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 a few common types of passive income.
Tax rates for passive income in Israel depends on income sources and are divided into three main categories: interests, 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 maximal tax rate of 46% (in 2009) on certain capital assets including untraded shares in Israel or abroad. Capital gains, one of the most common sorts of passive income, are generally taxed at a rate of 20% 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 kinds of passive income and capital gains of individuals are taxed based on tax rates, specifically applied for those kinds of income/gains.
Companies are taxed on a much more unified manner. Corporate tax rate in Israel is currently 26% (in 2009; this tax rate shall be gradually reduced up to 18% in 2016), disregarding the company's size. In addition, there are many tax exemptions from tax on passive income which are granted to individuals and are not given to companies.
Until 2003, the Israeli tax system was based on the territorial system. This taxation system determined that Israeli tax laws apply only to income which was derived in Israel. This allowed Israelis, which have returned to Israel after living abroad, and new immigrants to Israel to keep holding resources of passive income abroad, without being taxable in Israel in respect of this income. In 2003, The Israeli taxation system began to be based on the personal system. The implication of this reform was that many sources of income derived by new immigrants and returning Israeli citizens became subject to Israeli taxes.
In order to give incentives to new immigrants and Israelis to return to Israel, the Israeli government has instituted many tax relieves on passive income for "returning residents" and new immigrants which mostly apply to different kinds of passive income. A returning Israeli resident is defined as an Israeli which has resided out of Israel for six years continuously; another category is a "senior returning resident" defined as a resident resided abroad for ten years. Israeli tax regulations state that a new immigrant and a "senior retuning resident" are entitled for an exemption from Israeli taxes on passive income derived from dividends, rents and deposits derived abroad (unless these incomes are derived from a business), for a period of ten years. "Returning residents" are entitled tax exemption in Israel on passive income for a period of five years from the date of their arrival in Israel.
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