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NEWS
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GLOBAL GIANT 3M TO INITIATE ISRAEL R&D CENTER

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US DEPARTMENT OF DEFENSE TO AWARD $100,000 TO BEST ISRAELI ANTI-TERROR STARTUP

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GERMAN MEDIA GIANT PROSIEBENSAT.1 TAPS ISRAELI INGENUITY

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ISRAELI CHIEF SCIENTIST MEETS WITH BRITISH MINISTERS

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REVERSING THE BRAIN DRAIN

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RECORD YEAR FOR OFFERINGS BY ISRAELI COMPANIES

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EVENTS
TAXATION

Taxation

 

Once a company has been registered with the Registrar, it must be registered with the appropriate Tax Authorities.

 

Registration as a company should be made at the Tax Authority upon commencement of operations. The filing number is usually the same one as the one issued by the Registrar of Companies. Registration is made using form 4436, which includes basic details of the company.

 

 

A. Monthly and Annual Tax Filings

 

The Israeli tax year is generally the calendar year. Subsidiaries of foreign public companies may sometimes use a different fiscal year.

 

All companies doing business in Israel are required to file audited annual tax returns and financial statements within five months after their fiscal year.  Extensions may be obtained. Filings may sometimes be spread over a period of up to 13 months after the tax year-end.

Companies must also file monthly returns on account accompanied by tax payments. Bimonthly returns are sometimes acceptable for small businesses.

 

Taxes to be filed include:

          Company tax installments- a percentage of the company's monthly sales revenue.

          Supplementary company tax installments with respect to certain non-deductible expenses.

          Tax withheld from salaries and remittances to suppliers when applicable.

          Value-added tax (VAT).

          National Insurance.

 

These filings and payments must be made by the 15th day after the month's end and can be paid at a bank or post office. Late payments of even a few days generate a computer penalty.

Regulations require detailed bookkeeping and invoice requirements for income tax and VAT. Accounting records must be available for inspection in Israel by tax officials.

 

 

B. Israeli Tax Structure

 

(1) Corporate Tax 

Israeli resident companies are subject to tax on worldwide profits and gains, with credit granted for overseas taxes. A nonresident company is subject to tax only on Israeli-source profits, which include, inter alia, income deriving from an Israeli permanent establishment or income accrued and produced in Israel, as well as capital gains from the sale of Israeli assets.

For an Israeli resident corporation, corporate income tax applies to all income, regardless of from where it arises. Israeli-resident companies are subject to capital gains tax on any of their capital gains worldwide.

The standard rate of company tax in Israel in 2014 is 26.5%. Dividends are taxed at rates ranging from 25% to 32%, resulting in a combined tax burden on distributed corporate profits of 45% to 50%. This is subject to any tax treaty in the case of foreign companies and investors.

Preferred enterprises in industry and technology pay company tax of 9% in development area A and 16% elsewhere, and the withholding tax on their dividends is 20% in 2014. The resulting combined tax burden on distributed tax-break profits is therefore 27.2% to 32.8% subject to any tax treaty in the case of foreign investors.

There are no basic differences in the tax regime as applied to different forms of business organizations. However, partnerships are transparent for tax purposes.

 

(2) Value Added Tax (VAT)

VAT is an indirect tax based on consumption or import of goods and services in or to Israel. The standard Israeli VAT rate is currently 18%. Businesses with annual revenues below NIS 79,482 in 2014 are usually exempt dealers, except in certain professions. Exempt dealers dont need to charge customers any VAT and cannot recover VAT on their expenses.

A foreign entity or person that starts to conduct any part of business in Israel must also appoint a local VAT representative whose permanent place of residence is in Israel, and who assumes the responsibility for handling all VAT matters. VAT form 22 (APPLICATION FOR REGISTRATION OF A DEALER) and form 821 (REGISTRATION FOR VAT PURPOSES) should be completed and signed by all parties. The representative will be treated as the person liable for VAT.

In order to register as a local business, the registration should be made at the local VAT office nearest to the company's office.

The following materials are required in order to register:

1. Certificate of incorporation signed by the Registrar of Companies

2. A copy of the Memorandum of Association and Articles of Associations

3. A contract regardig renting or buying offices for the company

4. Document proving the possession of an Israeli bank account

5. A lawyer/accountant's certificate with respect to: (a) the authorized signatories of the company; (b) the directors of the company

6. A photocopy of the director's identity card

7. Company stamp

VAT Exemptions for Exporters

 

Most export transactions, including export of goods, rendering of services to foreign entity or resident or sale of intangible assets to a foreign company which is situated abroad are zero-rated transactions provided certain conditions are met. Because of variations in how this provision is applied, exporters should make sure to check with their accountants for further clarification. 

 

 

VAT Refunds for Exporters

 

All business companies in Israel, including exporters, are required to pay VAT on imports. However exporters are generally entitled to a VAT refund within 30 days after filing the relevant return.

