Dr. Avi Nov, Adv.
Residence of a company:
A corporation is considered an Israeli resident for tax purposes in one of these conditions:
1. The corporation was incorporated under Israeli law; or
2. The corporation is managed and controlled from Israel.
Standard company tax rate:
The standard Israeli corporate tax rate is 24%. This rate applies to the undistributed profits of the company.
In some cases, a reduced rate of tax is payable or an exemption granted, mainly to industrial companies. For more details, see: Israel's 2011 Investment Incentives for industrial companies.
Other Incentives and Benefits:
· Accelerated Depreciation.
· Exemptions from Import Taxes (for exported goods).
· Deferred VAT Payments (for exporters).
· Various Export Financing Guarantees and Insurance.
· Employment Incentive Payments.
· R & D grants, financing and tax incentives.
Dividends paid to a foreign resident are taxed in Israel at a rate of 20% or 25% if the shareholder owns more than 10% of the Israeli company. However, many Israeli tax treaties set a lower withholding tax rate. Dividend between two Israeli companies is tax exempt.
The rate paid on interest earned by a company is 24% (to be reduced gradually to 18% by 2016) and by an individual is 20%. However, many Israeli tax treaties set a lower withholding tax rate.
Individuals pay tax at a rate of 20% for sale of assets bought after 1.1.2003. Corporations pay the general tax rate of 24%.
The sale of non-traded shares bought after 1.1.2003, is taxed at a rate of 20% for individuals, when the seller holds 10% or more of the shares sold the tax rate is 25%.
The sale of shares traded in the stock market, regardless of the date of purchase, is taxed at the same rates as for non-traded shares, for both individuals and corporations.
Non-residents are exempt from capital gain tax on sale of shares of Israeli companies bought from 1.1.2009 onwards, subject to certain terms.
Residence of an Individual:
The main test that is used to determine residency of an individual is the "center of life" test. A a number of auxiliary qualitative criteria are applied,
to demonstrate the family, economic and social relations representing the individual’s “center of life”. Including, inter- alia, the following:
1. The location of permanent home (even if he does not reside therein).
2. The location of actual home of himself and members of his family, i.e. actual place of residence.
3. The location of fixed or permanent business or work.
4. The location of active material economic interests.
5. The location of activity in organizations, associations or institutions.
For more details, see: Israeli Residence for tax purposes
New residents and returning residents:
Tax exemption for 10 years on income and capital gains derived outside Israel by new residents and returning residents (lived abroad 10 years) who arrived after January 1, 2007.
Value Added Tax (VAT):
From 1.1.2010, the new standard VAT rate in Israel is 16%.
Some transactions are subject to VAT at the rate of 0%, such as:
· Exported goods
· Fresh fruit and vegetables
· Hotel services and car rentals to tourists who pay in foreign currency
· Sale of intangible assets to non‐residents
· Transportation of cargo and passengers to and from Israel
· Insurance premiums
· Certain services rendered to non‐residents.
According to Section 85A of the Israeli Tax Ordinance where there is a special relationship between the parties to an international transaction, as a result of which the price of the transaction results in a smaller profit than would have been realized if the transaction price had been set on arm’s length terms, the transaction must be reported and taxed on the basis of its fair market value. For more details, see: Israeli Transfer Pricing Regime.
Corporations that are classified as Israeli Holding Companies are entitled to a tax exemption status. For more details, see: Israel Holding Company – Participation Exemption
Israel's Double Taxation Treaties:
Special tax rates apply under Israel's tax treaties with approximately 50 countries.
Three new tax treaties (Vietnam, Estonia and Taiwan) entered into force on January 2010.