally a non- Israeli tax resident coming to work in Israel for a predetermined period of a few years (in practice, up to 3 years is commonly used as a guiding rule) and having a work visa, shall be considered a nonresident for Israeli tax purposes, provided the person has not taken other steps that show that his/her center of life has shifted to Israel (e.g., he/she has not purchased a home in Israel, made investments in Israel, applied for Israeli citizenship, etc.). If an individual shall be deemed to be an Israeli resident while at the same time resident of another country under its domestic tax laws (e.g., United States or United Kingdom), the "tie-breaker" tests set out in the relevant Israel tax treaty will determine in which country the individual will be deemed as tax resident (see Appendix C for the listing of Israel s double income taxation agreements). Permanent establishment issue In order for a foreign resident to qualify for a tax treaty exemption for income tax, the tax treaties generally require that the foreign employer has no permanent establishment ( PE ) in Israel. Israeli tax legislation and domestic law provide no definition of a PE. As such, the relevant Israel tax treaty for the definition of a PE (see Appendix C for the listing of Israel s double income taxation agreements) needs to be examined. Method of calculating income tax Taxation of individuals is imposed in graduated rates. Non-Israeli residents are taxed at the same rates as Israeli residents. The annual tax brackets are an aggregation of the monthly brackets in force during the year, which are periodically updated for inflation. The annual bracket amounts are provided in Appendix A and sample calculations are shown in Appendix B. Approved specialists (non- Israeli tax residents approved by the director of the Investment Center at the Ministry of Industry and Trade), provided they are experts who possess skills not readily available locally, are taxed at a maximum rate of 25% on their earnings for a period of three years, with a possible extension of up to a further five years. They are also entitled to the benefits available to foreign experts (see Step 2, Benefits in kind section regarding foreign expert deductions) in the first 12 months. Approval is generally given on income up to US$75,000 per annum. 6 Human Resources Services
Foreign journalists are entitled to a 25% tax rate and the special deductions similar to foreign experts (see Step 2, Benefits in kind section regarding foreign expert deductions), upon meeting certain conditions. The benefits under this special regime are available to foreign journalists for a period of three years. Payment in foreign currency Individuals can be paid in foreign or local currency. Generally, an employee s taxes must be paid through the foreign or local company s withholding tax file. Where taxes are still due for the employee, in order to pay the tax liability incurred in the employment of a non-israeli tax resident in Israel, if there is a tax representative of the employer in Israel, then such payment should be sent by the representative through a payment voucher via the post office. If there is no such tax representative, then payment to the Israeli Tax Authorities ( ITA ) is possible via direct transfer, but the process is much more complicated. With regard to refunds, currently, the ITA does not send tax refunds to non-israeli bank accounts. Therefore, in order for an employee who is eligible for a refund to receive such refund, the employee must have an Israeli bank account. Tax treaties Tax treaties with Israel provide that remuneration derived by a non-israeli tax resident with respect to employment exercised in Israel shall not be taxable in Israel if the foreign resident is present in Israel for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned (each treaty's exemption provision needs to be examined as the 183 day language sometimes differs); the remuneration is paid by, or on behalf of, an employer who is not a resident of Israel; and the remuneration is not borne by a PE which the foreign employer has in Israel. See Appendix C for the listing of Israel s double income taxation agreements. Human Resource Services 7
Step 2 Understanding the Israeli tax system Taxable income Taxable employment income is broadly defined in the Israeli Income Tax Ordinance ( ITO ) and covers salary, bonuses, cost of living allowances, tax equalization payments and virtually all types of fringe benefits (including benefits from stock based compensation plans). Where the intention of the employer is that the employee should not suffer the additional income tax and social taxes arising from a taxable benefit, the employer is required to gross up these payments for income tax and social taxes. Taxation of employment income There are important Israeli taxation differences for the individual depending upon whether he/she shall be an Israeli tax resident or a non- Israeli tax resident. Israeli tax residents are