Dr. Avi Nov, Adv.
Income of Israeli residents accrued outside of Israel, may be taxed in Israel. Since, Israeli residents may be taxes on the same income abroad, Israel tax law provides a method for handling double taxation.
The accepted method in Israeli tax law is providing credit for foreign tax paid to the overseas country. A similar method is employed by Israel tax treaties.
The principles for granting credit for foreign tax are provided below:
A resident of Israel, who paid overseas taxes for income originating outside of Israel taxable in Israel, will be entitled to receive credit for the overseas taxes, whether there is an treaty with the country in which the tax was paid or not.
“Overseas taxes” - taxes paid to the tax authorities of a foreign country, including taxes paid to countries that are part of a federal country (e.g. the states in the United States), or regional authorities that are part of that country, calculated as a proportion of the income, apart from municipal taxes.
For the purpose of calculating the credit permissible, there is no separation between the foreign countries - all countries abroad will be considered to be a single country.
The use of the “basket method” – incomes originating from abroad will be grouped according to the income source type (income from a business, from interest, from dividends, from rent, etc.), as will the tax imposed on these incomes.
The credit will be calculated separately for each basket, according to the overseas taxes paid for the incomes in this basket.
The credit limit is the tax imposed in Israel for that type of income.
If there is surplus tax paid overseas that has not been permitted as credit, this may be carried over, for five years, linked to the Shekel annually, and offset against tax that the assessee will be required to pay in Israel for income from overseas from the same basket (Article 205A of the Ordinance).
No credit will be given for tax paid abroad on income exempt from tax in Israel.
Credit for foreign tax will be given to a person liable to pay the tax overseas. Credit will not be given for tax paid “voluntarily” overseas.