Israeli incorporated companies and foreign companies that have a permanent establishment in Israel are subject to Israeli corporate tax. The corporate tax rate is 23% in 2020 (Same as 2019).
Credit is given for tax that is paid by the Israeli corporation overseas.
However, in special circumstances, pursuant to the Capital Investment Encouragement Law, reduced corporate
tax at rates of 5%-16% will apply to income originating from a ‘preferred establishment’ or a ‘special preferred establishment’.
Tax concessions and exemptions
The State of Israel grants a broad number of support and incentive packages to help support stable, long-term growth of Israel’s economy, creating new jobs in the economy and reducing unemployment.
Pursuant to the Capital Investment Encouragement Law in Israel, companies that meet certain criteria (e.g. at least 25% of its income must derive from sales to a market that has a population of more than 14 million) are offered incentives that may be divided into two primary tracks:
- A reduced tax benefit track;
- A grants
The tax benefits track
A ‘preferred company’ pays corporate tax at a reduced rate of 16%. However, a company established in a type ‘A’ development zone pays corporate tax at a further reduced rate of 7.5%. In addition, a ‘preferred company’ is entitled to accelerated depreciation (under the conditions prescribed in the law) and reduced tax liability of 20% for dividends originating from preferred revenue.
Commencing 2017, ‘preferred technology companies’ pay company tax on profits derived from intellectual property at a rate of 12% if the enterprise is located in the center of Israel, and 7.5% if it is located in a type ‘A’ development zone. For companies with annual revenues above NIS 10 billion, the company tax rate is 6% regardless of the company’s location.
A company needs to meet additional terms in order to be considered a ‘preferred technology company’. For example, the research and development expenses must be at least 7% of income (on average, in the three years preceding to the first year that the benefit is required), or higher than NIS 75 million.
For Israeli resident recipients, the tax rate on dividends from preferred technology companies is 20%. If the recipient is a foreign resident and 90% of the shares are held by a foreign resident, then the tax rate on dividends is 4%.
The capital gains tax for preferred technology companies with annual revenues of up to NIS 10 billion, who sell an intangible asset to foreign related parties, is 12% if the intangible asset was bought from a foreign resident for a price of no less than NIS 200 million. For companies with annual revenues exceeding NIS 10 billion, the tax rate for selling an intangible asset to foreign related parties is 6%, if the Israeli company is the owner of the intangible asset from day one, or if the seller is a foreign company.
Companies that have a ‘special preferred establishment’ status will pay reduced corporate tax of 5% in a type ‘A’ development zone and 8% in the rest of the country. The conditions to fall under the definition of a ‘special preferred establishment’ are: total preferred revenue of the establishment is NIS 1 billion; the total revenues of the ‘preferred company’ and consolidated companies according to accounting rules add up to approximately NIS 10 billion; the company’s business plan is in accordance with the conditions prescribed in the law.
A company in this track, whose investment plan has been approved according to the Capital Investment Encouragement Law, will be entitled to a 20% grant on its approved investment in fixed assets (new equipment and infrastructure that will be included in the plan at the discretion of the director of the investments center).
VAT and indirect taxes
The standard VAT rate in Israel for 2020 is 17%. VAT is imposed at a uniform rate of the price of a ‘transaction’ in Israel or on the import price of goods into Israel. Israeli law prescribes types of transactions that will either be exempt from payment of VAT, or charged at a zero rate. In the first case, this will lead to prohibition of deduction of VAT that was paid by the supplier at the time of generation of the tax exempt revenue, whereas charging the transaction VAT at a zero rate (for example, transaction of export from Israel) will allow for reclaiming of the tax that was paid when generated.
In addition to VAT that is imposed on imported goods, the transaction may be liable for customs and/or purchase tax payable by the importer, in accordance with the regulations on the subject.
Taxation of foreign companies
As a rule, a foreign company controlled and managed outside of Israel, with no permanent establishment in Israel, is not required to pay tax in Israel, except for special incomes such as gains from real-estate investments or generating profit from a natural resource of the State of Israel.
A foreign entity that operates in Israel must appoint a representative, who is a resident of Israel, to operate on its behalf and deal with its affairs with the VAT authorities. It must do so within 30 days of commencing its activity in Israel.
