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Corporate Tax in Israel

Corporate tax is a tax levied on profits made by companies. Corporations (companies) are considered separately from their owners. Therefore, any profits derived by companies are taxed separately from their owners' profits. There are a number of laws and regulations governing rates and permissible deductions of corporate tax in Israel. This article presents a brief summary of corporate tax rates in Israel, the laws and regulations regarding Israeli corporate taxes, as well as summarizing a number of the main tax deductions and relieves.

In recent years, the Israeli government has decided to implement a gradual decrease of corporate tax rates in Israel, based on the assumption that corporate tax rates constitute a major factor in the decision of foreign investors to invest in Israel, as opposed to alternative countries. The corporate tax rate in Israel in 2006 was 31%. The rate of corporate tax in Israel in 2016 is 25%. 

The three main laws which regulate corporate tax in Israel are: the Income Tax Ordinance, the Law for Encouragement of Capital Investments and the Law for Encouragement of Industry (Taxes). These laws regulate tax rates and determine tax deductions and certain tax incentives. Israeli tax laws state that Israeli residents are liable to Israeli taxes on their worldwide income, as well as capital gains. Non-resident companies are liable to Israeli taxes on income derived in Israel. A company which is incorporated in Israel or which is managed in/from Israel is considered an Israeli resident company.

In order to encourage local and foreign investors, as well as entrepreneurs to establish businesses and to invest in Israel, the Israeli government and tax authorities have introduced many tax incentives designed to reduce the rate of corporate tax in Israel for many local and foreign companies on their taxable income. The main corporate tax incentives instituted in Israel are:

Foreign tax relief: As of January 2003, companies in Israel are allowed to deduct foreign taxes paid on overseas profits, under certain conditions.

Grant programs: There are a number of regulations and tax incentives administered by the Israeli investment center and the Ministry of Industry, Trade and Labor, in order to encourage research and development projects in Israel.

Tax benefits under the Law for Encouragement of Capital Investments (the "Investment Law"):

In addition to receiving various grants, approved enterprises may benefit from reduced corporate tax rates of 0%-25% for a period of 7 to 10 years.

On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") that has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a "Beneficiary Enterprise." Provisions generally require that at least 25% of the Beneficiary Enterprise's income shall be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.

Income derived from a "Beneficiary Enterprise" will be tax exempt for a period of 2-10 years, as of the first year in which the approved enterprise first generates taxable income.

On December 29, 2010, the Investment Law was amended to significantly revise the tax incentive regime in Israel commencing on January 1, 2011. The December 2010 amendment introduced a new status of "preferred enterprise,” replacing the existing status of "beneficiary enterprise.” As with a "beneficiary enterprise,” a preferred enterprise is an industrial company meeting certain conditions, including a minimum of 25% of its income from export activities. However, under the December 2010 amendment, the requirement for a minimum investment in production assets in order to be eligible for the benefits granted under the Investments Law was cancelled. A preferred enterprise is entitled to a reduced flat tax rate with respect to preferred enterprise income at rates between 9% - 16% (since 2014).

Priority zones: Israeli government policy is to provide privileged conditions for companies in the peripheral areas of Israel. Most priority areas are in the Galilee in northern Israel and the Negev, in southern Israel. Benefits for companies in priority A areas include a reduced corporate tax rate, which depends on the company's value, field of activity and if it is a residential or foreign owned company.

In addition to the above-mentioned tax relief and exemptions, many other incentives were introduced by the Israeli authorities over the past years, in order to encourage establishment of businesses and promotion of initiatives in Israel.

Find out more about VAT in Israel, Income tax or other Taxes in Israel?