THE ISRAELI TAX SYSTEM Iris Stark, CPA October 2012
THE ISRAELI TAX SYSTEM Taxation in Israel is based on an individual method. Accordingly, as of 2003, all Israeli residents are liable for payment of tax in respect of their entire income worldwide. The individual method raises, in effect, the tax liability, on all income active, passive and capital gains, and therefore income generated or derived outside Israel will also be liable for tax, regardless of whether it was received abroad or in Israel. Foreign residents are also liable for tax on income generated or derived in Israel with certain exceptions and relief, subject to the Israeli Tax Law and the Double Taxation Treaties. Residents Test: Corporations - The Management and Control test or where the company was registered. Individuals - The centre of life test (183 Days Presumption).
TAX RATES (CURRENTLY) Corporate Tax Individual Tax Withholding tax on payments to foreign resident VAT Income tax 25% Up to 48% Additional 2% From 1.1.2013 25% unless reduced under an applicable tax treaty. 17% over $200,000 Capital Gains tax 25% 25% / 30%(**) Dividend 0% / 25%(*) 25% / 30%(**) (*) upon distribution to a non-israeli company or on dividend distribution from non-israeli company. (**) in case an individual holds 10% or more, of any means of control of a company. There is no inheritance tax in Israel.
Property in Israel- Also Applicable to Foreign Investors Foreign Individuals: Residential rental income Residential rental income is taxable at 10% of the gross income. No ceiling Exemption on gross income from residential rental. NIS 4,910 per month ($15,425 per year) There are some exemptions from capital gains derived from selling a residential apartment where certain conditions are met. Depending on the sale value of the apartment and the period between sales.
TREATY RELIEFS Israel is a signatory to a Treaty for the Prevention of Double Taxation with about 50 countries world-wide. Most of Israel s tax treaties are based on the Model Tax Convention of the OECD (the Organization for Economic Cooperation and Development). The countries that have tax treaties with Israel include among others, The United Kingdom, The United States, Singapore, Austria, France, Denmark, India and Poland.
ISRAELI TAX TREATIES Country Dividends (%) Interest (%) Royalties (%) Country Dividends (%) Interest (%) Royalties (%) Austria 0/10 5 0 Luxemburg 5/10/15 5/10 5 Belarus 10 5/10 5/10 Mexico 5/10 10 10 Belgium 0/5 5 0 Moldova 5/10 0/5 5 Brazil 10/15 15 10/15 Netherlands 5/10/15 10/15 5 Bulgaria 10/12.5 5/10 12.5 Norway 25 25 10 Canada 15 15 15 Philippines 10/15 10 10/15 Croatia 5/10/15 0/5/10 5 Poland 5/10 5 5/10 China 10 7/10 7/10 Portugal 5/10/15 0/10 10 Czech Republic 5/15 10 5 Romania 15 5/10 10 Denmark 0/10 0/5 0 Russia 10 10 10 Ethiopia 5/10/15 0/5/10 5 Singapore 5/10 7 5 Estonia 0/5 0/5 0 Slovakia 5/10 2/5/10 5 Finland 5/10/15 10 10 Slovenia 5/10 0/5 5 France 5/10/15 5/10 10 South Africa 25 25 0 Georgia 0/5 0/5 10 Spain 10 5 5/7 Germany 25 0 0/5 Sweden 0 25 0 Greece 25 10 10 Switzerland 5/10/15 5/10 5 Hungary 5/15 0 0 Taiwan 10 7/10 10 India 10 10 10 Thailand 10/15 10/15 5/15 Ireland 10 5/10 10 Turkey 10 10 10 Italy 10/15 10 10 Ukraine 5/10/15 5/10 10 Jamaica 15/22.5 15 10 United Kingdom 0/5 0/5 0 Japan 5/15 10 10 USA 12.5/15/25 10/17.5 10/15 Korea S. 5/10/15 7.5/10 2/5 Uzbekistan 10 10 5/10 Latvia 5/10/15 5/10 5 Vietnam 10 0/10 5/15 Lithuania 5/10/15 0/10 5/10
EXEMPTIONS FOR FOREIGN INVESTORS Generally, according to the Israeli domestic law, capital gains derived from the sale of capital assets, based in Israel are subject to tax in Israel. Exemptions and Relief: Tax exemption for non-residents selling shares listed for trading on a stock exchange, provided that the capital gains are derived from a non-israeli permanent establishment of the foreign resident in Israel. Tax exemption on capital gain derived from realization of shares of an unlisted Israeli company, purchased after January 1, 2009 and subject to certain conditions; Treaty relief.
EXEMPTIONS FOR FOREIGN INVESTORS A foreign resident who has deposits in Israeli banks, gets tax exemption on profits on interest from the deposit. It is intended to encourage the investment of foreign residents in Israeli banks. In this context, it should be noted that banks in Israel have shown their immunity over the years since the global financial crisis. Against the background of uncertainty created by this crisis since 2008, Israel is still an island of stability in a sea of instability.