In accordance with a number of double taxation treaties, passive income, such as royalties income, dividends and interest, will be subject to tax at a limited rate that may be withheld at source, and against which credit will be credited in the country of domicile. In case of revenue of a foreign entity that operates overseas, through a
permanent establishment, and the dividends are related to that permanent establishment’s operations, the country of origin will be given a full taxation right.
Personal income tax
A resident of Israel is liable for tax on a personal basis, i.e. on income that he has generated inside or outside of Israel, including income from employment, business, interest, dividends, royalties and capital gains.
The income taxation method in Israel is progressive; the initial tax rate is 10% and it gradually increases to a limit of 50%. The tax rate on dividends is 25%, but if the individual receiving the dividend is a significant shareholder in the distributing company (i.e., holds 10% or more of the company’s share capital), the tax rate to be imposed on the dividends, at the time of distribution, is 30%.
In addition to the income tax liability, an Israeli resident is required to pay National Insurance fees and Healthcare Insurance fees to the National Insurance Institute at rates of approximately 7-19% of income from employment or a business (employers partially bear amounts payable by their employees to the National Insurance Institute).
A resident of Israel is liable for tax on his income from employment, ancillary wages (such as the value attributable by law to benefits, e.g. a company vehicle, travel expenses, etc.) and from benefits (such as financing of academic studies) that he has gained from an employer in Israel or elsewhere in the world or as a self-employed person. In addition, he is liable to pay taxes on his income from interest, dividends, royalties or capital gains achieved.
An Israeli business, registered at the VAT office, is liable to pay VAT collected from his customers, after deducting VAT amounts paid to suppliers and service providers. Expenses that have been used for generating taxable income will be deducted from that income. Expenses will include vehicle upkeep (insurance, fuel and more), services received from various service providers, commissions paid to agents and others. A self-employed resident working from home may claim deduction of part of his home maintenance expenses (electricity, water, municipal taxes and other) in accordance with the circumstances of the matter.
Taxation of non-residents
A person will be considered resident of Israel, for tax purposes, if his tax domicile is in Israel. At the time of determining tax domicile, all of his family, economic and social relations will be taken into account.
The law states that a person’s tax domicile is presumed to be in Israel when:
- He has been in Israel during the tax year 183 days or longer;
- He has been in Israel during the tax year 30 days or longer, and his total stay in Israel in the tax year and in the two preceding years is 425 days or longer.
These tests may be refuted both by the payer and the assessment officer.
One who does not meet the criteria of being considered a resident of Israel will be liable for tax in the State of Israel for income that he has generated in its territory (territorial method). However, there are a number of reliefs and exemptions for a foreign resident, including exemption from tax on certain capital gains. The income of a foreign resident in Israel will be tested according to the tax treaty between the state of his residence and the State of Israel, including withholding tax at source on dividends that he receives.
Double taxation treaties
The State of Israel has engaged heretofore in 56 double taxation treaties. These treaties lay down the manner of distribution of income between the member states. The taxation treaties include, inter alia, relief in the form of reduced tax payment in Israel for income of a foreign resident in Israel including profits of business, capital gains, royalties, dividends and interest.
Further information regarding taxation treaties to which Israel is a signatory may be found on the State Revenue Division website www.financeisrael.mof.gov.il .
Tax exemptions for new immigrants and returning residents
New residents and senior returning residents (lived abroad for at least 10 years) are generally exempt from Israeli tax on non-Israeli source income for 10 years. Customs regulation
Customs duty is imposed on the import of goods into Israel. As commonly practiced in the world, Israel also has customs and purchase tax schedules that differentiate between types of goods by subjects and sub-subjects.
The correct classification of the goods that are imported is the key to determining the customs rate to be imposed. In addition, thought should be given to import licenses and approvals that are required, as well as additional import conditions if required, in accordance with the laws, regulations and provisions on the subject. Customs brokers are the ones who usually help businesses in dealing with customs and purchase tax issues.
Land and property taxes
The Land Taxation Law (Betterment and Purchase) 1963 and the regulations and orders ancillary thereto, lay down the tax that will be imposed at the time of purchase, sale or transfer of land and property. In Israel, progressive purchase tax is imposed on the purchase of a single home by a resident of Israel at rates of 0%-10%, according to its value. Progressive purchase tax rates ranging from 8%- 10% will apply to the purchase of a residence that is not the only residence owned by a given resident of Israel and also the purchase of a home by a foreign resident.