 

Exporters are entitled to join a quick refund arrangement if they meet one of the criteria detailed below:

 

          At least 50% of the previous' years turnover was exports.

          The total amount for each VAT return is not less than 10,000NIS.

          There were at least $10 million in exports in the previous year.

          The enterprise is an approved/beneficiary one.

 

 

 (3) Tax on Dividends 

Dividends payable to Israeli companies resulting from income produced or accrued in Israel are tax-exempt (0%).  Dividends from income produced or accrued or dividends received from abroad are subject to a 25% tax.  A tax credit may be granted for tax withheld or, alternatively, the gross dividend will be subject to the regular corporate tax rate, with both a direct and indirect foreign tax credit, if the Israeli company qualifies for the indirect tax credit mechanism. 

Dividends distributed by a priority enterprise as of 1 January 2014 are taxed at 20%, while dividends distributed by a special priority enterprise are generally taxed at a rate of 15%.

Dividends from a revaluation of assets are taxed in the same way as a sale of the assetscapital gains tax is applied on the difference between the original purchase price of the asset and the gross amount distributed.

Subject to any foreign tax treaty, dividends paid to shareholders who hold under 10% of the company are subject to a 25% withholding tax, and dividends paid to more significant shareholders who hold over 10% of the company are subject to a 30% withholding tax.


(4) Personal Income Tax

An employer is required to open a withholding tax file and withhold income tax from employment remuneration paid to employees, for work performed in Israel.

 

The withholding tax file should be opened with the tax authorities prior to making remuneration to employees or payments to other recipients. 

In contrast to salaried employees, self-employed persons must file an annual tax return and make their own tax payments.

Taxes of up to 50% are levied on most domestic Israeli expenses, unless the recipient holds confirmation from the Israeli Tax Authority allowing a lower rate.

 

Israeli banks must withhold tax, generally at rates of 25-31%, on remittances from Israel, unless the remittance is related to imported goods.

 

An exemption or reduction in tax withholding may be obtained for certain cases such as when a treaty applies or when the payments are for services that are rendered entirely abroad.

 

Failure to withhold will result in a denial of the relevant expense and possible penalties.

 

Income Tax Rates as of 2014 are as follows:

Monthly Income (NIS)

Monthly Income (USD)*

Tax Rate (%)

Up to 5,280

Up to 1,515

10

5,281-9,010

1,516-2,585

14

9,011-14,000

2,586-4,016

21

14,001-20,000

4,017-5,737

31

20,001-41,830

5,738-11,999

34

Each additional shekel

48

*Estimates based on January 2014 exchange rate of 3.486 NIS/dollar.

 

(5) Capital Gains Taxes 

The general capital gains tax rate for a corporation is the standard corporate tax rate. The inflationary component of the gain is exempt from tax. Persons who are not residents of Israel for tax purposes are exempt from Israeli capital gains tax on gains from the sale of shares traded on the Tel Aviv stock exchange and gains from the sale of shares of Israeli companies traded on stock exchanges overseas acquired after listing, unless the gain is attributable to a permanent entity the seller possesses in Israel. Nonresidents are also exempt from tax on gains derived from the sale of shares allocated to them by an Israeli-resident company in consideration for their capital investment, as long as the that Israeli company was classified as a R&D intensive company.

Gains derived from the sale of securities in Israeli or Israeli-related companies purchases on or after 1 January 2009 are also exempt from capital gains tax for nonresidents, regardless of relevant tax treaty stipulations. However, the exemption does not apply in the following situations:

1. Comapnies whose assets consist mostly of real estate

2. The shares sold were acquired from a related part or by way of certain tax-deferred reorganizations.

3. The shares were held through a permanent entity.

4. At least 25% of the non-resident selling entity is controleld by Israeli residents.

 

(6) Real Property Betterment Tax 

When a company sells real property, the standard corporate tax rate on the date of sale is applied to the amount of betterment, which is the gain accrued on the property from the original purchase date until the sale date.  In some cases, municipal authorities may levy a separate betterment levy of 50% on gains from a property which resulted directly from the municipal authorities actions.  In such a case, the levy paid may be deducted from the overall betterment amount before applying the property betterment tax.

 

(7) Import Duty and Purchase Tax

 

Certain imports and local industrial production are also subject to a purchase tax. Importers must pay the tax, along with any applicable duties when the imported goods are released from customs, while local manufacturers must pay it 15 days after the end of the month in which the relevant goods are sold.

Israeli importers with the USA, EU, EFTA, Canada, Mexico, Turkey and the MERCOSUR countries benefit from bilateral duty free agreements. Reductions in purchase tax on imports are also available to companies producing in Israel for export.

 

(8) Tax Treaties 

Currently, Israel has tax treaties with around 52 countries. The treaties function to prevent double taxation by guaranteeing that the investors state of residence will provide either a tax credit for tax which has been paid in Israel or, alternatively, that the Israel sourced income will be exempt from tax in Israel or in the country of residence of the foreign investor.