BUSINESS FORMS AND STRUCTURES Israeli limited company The two basic corporate forms are private and public limited companies. There is no official minimum capital requirement for setting up a company. Also there are no minimum requirements for the number of founders or shareholders and on the nationality or residence of shareholders. Branch of foreign company Partnerships Foreign companies may operate in Israel through a branch, but most prefer to establish a local subsidiary mainly in order to create a "wall" between the Israeli activity and the foreign company. Only companies registered in Israel are eligible for approved status (which qualifies a project for special incentives and assistance). Branch managers are personally liable for certain company obligations, such as money owed to workers. It should be noted that distributions from the Israeli branch to the foreign company, are not subject to tax in Israel (i.e. there is no "branch tax" in Israel). The branch will be liable to pay Israeli Tax upon its local activity. A limited partnership must have at least one general partner and one limited partner. The general partner, as in a general partnership, has unlimited liability for the obligations of the partnership. The liability of a limited partner is limited to the sum invested in the partnership. The limited partner may not participate in the management of the partnership and does not have the power to bind the partnership.
Transfer pricing rules Controlled Foreign Corporation (CFC) Thin Capitalization Rules ANTI AVOIDANCE RULES The Israeli transfer pricing rules, which are based on the OECD guidelines, apply to transactions between an Israeli resident and its related non-resident. A hierarchy of transfer pricing methodologies applies, with preference given to transaction-based methods over profit-based methods. Documentation requirements mandate, that the taxpayer will attach a statement to the annual tax return, and provide a detailed transfer pricing study upon the request of the tax authorities. Advance pricing agreements may be obtained. Under the Israeli CFC regime, if a foreign company is controlled by Israeli shareholders (more than 50% of its means of control are held by Israeli shareholders) and has accumulated undistributed passive profits, taxed at a rate lower than 20%, it will be considered a CFC. In such a case, the Israeli controlling member, will be treated as if it had received its proportionate share of those profits as dividend income (deemed dividend), even though not actually distributed. The deemed dividend will be taxed in the hands of the Israeli resident at a rate of 25%. Simultaneously, a tax credit (a deemed credit) will be granted to the Israeli controlling shareholder in the amount of the foreign tax that would have been paid if the undistributed passive profits had been distributed as a dividend. Israel does not have thin capitalisation rules. But the ITO could restrict the deduction of financial expenses by virtue of the circumstances.
TAX INCENTIVES Investment Incentives The State of Israel encourages both local and foreign investment by offering a wide range of incentives and tax benefits to investors in industry, tourism and real estate. Special emphasis is given to hi-tech companies and R&D activities. The purpose of the Law for the Encouragement of Capital Investments is to strengthen the industrial capability of the country. The law focuses on achieving growth in the business sector, improving Israel s industrial competitiveness in international markets, and creating employment and promoting development. Below is a short summary of the main points of the new law. Qualification requirements To qualify for benefits under the law, the company has to be an industrial company, registered in Israel and has to be internationally competitive i.e. have export capability. However, Biotechnology and Nanotechnology companies do not have to meet the "export" requirement to qualify. An investment in the Priority Area recognized by the law, could be recognized as an Approved Investment.
TAX INCENTIVES Location For the purposes of the law the country is divided into two areas: Priority Area A - Mainly the Galilee in the north, the Negev in the south and Jerusalem. The Center of the country all areas not specified in item 1. Investment Incentives according to the Law Companies that qualify will be entitled to reduced tax rates as detailed in the next slide, and might be eligible to receive capital grants.
TAX INCENTIVES Special tax rates Center of the Country Priority Area Company Tax rates Years: 2011 & 2012 15% 10% Years: 2013 & 2014 12.5% 7% 2015 onwards 12% 6% Dividend Tax rate 15% 15% There is no termination period regarding the tax benefit. As long as the company remains internationally competitive, it is eligible for the tax benefit as prescribed by the law. Grants track Investors seeking cash incentives must file an application before investing in a project. Applications are filed on official forms with the Investment Centre.
RELIEF FROM TAX AND REPORT OBLIGATIONS TO NEW RESIDENTS AND SENIOR RETURNING RESIDENTS The main principles of the program: The program applies to new residents ( olim ) and returning residents who arrived in Israel after a 10-year absence, and became Israeli residents from 2007 onwards. The program grants exemption from tax and report obligations for a period of ten years on foreign-sourced income i.e. income derived outside of Israel. The relief applies to all income including active income (business, labor etc.) passive income (interest, dividends, rent etc.) and capital gains. A complete exemption is granted from the mandatory report obligation with regard to income, bank accounts or assets located out of Israel, regardless of their value, purchase date or location worldwide.
THANK YOU Iris Stark, CPA October 2012