Personal taxation in Tel Aviv
Effective personal income tax rate
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Israeli residents are taxed on their worldwide income. Nonresidents are taxed only on Israeli-source income.
An individual is resident in Israel if his/her “center of vital interests” is in Israel. The number of days spent in Israel and overseas also affects residence status: an individual will be deemed to be resident if he/she has spent 183 days or more in Israel or if, during the current tax year, he/she spends 30 days or more in Israel and the total duration of his/her stay in Israel in the tax year and in the two preceding tax years, on a cumulative basis, amounts to 425 days or more.
A married couple, living together, may opt for separate tax assessment in certain circumstances; otherwise, they may file jointly.
The income tax rates are progressive up to 48%.
Deductions and allowances
Deductions are granted for pension fund contributions, and individuals are entitled to various personal allowances and credits.
All income from employment and/or a vocation is taxable, including the value of fringe benefits and cost-of-living allowances. Passive income from bank deposits and savings, both in Israel and overseas, also is taxable.
“Real” gains (i.e. the portion of gains not derived from inflation) derived from the sale of shares in a publicly traded company are subject to a 25% tax rate if derived by noncontrolling shareholders (i.e. those holding less than 10% of the Israeli payer
Other taxes on individuals
Real property tax
Property betterment tax is applicable to the sale of real property. The principles of the property betterment tax are similar to those of the capital gains tax. The tax regime uses a linear tax model that taxes the real betterment at different tax rates, depending on the dates on which the betterment was accrued. Betterment accrued from the date of purchase up to 7 November 2001 is subject to the marginal individual tax rates; betterment accrued from 8 November 2001 to 1 January 2012 is subject to the marginal individual tax rates up to 20%; and betterment accrued after 1 January 2012 is subject to the marginal individual tax rates up to 25% (30% if the seller holds more than 10% of a real estate company).
National insurance is required by law (covering allowances and stipends for pensioners, widow/ers, disability, maternity, children’s allowances, industrial accidents, military service pay and unemployment). Some employers pay part or all of employees’ compulsory contributions to the national insurance scheme.
Compliance for individuals
Penalties apply if advance payments are overdue or if tax returns are filed late. The balance of any tax due is payable as of the beginning of the following tax year. Overdue tax is subject to an annual 4% interest rate (both the interest and principal are linked to the CPI) until paid in full.
Filing and payment
An individual must file an annual tax return no later than 30 April of the following year. An extension of the deadline or an exemption from filing may be granted in certain cases.
Corporate taxation in Tel Aviv
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Israeli resident companies are subject to tax on worldwide profits and gains, with a credit granted for overseas taxes paid. A nonresident company is subject to tax only on Israeli-source profits, which include income derived from an Israeli permanent establishment (PE) or income accrued and produced in Israel, as well as capital gains from the sale of Israeli assets.
Taxation of dividends
The tax rate on dividends distributed by an Israeli resident company to another Israeli company is 0%, provided the dividends arise from income produced or accrued in Israel. The tax rate on dividends from income produced (or accrued) abroad, or from dividends received from abroad, is 25%; a tax credit will be granted for tax withheld. Alternatively, the gross dividend will be subject to the regular corporate tax rate, with a direct and an indirect foreign tax credit if the Israeli company qualifies for the indirect tax credit mechanism.
A corporation is deemed to be resident in Israel if its activities are managed and controlled from Israel or if it is organized under the laws of Israel.
Trading or business losses may be offset against income from any source in the same year. Losses may be carried forward indefinitely to be offset against business income and business capital gains. Losses may not be carried back.
Various programs are available, e.g. foreign investment incentives (approved enterprise status, various tracks), a holding company regime and R&D incentives. See also "Taxation of dividends" and “Rate,” above.
The basic tax rate for companies is 25% (reduced from 26.5% as from 1 January 2016). An Israeli company classified as a preferred enterprise is taxed depending on where its facilities are located (9% if located in “Area A” and 16% if located elsewhere).
A special tax regime applies to Israeli holding companies that invest in foreign corporations. An eligible corporation is entitled to an exemption from tax on dividends received from a qualified foreign subsidiary and on capital gains derived from the sale of shares in such a subsidiary, as well as a full exemption from tax on financial income derived from investments in the Israeli capital market. In addition, dividends paid by the holding company to a nonresident shareholder are subject to a 5% withholding tax, rather than the normal 25% or 30% tax (see “Dividends” under “Withholding tax,” below).
Foreign tax credit
Israel grants a direct tax credit on foreign taxes paid on non-Israeli-source income. An indirect tax credit is granted in certain cases.
An Israeli resident corporation is subject to corporate income tax on its worldwide income, and to capital gains tax on worldwide capital gains.
The capital gains tax rate depends on the purchase date and the nature of the asset. The general capital gains tax rate for a corporation is the standard corporate tax rate. The inflationary component of the gain (accrued as from 1 January 1994) is exempt from tax.