taxable on their worldwide income. Non-Israeli tax resident individuals are subject to income tax only on Israeli-source income and to capital gains tax on capital gains derived from Israeli sources (e.g., gains from the sale of assets situated in Israel). In other words, non-israeli source personal or investment income of a non-israeli tax resident would generally be outside the scope of Israeli taxation. Under the ITO provisions, the Israeli income tax liability that arises for a non-israeli tax resident working in Israel is the same irrespective of whether (i) the employer is a foreign entity or a local company; (ii) the salary is to be paid in Israel or abroad; (iii) the salary is paid in foreign or local currency or (iv) where the expatriate employee signs the employment contract. A payroll tax file needs to be opened by an employer (whether an Israeli resident or foreign resident employer), who is required to remit the income tax and social security withholdings to the ITA and National Insurance Institute. An employer should report any personal (income and social) tax withheld from an employee s compensation on tax form 102. Withholding tax with respect to employee income realized between the 14th day of one month and the 13th day of the next month should be remitted to the tax authorities by the 15th day of the following month (bimonthly for certain employers with not more than 10 employees at any time during the preceding year). An Israeli resident taxpayer with earnings from employment is generally not required to file a tax return, when tax is withheld at source from his/her wages and at the prescribed levels from other specified sources (e.g., rental, dividend, interest and capital gains). However this exception does not apply when the taxpayer's income exceeds certain prescribed income levels or when certain circumstances occur (e.g., the taxpayer is an owner of foreign assets or beneficiary of a trust). Detailed rules apply. A non-israeli resident taxpayer whose income consists solely of earnings from employment is generally not required to file a tax return where full tax is withheld at source from his/her wages. 8 Human Resources Services
Economic employee/employer The ITO and Israeli case law do not specifically address the Israeli tax implications and potential PE exposure for foreign companies seconding employees to an Israeli affiliate. It would appear that the key issue is whether the employees shall be deemed to be employed by the Israeli company during the period of secondment. The legal determination of whether there is an employer-employee relationship for tax purposes is generally based on Israeli labor law principles. This has been confirmed by Israeli court cases and is expressed by the ITA in its Commentary to the ITO definition of work income. Consequently, in order to contend that a seconded employee is working in Israel as an employee of an Israeli company and not its foreign affiliates, it shall be important to be able to demonstrate that the working relationship of the employee and the Israeli company has factors that reflect an employer-employee relationship. In addition, the secondment agreement should be in line with this factual relationship, expressly stating that the authority, supervision and control of the employee is shifting to the Israeli receiving company. Although the ITA would focus on examining the form over substance as to the actual working relationship, the agreement should be supportive of the factual situation. Benefits in kind Taxable employment income includes salary, bonuses and benefits in kind. Company cars If the employee shall be entitled to use an employer owned or leased vehicle, there will be an imputed value added to the employee s monthly taxable income in accordance with the provisions of the Income Tax Regulations (The Value of the Use of a Vehicle), 1987. There is a distinction between company vehicles that were manufactured from January 1, 2010, whose values are calculated linearly, versus company vehicles that were manufactured until December 31, 2009, whose values are calculated based on vehicle category. If the employee shall receive reimbursement for the use of his/her own vehicle for business purposes, the amount of reimbursement would constitute taxable income and an employer would be required to gross up the payment by the additional employee tax payable, if the reimbursement amount is to be provided to the employee as a net benefit. Accommodation costs Necessary costs of airfare and shipping of the employee s personal effects, upon arrival to Israel or upon departure from Israel, that are paid by the employer on the employee s behalf directly to the third parties concerned (airlines, travel firms, shipping and moving companies etc.) are generally not regarded as taxable income. Reimbursements that are paid directly to the employee to cover costs of relocating are generally taxable (however, if it can be established that the payments directly relate to the actual moving, airfare or shipping costs, and the employee advanced the costs on behalf of the employer, it may be argued that the payments should not be taxable to the employee). Other payments which the employee may receive relating to his/her relocation such as bonuses for cost of living, perdiem and personal reimbursements are generally taxable. Amounts paid by the employer for the employee s rent and utilities are a taxable fringe benefit. However, for the first 12 months of the employee's stay in Israel they might not be taxable (see the next section regarding foreign expert deductions). Human Resource Services 9