Concerning a property that is not being used for residency purposes, a uniform purchase tax rate of 6% will apply, whether for an Israeli resident or a foreign resident.
Many activities in Israel are performed in an environment which is knowledge and intellectual property intensive, and are based on research and development. The Government of Israel encourages the creation of intellectual property.
The Chief Scientist’s Office and the various government ministries have budgets for state participation in these activities in exchange for royalties that will be paid by the developing entity at the time of completion of development. On the other hand, certain restrictions are imposed on taking the intellectual property out of Israel.
Naturally, this activity involves protection of the intellectual property which has been developed. Patents and copyrights will be registered at the appropriate registrars, both in Israel and in the main target countries for product marketing.
Pursuant to the IFRS standards that are applied by public companies in Israel, development expenses are to be capitalized, for financial reporting purposes, upon the fulfillment of conditions that are prescribed in the standards, unlike US GAAP that prohibits such accounting practice. In addition, expenses due to patent registration will be capitalized.
R&D capital expenses will be tax deductible for an Israeli taxpayer. Expenses incurred within a program that has been approved by the Chief Scientist will be deductible in the year incurred. In other cases, their amortization will be permitted as an expense over a three year period.
Amortization on other intangible assets will also be deductible. Amortization rates have been established in a manner that is supposed to reflect the financial lifetime during which the property will be used in generating income. Amortization of intangible assets that have been acquired for generating income will be deductible upon the fulfillment of a number of conditions that must be carefully checked for, at rates of 10% (goodwill) or 12.5% (know- how, patent, copyright) per year.
Research and development (R&D) concessions
Israel is a major technology and development center, in a wide range of fields, some of which are world leaders. Israel has gained this status due to Israeli entrepreneurs’ innovations and significant number of technological and scientific breakthroughs that has been achieved in Israel.
The function of the Innovation Authority in Israel is to assist and encourage the development of novel technologies, from the initial stage, through product development to the stage at which it is considered a mature industrial or technological company. Companies that fulfill the conditions and meet the criteria receive approval for a program by the Innovation Authority.
Once the program is approved, the companies are entitled to receive a grant of 20-50% of the approved research and development expenses. If the approved program is in a preferred area, as defined by the State, an additional grant of 10%-25% will be given. The grant is to be repaid by payment of royalties if the technology reaches the commercialization stage.
Israel Innovation Authority runs bi-national cooperation tracks between Israeli and foreign companies. The funding rate for an approved plan in this framework may reach 50% of the approved budget. The program includes many European, Far Eastern, North American and South American countries.
In addition, there are a number of grants for generic research and development for which there is no royalty payment and that may reach 66%. Among others, there is a program for transfer of know-how from an academic research institution to an industrial company with the aim of commercializing the knowledge and a generic program for large companies.
Bi-national funds (such as BIRD, SIIRD, CIIRDF) help finance R&D and are subject to the R&D law in Israel, but they also require a return of investment, assuming that it matures.
The Ministry of Energy and Water Resources in Israel is responsible for providing support and grants in the field of energy and energy economization. Pursuant to one of these programs, there is a grant of up to NIS 300,000 for companies that will install and fulfill the energy saving objectives set forth in the program. In addition, there is a track whose purpose is assisting in the reduction of emission of greenhouse gases. The government grant amount will be at a rate of 20%, up to a limit of NIS 3 million (approximately US$ 0.75 million).
Equipment that leads to energy saving and efficiency is fully depreciable in Israel at the rates set forth in the regulations.
The movement of foreign currency to and from Israel is free. The Israeli currency The New Israeli Shekel is traded in many countries. Currency movement restrictions and controls apply to prevent money laundering.
In recent years, the Bank of Israel has been implementing a policy of protecting the Israeli currency by massive acquisitions of foreign currency in exchange for local currency. This has resulted in an accumulation of foreign currency balance on a very large scale compared to Israel’s economic activity volume. At the time of writing, the foreign currency balances are equivalent to US$ 116 billion. These balances are invested by the Bank of Israel while implementing a risk dispersion policy.
Israel’s current account surplus is approximately US$ 3.9 billion (approximately 1% of Israel’s gross domestic product).