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Tax Rates for Passive Income in Israel

Passive income is income which does not require any significant active input from its recipient. Income derived from rent, income from a limited business partnership, royalties and dividends are just a few common types of passive income.

Tax rates for passive income in Israel depend on income sources and are divided into three main categories: interest, dividends and capital gains from sources of income in Israel and abroad.

Tax rates for passive income in Israel vary from 10% on income from rent in Israel (subject to certain conditions) up to a maximum tax rate of 50% (in 2016) on given capital assets including untraded shares in Israel or abroad.

Capital gains, one of the most common forms of passive income, are generally taxed at a rate of 25% of the profit made by selling stocks and securities.

There are fundamental differences between individuals and companies regarding taxation for passive income and capital gains. Many forms of passive income and capital gains of individuals are taxed based on tax rates, specifically applied for those forms of income/gains.

Corporate tax rate in Israel is currently 25% (raised commencing 01.01.2016), independent of the company's size. In addition, there are many tax exemptions on passive income which are granted to individuals and are not to companies.

Up to 2003, the Israeli tax systemwas based on a territorial system. Under this system, Israeli tax laws apply only to income derived within the Israel’s borders. This allowed Israelis, who have returned to Israel after living abroad and new immigrants to Israel to retain sources of passive income overseas, without being subject to taxation in Israel in respect of this income. In 2003, the Israeli taxation system was amended and a personal taxation system was applied in addition to the territorial tax system. The implication of this reform was that many sources of income derived by new immigrants and returning Israeli citizens became subject to Israeli tax requirements.

In order to provide
incentives to new immigrants and Israelis to return to Israel, the Israeli government has instituted many tax relief measures on passive income for "returning residents" and new immigrants. A returning Israeli resident is defined as an Israeli who resided overseas for six years continuously; another category is a "Veteran Returning Resident" defined as a resident who resided overseas for ten years continuously. Israeli tax regulations state that a new immigrant and a "Veteran Returning Resident" are exempt from Israeli taxes on passive income derived from dividends, rents and deposits held by them overseas (unless income was derived from a business venture), for a period of ten years. "Returning Residents" are entitled to tax exemption in Israel on passive income for a period of five years from the date of their arrival in Israel.