Meals and accommodation costs - foreign expert deductions Under Israeli tax regulations, employees who meet the criteria of Foreign Experts are entitled to certain deductions from their Israeli-source taxable income for the first 12 months of their presence in Israel. To qualify as a Foreign Expert, the regulations require that an employee must meet certain conditions: The employee is a non- Israeli tax resident; The employee is staying lawfully in Israel; The employee was invited from abroad by an Israeli tax resident who is not a manpower contractor or a manpower broker, in order to provide a service to that Israeli tax resident in a field in which the non-israeli tax resident has specific expertise; During the entire period of his/her stay in Israel he/she was employed or provided a service in the field of his/her specific expertise; and The employee was paid monthly compensation for the service in excess of NIS 13,300 in 2014 (approximately US$3,800 based on a NIS/USD exchange rate of 3.5/1). Where the employee was in Israel less than a month, a proportional amount is to be applied. According to the regulations referred to above, the following deductions are allowable during the employee's initial 12 month period: An amount not in excess of NIS 330 (for 2014) (approximately US$94 based on an NIS/USD exchange rate of 3.5/1) which the employee spent for meals during each residing day of his/her stay in Israel. According to the ITA guidelines, the amount of the living allowance is limited to the lower of (i) NIS 330 daily or (ii) 50% of the employee s gross daily remuneration (the 50% limitation is according to an ITA Guideline only). The amount which the employee spent for lodging or rent paid for the employee's rented dwelling, on condition that the employee submits documents or receipts for the verification of these expenses to the Assessing Officer s satisfaction. Other taxable benefits Almost all private expenses paid to an individual by his/her Israeli or foreign employer are taxable benefits. These include private health insurance, private pension contributions, flight allowances for home leave, accommodation costs, utilities, school fees, language lessons for family members, etc. Reimbursement of expenses Reimbursement of expenses incurred by a non-israeli tax resident in Israel for the benefit of his/her employer, which are not of a personal nature (e.g., taxis for business meetings), should be tax-free. Tax deductions Business expenses deductible from business-source income must be incurred wholly and exclusively during the tax year for the purposes of producing this income. Employees are entitled to relatively few deductions. However, subsistence expenses if required to travel out of town and subsistence expenses abroad may be deducted in accordance to detailed rules. Contributions to an Israeli approved pension fund, provident fund or training fund are deductible up to predetermined limits for the self-employed and employees. Mortgage interest and medical expenses are not deductible. 10 Human Resources Services
Charitable contributions are not deductible, but a tax credit may be allowed (see below). Capital gains For Israeli tax residents, capital gains tax is generally payable on capital gains by Israeli tax on the sale of assets (irrespective of the location of the assets). Non- Israeli tax residents are subject to capital gains tax on the sale of: Assets located in Israel; Assets that are a share or the right to a share in an Israeli entity; and Assets that are a right in a non-israeli resident entity, which is essentially a direct or indirect right to property located in Israel. Taxation will apply only with respect to that part of the consideration that stems from the property located in Israel. In general, the tax rate for capital gains is 25%. This rate is increased to 30% where the seller is a 10% or more shareholder at the date of sale or during any of the 12 months preceding the sale detailed definitional rules apply. An additional 2% surtax shall apply to the capital gains if the employee's total 2014 annual taxable income (including from capital gains) exceeds NIS 811,561 (approximately US$231,875 based on an NIS/USD exchange rate of 3.5/1). For tax purposes, the capital gain is generally calculated in local currency, and there are provisions for segregating the taxable gain into its real and