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	Israel		Info-Prod Country Guide
JUDICIARY   BUSINESS FORMS & STRUCTURES   CURRENCY & BANKING   INTELECTUAL PROPERTY TAXATION   INVESTMENT & TRADE   ENVIRONMENTAL LAW

Taxation General Israel's primary laws on income taxes are the Income Tax Ordinance (New Version) (ITO) and the Income Tax Law - Inflationary Adjustments of 1985 (the Inflation Law). According to the ITO, companies and individuals are subject to tax on "all income derived from, accrued in or received in Israel." Taxable income includes business and trade profits, wages and salaries, as well as passive income, such as dividends, interest, royalties, rentals, real estate profits and capital gains. Taxation of Companies Resident and non-resident companies are liable to pay corporate tax at a rate of 36 percent on income derived from, accrued or received in Israel. Companies that are residents of Israel are also liable to pay capital gains tax on capital gains, regardless of where such gains are derived. A non-resident company is also liable to pay capital gains tax on capital gains derived from the disposition of an asset located in Israel or an asset that, although not located in Israel, represents a direct or indirect right to an asset in Israel. An Israeli resident company is defined as a company registered in Israel and whose main activity is in Israel. A foreign registered company, however, will be deemed an Israeli resident only if it so requests or if it is controlled and managed in Israel. Taxation of Branch Operations An Israeli branch of a non-resident company is taxed as though it were a regular resident company with respect to all of its profitsderived from, accrued or received in Israel. The branch may deduct from its taxable income all expenses incurred in the production of its Israeli source income regardless of where such expenses were made. Branch profits after tax, which are remitted abroad, are not subject to either the branch profits tax or withholditax (except in the case of an "approved enterprise," as discussed in the Encouragement of Capital Investments Law section below, in which case a branch profits tax of 15 percent is imposed). Taxation of Partnerships A partnership is not subject to income tax. Rather, the partnership's income is apportioned to its partners according to their respective shares in the partnership's income. A partner's share of losses incurred by the partnership in a particular tax year may be offset against the partner's income from other sources in the same tax year. Taxation of Individuals Individual Israeli residents are subject to taxation on their income derived from, accrued or received in Israel. The tax rates applied to individuals are graduated and include various tax credits depending upon the taxpayer's personal status. The maximum marginal tax rate for individuals is currently 50 percent. Non-residents who have Israeli source income or derive capital gains from the disposition of assets located in Israel or assets located outside Israel that represent, directly or indirectly, a right to an asset in Israel, are subject to income tax and capital gains tax accordingly. Capital Gains Tax General Capital gains tax is imposed on the gain derived upon the disposition of fixed and intangible assets. In computing the amount subject to capital gains tax, a distinction is made between real and inflationary profit (inflationary profit is equal to present value minus the actual cost adjusted by the rise in the consumer price index). Inflationary profit for the period during which an asset was owned and until December 31, 1993 is taxed at 10 percent, and inflationary profit derived after that date is exempt from tax. Real profit, if derived from the disposition of such assets, is subject to the particular taxpayer's ordinary income tax rate (36 percent for companies and up to 50 percent for individuals). Capital gains derived from the sale of stock of Israeli companies traded on the Tel Aviv Stock Exchange (and certain foreign stock exchanges) by foreign investors who do not conduct business in Israel and by Israeli individuals and other entities that are not subject to Part B of the Inflation Law are exempt from tax. It should be noted that gains derived from such transactions in stock are not exempt from taxation if earned by a "dealer" in securities. Also exempt from capital gains tax are gains from the sale of personal effects, sale of state-issued bonds and the sale of assets held outside Israel by a new immigrant, provided such sale took place within seven years from the date of establishing Israeli residency. Interest Interest received or accrued is generally taxed at the same rate as the particular taxpayer's ordinary tax rate. According to the ITO, however, a company given a loan that bears interest at a rate less than the rate of the increase in the consumer price index, shall be liable to pay corporate tax on the deemed interest income amounting to the difference between the interest rate charged and the consumer price index increase plus 2 percent per annum. Loans granted by financial institutions in the ordinary course of business are exempt from this rule. Dividends A corporate entity that receives dividends distributed by an Israeli company that is subject to Israeli corporate tax, is not liable for tax on such dividends. Dividends paid by an Israeli company to an individual Israeli residents are generally subject to withholding tax at a rate of 25 percent. Dividends paid by an Israeli company to a non-resident shareholder are also subject to withholding tax at a rate of 25 percent