Israeli Taxation of Non Profit Organizations

Dr. Avi Nov Adv.

October 2010

There are two main tax laws in Israel that regulate the taxation of Non Profit Organizations, the Income Tax Ordinance ("Tax Ordinance") and the Value Added Tax law. According to Israeli tax law, Non Profit Organizations may benefit from various tax exemptions. 

Tax Exemption

According to the Tax Ordinance, only "public institutions" are granted exemption from taxes. These institutions are usually, amutot, private companies for the public benefit, and endowments.

There are various criteria that an organization must meet to qualify for tax exemption, including the following:

• There institution must have at least seven members;
• The majority of the members may not be related to each other;
• The institution must have a public aim;
• The income and resources of the institution must be used in pursuit of the public aim; and
• The institution must provide annual reports detailing its expenditures, resources, and income to assure compliance with its public aims.

"Public aim" is broadly defined to include activities related to religion, culture, education, science, health, welfare, and sports, as well as any other public aim approved by the Israeli Minister of Finance.

Value Added Tax

According to the Value Added Tax Law of 1975, a Non Profit Organization engaging in non-commercial business may receive the status of "Malkar".

In order for an organization to attain Malkar status, it, must be an association of people); Must not engage in for-profit business activities; and must not be a financial institution.

Organizations withMalkar status, pay value added tax ("VAT") upon buying goods or services, and must pay a payroll tax ("Wage Tax") based on the amount of wages paid to their employees. The VAT rate in Israel is 16%, and the Wage Tax is 7.5%. 

U.S. Israel Income Tax Treaty

According to the U.S. Israel Income Tax Treaty, U.S. donors may deduct contributions to Israeli charities as long as the charitable organization would have qualified for exemption according to U.S. standards. Article 15A of the Protocol to U.S. Israel Income Tax Treaty,provides:

"(1) In the computation of taxable income of a citizen or a resident of the United States for any taxable year under the revenue laws of the United States, there shall be treated as a charitable contribution under such revenue laws contributions to any organization created or organized under the laws of Israel (and constituting a charitable organization for the purpose of the income tax laws of Israel) if and to the extent such contributions would have been treated as charitable contributions had such organization been created or organized under the laws of the United States; provided, however, that this paragraph shall not apply to contributions in any taxable year in excess of 25 percent of taxable income for such year (in the case of a corporation) or of adjusted gross income for such year (in the case of an individual) from sources in Israel.

"(2) In the computation of tax liability of a resident of Israel for any taxation year under the income tax laws of Israel, there shall be treated as charitable contributions eligible for credit or deduction, as the case may be, under such income tax laws, gifts to any organization constituting a charitable organization for the purpose of the revenue laws of the United States, if and to the extent such contributions would have been treated as charitable contributions had such organization been a charitable organization for the purpose of the income tax laws of Israel; provided, however, that this paragraph shall not apply to contributions in any taxation year in excess of 25 percent of taxable income for such year from sources in the United States."