inflationary components. The inflationary component is generally exempt (where accrued after January 1, 1994). A non-israeli tax resident that invests in capital assets with foreign currency may elect to calculate the inflationary amount in that foreign currency. Under this option, in the event of a sale of shares in an Israeli company the inflationary amount attributable to exchange differences on the investment is always exempt from Israeli tax. Special exemptions for non-israeli residents Non-Israeli tax residents are exempt from tax on capital gains from a sale of shares of an Israeli company traded on the Israeli stock exchange or on a foreign stock exchange. For non-traded shares of an Israeli company acquired from January 1, 2009 and thereafter, a non-israeli tax resident shall be exempt from tax on capital gains (provided that the investment is not in a company that on the date of its purchase and in the two preceding years, the main value of the assets held by the company, directly or indirectly, were sourced from an interest in either (i) real estate or in a real estate association (as defined in the ITO); (ii) the use in real estate or any asset attached to land; (iii) exploitation of natural resources in Israel; or (iv) produce from land in Israel and that the shares were not purchased from a relative). The non-israeli resident may also be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty (see Appendix C for the listing of Israel s double income taxation agreements). Tax allowances Tax credit Israeli tax residents are entitled to personal tax credits against their tax liabilities according to their status. At January 2014, each point was worth NIS 218 (approximately US$62 based on an NIS/USD exchange rate of 3.5/1) per month. Israeli tax resident individuals are entitled to a minimum of 2.25 points for a male, and 2.75 points for a female. Additional points are granted for, among other items, dependent children, new immigrants and single-parent families. Non-Israeli tax residents, that are not eligible for foreign expert deductions, are generally entitled to personal tax credits. Human Resource Services 11
Israeli tax residents and non- Israeli tax residents may be entitled to relief from double taxation in their home country under applicable tax treaties (see Appendix C for the listing of Israel s double taxation agreements). Detailed rules apply. Tax benefits for new immigrants and returning residents New immigrants and returning residents (who were foreign residents for a continuous period of at least ten years and returned to Israel to become Israeli tax residents after such period) may enjoy the following tax benefits upon becoming tax residents in Israel: Exemption from Israeli taxation for a period of ten years from the date of becoming Israeli tax resident, on passive income that is accrued or derived from outside of Israel or that is sourced from assets overseas. This exemption shall apply to income from dividends, interest, rent, royalties, pensions, annuities and the like. Exemption from Israeli taxation, for a period of ten years from the date of becoming Israeli tax resident, on income from a business, vocation or salary that is accrued or derived from outside of Israel. This exemption may be limited in certain cases. Exemption for a period of ten years from capital gains tax on the sale of assets located outside of Israel. The capital gain exemption shall apply even where the overseas assets sold are purchased during the ten year exemption period. Where assets are disposed of after the expiry of the ten year period, the taxable amount will be calculated on a linear basis by applying the ratio between the exempt and non-exempt periods to the total holding period of the asset. Exemption from reporting income derived or produced abroad or which are sourced from assets outside of Israel. A returning resident, who was a foreign resident for only six years before returning to Israeli residency status, shall enjoy the following: Exemption from Israeli taxation on passive income (but not pension income), and only for a period of five years from the date of becoming Israeli tax resident. This exemption applies only to passive income generated by assets that were acquired while the individual was a foreign resident. Exemption for a period of ten years from capital gains tax on the sale of assets located outside of Israel but only with respect to assets that were purchased during the period the individual was a foreign resident. Detailed rules apply to the above provisions and this subject matter is complex and requires review of each person's specific facts and circumstances. 12 Human Resources Services
