Repeal of Israeli tax exemptions for foreign residents

June 2011

Dr. Avi Nov, Adv. 

The Israeli Tax Authority representative explained that these tax exemptions were issued with intent to encourage foreign investor activity in the Israeli capital market and had they not been granted, these profits would be subject to tax at a rate of 15% or 20% or corporate tax, as applicable.

The Israeli Tax Authority representative expressed concern that the tax exemption was being used by players on the foreign exchange market intending to make short term profits and causing currency appreciation that may impair the long term competitiveness of the market, mainly regarding purchase of short-term Bank of Israel debt ("Makam") and short-term Government bonds.

The Finance Committee accepted the proposal to repeal the foreign residents' tax exemption for capital gains derived indirectly from State loans bearing a date of maturity not exceeding 365 days from the issue date, that is, via mutual funds and futures transactions. The elimination of the exemption will apply from 7.7.011, giving holders the opportunity to consider their steps following the new regulations, after which date their income would be subject to tax.

It should be noted that, as announced by the Minister of Finance, a decision has been made to amend primary legislation of article 97(b2) to the Income Tax Ordinance, to revoke the existing tax exemption for foreign residents on direct sale of short term state loan as noted above and to amend Income Tax Regulations (Tax Exemption for Interest paid on State loan).