Holding company regime
See under "Participation exemption."
Other taxes on corporations
Real property tax
Property betterment tax is applicable to the sale of real property. The principles of the property betterment tax are similar to those of the capital gains tax. The betterment is calculated from the date of purchase until the date of sale, and the amount of betterment is subject to the corporate tax rate at the date of sale.
National insurance is required by law (covering allowances and stipends). Some employers pay part or all of employees’ compulsory contributions to the national insurance scheme.
The purchaser of real property is subject to a purchase tax (acquisition tax) of 6%. When the asset purchased is a residential apartment, the purchaser is subject to tax at progressive rates ranging from 0%-10%.
See under “Real property tax.”
Payroll tax is levied only on nonprofit organizations, at a rate of 7.5% of wages, and financial institutions, at a rate of 17% of wages.
Compliance for corporations
The filing of a consolidated return generally is not permitted; each company in a group is required to file its own return. However, if certain conditions are satisfied, qualified “industrial companies” may file a consolidated tax return.
Penalties apply if advance payments are overdue or if tax returns are filed late. The balance of any tax due is payable as of the beginning of the following tax year. Overdue tax is subject to an annual 4% interest rate (both the interest and principal are linked to the Consumer Price Index (CPI)) until paid in full.
A taxpayer may request a ruling on the tax consequences of a proposed transaction.
The tax year begins in January. Taxpayers may apply for a special tax year, but the application will be approved only in special circumstances.
Companies must file an annual tax return no later than five months following the end of the tax year (an extension to file may be obtained in certain circumstances). The tax authorities determine advance tax payments, with some taxpayers required to pay tax according to their monthly turnover.
Other taxation in Tel Aviv
Value added tax
Filing and payment
The dealer will collect output VAT on the goods, services or assets it sells. The VAT collected will be transferred to the VAT authorities once a month or once every two months, whichever is determined to be more appropriate by the authorities based on the annual turnover projection (once a month if the annual turnover is greater than approximately NIS 1.5 million). The dealer may offset the output VAT against any input VAT paid in the course of doing business.
The standard VAT rate is 17%. Certain items are subject to a 0% rate, including exported goods, intangible goods and the provision of certain services to nonresidents (i.e. tourism services), the transport of cargo to and from Israel, the sale of goods and services to the Eilat free-trade zone and the sale of fresh fruit and vegetables.
VAT applies to most goods and services, and imports.
An Israeli company, or a foreign company conducting business in Israel, generally must register for VAT purposes. A nonregistered foreign company operating in Israel generally must register within 30 days. Additionally, a foreign company registered in Israel or a nonregistered foreign company that carries on an activity or business in Israel must appoint a local representative for VAT purposes within 30 days of commencing its domestic activities, and must notify the VAT office closest to its place of business.
Controlled foreign companies
A foreign company that is “controlled” by Israeli shareholders and that has accumulated undistributed passive profits taxed at a rate lower than 15% will be considered a controlled foreign company (CFC). In such a case, the Israeli controlling the CFC will be treated as if it had received its proportionate share of the profits as dividends (deemed dividends). Upon the distribution of profits, the Israeli controlling shareholder will be eligible for a deduction in the amount of the gross notional dividends that were subject to Israeli tax (however, the deduction will not exceed the amount of profits being distributed), in addition to a tax credit for foreign tax paid.
The taxpayer generally must disclose all facts relevant for taxation, especially with respect to transactions with related parties.
The transfer pricing rules, which are based on the OECD guidelines, apply to transactions between an Israeli resident and its related nonresident. A hierarchy of transfer pricing methodologies applies, with preference given to transaction-based methods over profit-based methods. Documentation requirements mandate that the taxpayer attach a statement to the annual tax return and provide a detailed transfer pricing study at the request of the tax authorities. An advance pricing agreement may be obtained.
The Israeli tax authorities can challenge artificial transactions.
A 25% (reduced from 26.5% as from 1 January 2016) withholding tax is levied on royalty payments to nonresidents. The rate may be reduced under a tax treaty.
Dividends paid to a noncontrolling foreign resident (i.e. a person that holds less than 10% of the shares of the Israeli payer) are subject to a 25% withholding tax; otherwise, the rate is 30%. These rates may be reduced under a tax treaty or incentives regime.
Branch remittance tax
There is no specific tax on the remittance of profits; however, in the case of an approved enterprise, a branch may be subject to a tax rate of 15%, in addition to the corporate income tax.
Other payments to non-Israeli corporations are subject to withholding tax at a rate of 25% (reduced from 26.5% as from 1 January 2016), and a 25% rate applies to non-Israeli individuals. The rate may be reduced under a tax treaty.
Corporate income tax (currently 25%, reduced from 26.5% as from 1 January 2016) will be imposed if the recipient of the interest is a “body of persons," although the rate may be reduced under a tax treaty. A 0% withholding tax applies to interest on certain bonds.
Technical service fees
See “Other,” below.
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