Step 3 What to do before you arrive in Israel Employment visas (work permits) An employment visa or work permit is usually required if: You are expected to make regular trips to Israel for work purposes; The purpose of your trip is anything other than attending business meetings and/or for tourist purposes; or You wish to enjoy taxable benefits such as accommodation expenses and a daily living allowance from remuneration for services performed in Israel. The work permit application must be submitted at least two to three months before you travel. Under the Israeli Entry Law (1952), a foreign worker is a worker who is not a citizen or resident of Israel. A foreign worker shall be deported from Israel if he/she enters Israel for work purposes without a work permit. Heavy fines and possible imprisonments are possible sanctions. In addition, the employer itself will be prevented from sending other employees to Israel and will be subjected to criminal offenses if he employs a foreigner under a visitor visa (B2 Visa). B-1 visa The Israeli B-1 Visa process includes the following milestones: Filling a request for a "Principle Working Permit Approval" to be examined by a special committee within the Interior Ministry in Jerusalem. After receiving the "Principle Working Permit Approval" an "Invitation to enter Israel", shall be sent to the Israeli Consulate at the expert s country. The expert shall collect the invitation and can then enter Israel and start work immediately. Upon arrival, a "Multiple Entry Visa" shall be issued at the Interior Office allowing multiple entries during the visa validation period. B1 Visas are normally valid for up to one year. Extensions of up to one year at a time may be requested, but the total stay under the B-1 status may not exceed five years and three months. Employment/Work in Israel is permitted under the appropriate B-1 Visa only. B-2 visa An Israeli B-2 Visa is granted to a person who wishes to stay in Israel for only a short time (i.e., for a visit, tourism, a business meeting or study in a Hebrew ulpan). A person who enters Israel on a B-2 Visa is not allowed to work in Israel. Import of personal property belonging to individuals Upon entering Israel, a non- Israeli tax resident may import certain personal and household effects free of duties and taxes. These items are constantly updated and the updated list should be checked before assignment. Human Resource Services 13
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Step 4 What to do when you arrive in Israel Registration As an expatriate, a non-israeli tax resident employee is not required to register with the Israeli tax authorities on arrival in Israel. The tax registration will occur when the employee files their first Israeli personal income tax return (i.e., the year following that of the arrival in Israel, if applicable (see Step 5, Tax return submission section)). Social security obligations Usually, an Israeli employer will undertake the registration formalities with the social security authorities on behalf of an employee. If the employee remains covered under their home country social security schemes, the employee must have a certificate of coverage issued by the foreign competent authorities. Israeli has social security conventions with certain countries, which depending on the expatriate's normal place of employment, immigration status and the social security convention applicable, such certificates may exempt the expatriate and his/her employer from contributing to the Israeli unemployment fund. Each situation needs to be examined. Currency The currency in Israel is the New Israeli Shekel. Human Resource Services 15
Step 5 What to do at the end of the year Tax return submission A non-israeli tax resident employee will generally not be required to file an Israeli income tax return if proper withholdings are remitted to the tax authorities, and the employee has no other Israeli source income. Tax returns are filed on a calendar-year basis. Subject to certain exceptions as detailed below, an individual who is a resident of Israel is required to file an annual tax return. Should a tax return be required, April 30 is the prescribed filing due date, subject to extensions. An Israeli resident taxpayer whose income consists solely of earnings from employment is generally not required to file a tax return where tax is withheld at source from his/her wages and is withheld at the prescribed levels from other specified sources (e.g., rental, dividend, interest and capital gains). However, if the taxpayer meets one of the exceptions to this general rule, some of which are listed below, the individual would be required to file a tax return (certain further exceptions may also be applicable): Wages exceeded NIS 650,000. Any of the following categories of income exceeded NIS 337,000: rental income, foreign income, non-exempt foreign pension income and certain other income (detailed definitional rules apply); Income from the sale of securities exceeded NIS 1,857,000; Interest income exceeded NIS 644,000; The taxpayer together with his/her spouse and children under age 18 at any time during the year owned (i) shares of a foreign non-publicly traded company; (ii) foreign assets having a value of at least NIS 1,874,000; or (iii) deposits with a foreign banking