unless a lower rate is applicable under a tax treaty. Dividends distributed from an approved enterprise, under the provisions of the Encouragement of Capital Investments Law, are subject to a reduced withholding tax rate of 15 percent which is applicable to both corporate and individual shareholders. Deductions Under the provisions of the ITO and related regulations, a company may deduct expenses incurred in the process of producing income. Depreciation Depreciation of fixed assets is allowed to be deducted from companies' taxable income, at rates determined under the various tax laws and regulations relating to such fixed assets. Industrial "approved enterprises," under the provisions of the Encouragement of Capital Investments Law, are usually entitled to use accelerated rates of depreciation, which may result in allowable depreciation. Indirect Taxes Value Added Tax The Value Added Tax (VAT) is an indirect tax based on the consumption of goods and services in Israel. VAT applies to every taxpayer conducting business or engaged in trade in Israel that sells assets or provides services during the course of business. VAT is ordinarily charged at a rate of 17 percent of the sale price of a transaction. The VAT law exempts certain transactions, however, such as residential rentals for a period not exceeding ten years and sales of buildings approved after 1979 under the Encouragement of Capital Investment Law of 1959. In addition, certain transactions are zero rated. The primary transactions to which a zero rate applies are certain export sales, and services rendered to tourists in hotels. Applicability of the zero rate is pre-conditioned upon payment for the transaction in foreign currency which is deposited in Israel with an authorized dealer (i.e., an Israeli bank) along with a written receipt evidencing such transaction. Real Property Tax Property tax on vacant real estate is levied at a rate of 2.5 percent of the value of the land. Real estate which is considered inventory is taxed at a rate of 1.2 percent. Agricultural land is not subject to this tax. Land Betterment Gains arising from the sale or disposition of real estate property in Israel are subject to tax under the provisions of the Land Betterment Tax Law of 1963. The rates of land betterment tax are levied and computed in a manner similar to the taxes levied on capital gains. Thus, the inflationary profit is taxed at a rate of 10 percent (inflationary profit after January 1, 1995 is not subject to tax), and the real gain is taxed at a rate of 36 percent for corporations, and at graduated rates up to a maximum of 50 percent in the case of individuals. Transactions that are considered a sale, the profits of which are subject to this tax, include most types of real estate transfers and leases of real estate for a period exceeding ten years. Acquisition Tax Acquisition tax is levied on transactions in real estate at a rate of 3.5 percent of the value of developed real estate, and 5 percent in the case of vacant land. Transactions for the sale of a residence are stated at progressive tax rates ranging between 0.5 percent to 4.5 percent of the value of a residence. Stamp Duty Most legal documents are subject to a stamp duty which varies in amount from 0.4 percent to 1 percent depending on the nature of the document. Failure to pay the assessable stamp duty does not impinge on the validity of the legal document, unless payment of the duty is an express pre-condition intrinsically contained in the document. A document for which stamp duty has not been paid, may not be accepted as evidence in a court of law or accepted by official government offices. Stamp duty not paid within thirty days will incur penalties of between 25 percent to 50 percent. Gifts and Inheritance Taxes There are no gift or inheritance and estate taxes in Israel. Taxation under Inflationary Conditions The Inflation Law, which applies to companies that have business or commercial income, is intended to protect the net equity invested in a business from erosion by inflation. It is also intended to remove distortions derived from the effects of inflation when assessing companies' taxable income. Under Section 6 of the Inflation L, the appreciation in value of traded securities held by companies to which the Inflation Law applies, is added to such companies' taxable income, even if such appreciation has not been realized by the sale of such shares. Treaties for the Prevention of Double Taxation Israel is a party to several treaties for thavoidance of double taxation. These treaties generally provide for the reduction or elimination of withholding taxes levied on dividends, interest and royalties paid by a resident of one of the treaty countries to a resident of another treaty country, and some of the treaties provide for the reduction or exemption of capital gains tax imposed on a resident of one of the treaty countries on gains derived from the sale of assets in another treaty country. Furthermore, the treaties avoid double taxation by allowing a taxpayer to take a credit against such taxpayer's domestic tax liability for taxes withheld in the income source country. Tax treaties have been signed, inter alia, with the following countries: Austria, Argentina, Belgium, China, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, India, Ireland, Italy, Jamaica, Japan, the Netherlands, Norway, Uruguay, the Philippines, Poland, Romania, Singapore, South Africa, Sweden, Switzerland, Thailand, Turkey, the United Kingdom and the United States. Previous Chapter Contents Menu Next Chapter

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