The following are the countries which have tax treaties with Israel: Austria, Belarus, Brazil, Bulgaria, Belgium, Canada, China, Croatia, Czech Republic, Denmark, Estonia, Ethiopia, Finland, France, Georgia, Germany, Ireland, Greece, Holland, Hungary, India, Ireland, Japan, Jamaica, Korea, Luxemburg, Latvia, Lithuania, Malta, Mexico, Moldova, Norway, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovenia, Slovakia, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, Ukraine, United States, Uzbekistan and Vietnam.


(9) Foreign Tax Credit

 

Israel grants a direct foreign tax credit on foreign taxes paid on income generated outside of Israel, while certain cases receive an indirect tax credit.

 


(10) Payroll Tax

Payroll tax is levied only on nonprofit organizations (at a rate of 7.5% of wages) and financial institutions (at a rate of 18% of wages).


(11) Real Estate Acquisition Tax

In general, an acquisition tax of 6% is applied to the purchaser of real property in Israel. In the case of a residential apartment, the acquisition tax ranges from 0-10%.


(12) Annual Tax Return

The Israeli tax year begins in January. Taxpayers may apply for a different tax year structure, however, such requests are only approved under special circumstances.

Companies must file an annual tax return no later than 5 months following the end of the tax year. Each company in a group is required to file its own return; nevertheless, certain qualified industrial companies may file a consolidated tax return. The tax authorities determine advance tax payments, with some taxpayers required to pay tax according to their monthly turnover. Penalties apply if advance payments are overdue or if tax returns are filed late. Any overdue tax is subject to an annual 4% interest rate (both the interest and principal are linked to the Consumer Price Index) until paid in full.

 

(13) Employer Contribution to Employee Social Security and Health Insurance  

 

Employers must contribute a fixed percentage of the given employee's salary toward social security and health insurance.

Social Security (locally called 'National Insurance'): The National Insurance Institute provides Israeli residents with a comprehensive system of social security benefits which are financed by national insurance contributions from both employers and employees.

Health Insurance: All Israeli residents are entitled by law to health services and are required to pay health insurance dues, determined on the basis of occupation and sources of income. The State of Israel is responsible for funding and subsidizing such services, while preserving the right to medical secrecy, privacy and human dignity.

According to Israeli law, employers are responsible for withholding employees' contributions from salaries and remitting these together with the employers' own contributions, to the National Insurance Institute. Separate registration at the National Insurance Institute is not required.

A copy of the form submitted to the withholding tax office is transferred to the National Insurance Institute and the same filing number is used for both authorities.

National Insurance and Health Insurance rates (as a percentage of income) for salaried employees are as follows (as of 2014):

 

 

Up to 60% of the Average Salary -

NIS 5,453 (USD 1,564)*

Over 60% and up to the Maximum Income Subject to Insurance Fees NIS 43,240 (USD 12,404) *

Employee

Employer

Total

Employee

Employer

Total

Social

Security

0.40%

3.45%

3.85%

7%

6.75%

13.75%

Health Insurance

3.10%

--

3.10%

5%

--

5%

Total

3.50%

3.45%

6.95%

12%

6.75%

18.75%

* Average salary in January 2014 was 9,088 NIS monthly = USD 31,680 annually at an exchange rate of 3.4860

Self-employed individuals contribute to their social security and health insurance as a percentage of their income, as follows:

 

 

For the share of income which is up to 60% of the average wage (reduced rate) - NIS 5,453

For the share of income which exceeds 60% of the average wage up to the maximum income subject to insurance contributions (full rate) - NIS 43,240

National insurance contributions

6.72%

11.23%

Health insurance contributions

3.10%

5.00%

Total

9.82%

16.23%

 

 

 

 

 

 

Self-employeed persons in Israel who are not residents of Israel are exempt from the requirement to make deposits into national insurance accounts.


 (14) Municipal Taxes

Municipal property tax is caluclated per square meter of property and is levied upon the tenant, regardless of whether the tenant owns or rents the property. Below is a sampling of municipal tax rates for industrial structures in a number of locations around Israel for 2013. In practice, rates vary greatly among locales as well as among locations within each locale.

Location

Average Municipal Tax Rate for Industrial (Manufacturing) Building Area (NIS per square meter per year)

Ashdod (Southern Israel)

62.39

Beer Sheva (Southern Israel)

49.03

Haifa Area 1 (Northern Israel)

123.80

Haifa Area 2 (Northern Israel)

113.09

Haifa Area 3 (Northern Israel)

78.21

Herzliya (Central Israel)

123.53

Jerusalem Area 1 (Central Israel)

145.22

Jerusalem Area 2 (Central Israel)

107.75

Karmiel (Northern Israel)

42.55

Omer (Southern Israel)

87.87

Tel Aviv (Central Israel)

84.00

Tiberias (Northern Israel)

27.28

Yerucham (Southern Israel)

57.98

Source: Israeli Manufacturers Association, 2013

 

 


Last modified: 9/17/2014 pic