institution of NIS 1,874,000 or more; The taxpayer is the settlor or beneficiary of a trust during the tax year; or The taxpayer received a distribution from a trust of more than NIS 100,000. Applying for an extension It is possible to request an extension for filing a personal income tax return from the tax authorities. This request has to be filed with the tax authorities within the normal filing deadline, i.e., by April 30th. Paying your tax liability The final tax liability is normally due by the filing deadline (April 30th following the year concerned, unless a filing extension was granted by the tax authorities). The employee shall be obligated to pay interest and linkage with respect to any tax that is owed. Such interest and linkage differentials shall accrue from the January 1st following the year concerned. 16 Human Resources Services
Payroll withholding of income tax and social tax is statutory, irrespective of the residence of the employer or employee. In general, withholding taxes in respect of salary payments effected from the 14th day of one month to the 13th day of the following month are payable on the 15th day that following month. Advance tax payments Tax advances are required to be paid by an individual for interest, dividends, capital gains and rental income in amounts and according to specific deadlines set out in detailed Israeli tax rules. Self-employed individuals are generally required to make monthly or bimonthly advance tax payments, usually based on a percentage of turnover. Fines and penalties The tax authorities may levy a fine for filing a tax return late. When fines are imposed, the seriousness, duration and consequences of the matter are taken into consideration. Late payment of tax is subject to interest at 4% per annum plus changes in the Israeli consumer price index. Obtaining tax credits in the home country If an expatriate needs to obtain a tax credit in his/her home country for Israeli taxes paid, the tax authorities will provide, on request, a certificate declaring his/her total Israeli income and the amount of Israeli tax paid. Human Resource Services 17
Step 6 What to do when you leave Israel Informing the tax authorities Notification to the tax authorities upon departure is generally not required. Filing your tax return If an expatriate is required to file a tax return, the expatriate s tax return should be prepared and submitted in the normal time scale and then the tax file should be closed. Exporting your personal possessions The personal possessions exported from the Israeli customs territories (including cars) are subject to the export customs clearance. The written customs declaration for export (export invoice) is mandatory and the customs authorities might upon their discretion require the individual to file other relevant documents. Currently, no export customs duties are applicable. Exit Tax When the employee was an Israeli tax resident and is now terminating Israeli tax residency, exit tax provisions will apply to capital assets (investments in marketable securities, including stocks from employee stock options) held on the day before termination. Capital assets will be deemed to have been sold on the day before the termination of Israeli tax residency. If an individual did not report and pay the exit tax on capital gains upon termination of Israeli residency, then that individual shall be deemed to have applied to postpone the payment of the tax until such capital gains are actually realized. The amount of capital gains subject to Israeli exit tax will be calculated by taking the realized capital gain, multiplied by the period of ownership from the day on which the asset was acquired until the day Israeli tax residency ceased, divided by the entire period of ownership. 18 Human Resources Services
Step 7 Health and social security contributions National insurance and health insurance contributions The current monthly rates for non-israeli residents are significantly lower than the rates imposed on Israeli resident employees. We set out below the rates for Israeli residents and for non-israeli residents, current as of January 2014 (periodically updated): Israeli resident employees: National Insurance Health insurance Employer Employee Fees paid by the employee % % % % Reduced rate on monthly income up to NIS 5,453 3.45 0.40 3.10 6.95 Full rate on the difference between NIS 5,453 and the maximum monthly income of NIS 43,240 Non-Israeli resident employees (subject to the provisions of any applicable social security totalization agreement): Total 6.75 7.0 5.0 18.75 Reduced rate on monthly income up to NIS 5,453 0.49 0.04 Not insured 0.53 Full rate on the difference between NIS 5,453 and the maximum monthly income of NIS 43,240 1.91 0.87 Not insured 2.78 Non-Israeli resident employees do not pay the mandatory Health Tax which is applicable to Israeli residents and therefore, they are not entitled to Israeli health coverage in paying their social taxes. Medical insurance coverage would therefore need to be provided through a private medical insurance plan. It should be noted that the minimal National Insurance payments for non-israeli resident employees do not provide any retirement benefit for the non-israeli resident but generally provide a certain element of work accident coverage. Human Resource Services 19
As shown on the above table, no National Insurance or Health Tax payments are due for any compensation portion exceeding the monthly threshold of NIS 43,240 (approximately US$ 12,350 based on an NIS/USD exchange rate of 3.5/1). When an irregular salary payment (such as a calculated benefit from an incentive stock plan or a bonus) in excess of one quarter of the usual salary is made, special provisions apply to the computation of social charges by which the application of this payment is equally attributed to the current month and to the past 11 months. The list of countries where Israel concluded bilateral treaties on social security can be found in Appendix C. 20 Human Resources Services
Step 8 Other matters requiring consideration Value added tax Local property tax Value added tax ( VAT ) is levied on the import of goods and on certain transactions conducted in Israel involving the sale of goods and the rendering of services. VAT is currently chargeable at the rate of 18% (the applicable VAT rate since June 2, 2013). Subject to the Israeli VAT Law and Regulations, exports of goods and certain services and various other transactions are zerorated, and certain transactions are exempt from VAT. Registered owners or tenants (in the case of tenancies) of land, buildings or flats located in Israel are subject to local property tax. The taxable period is the calendar year. The rates are set by the municipal administrator. Human Resource Services 21
Appendix A: Individual income tax rates Personal income tax rates Taxation of employees is imposed at graduated rates. Non-Israeli residents are taxed at the same rates as Israeli residents. The annual tax brackets are an aggregation of the monthly brackets, which are periodically updated for inflation. The annual bracket amounts expressed in NIS are currently as follows (for 2014): Annual Taxable Income Pay on lower amount Plus % on the excess Over But not over NIS 0 NIS 63,360 NIS 0 10% 63,361 108,120 6,336 14% 108,121 168,000 12,602 21% 168,001 240,000 25,177 31% 240,001 501,960 47,497 34% 501,961 811,560 136,563 48% 811,561 285,172 50% 22 Human Resources Services
Appendix B: Typical tax computation Sample tax calculation for the year 2014 Facts and assumption The employee is a non-israeli tax resident. The employee has resided 365 days in Israel. The employee is not a foreign expert. Income Annual gross salary is 800,000 NIS Children education expense is 40,000 NIS Per Diem Allowance is 56,000 NIS Cost of living allowance is 20,000 NIS Housing provided by the employer is 84,000 NIS Note (*) After 12 months in Israel, the employee may claim personal credit points based on a valid work permit. These credit points are not available for the first 12 months if the individual is a "foreign expert". Human Resource Services 23
Tax computation NIS NIS Gross salary derived in Israel 800,000 Children education expenses 40,000 Per Diem Allowance 56,000 Cost of living allowance 20,000 Attribution for Housing provided by the employer 84,000 Total Taxable income 1,000,000 Israeli income tax before personal credits 379,392 Personal credits (2.25 points) (*) (5,886) Israeli income tax after personal credits 373,506 Israeli social security (Employee's portion) 3,971 24 Human Resources Services
Appendix C: Double income taxation agreements Countries with which Israel currently has double income taxation agreements with: Austria Hungary Romania Belarus India Russia Belgium Ireland Singapore Brazil Jamaica Slovak Republic Bulgaria Japan Slovenia Canada Korea South Africa China, P.R.C. Latvia Spain Croatia Lithuania Sweden Czech Republic Luxembourg Switzerland Denmark Malta Taiwan Estonia Mexico Thailand Ethiopia Moldova Turkey Finland Netherlands United Kingdom France Norway Ukraine Georgia Philippines United States Germany Poland Vietnam Greece Portugal Israel has signed comprehensive social security conventions with the following countries: Austria France Slovakia Belgium France Sweden Bulgaria Ireland Switzerland Czech Republic Germany The Netherlands Denmark Norway United Kingdom Finland Romania Uruguay Human Resource Services 25
Israel has signed comprehensive social security conventions with the following countries: 26 Human Resources Services Canada Italy Poland
Appendix D: Israel contacts and offices Contacts and offices Vered Kirshner Yaki Itzhaki Tel: +972 (3) 7954510 Tel: +972 (3) 7954579 Email: Vered.Kirshner@il.pwc.com Email: Yaki.Itzhaki@il.pwc.com Tel Aviv PwC Israel Kesselman & Kesselman Trade Tower 25 Hamered Street Tel-Aviv, 68125 Israel Tel: +972 (3) 7954555 Fax: +972 (3) 7954556 Human Resource Services 27
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