Israel Tax Exemption Abolished

Foreign Residents

Dr. Avi Nov, Adv.

November, 2011

According to an amendment to the Israeli Income Tax Ordinance was published On November 16th 2011, which revoked the tax exemption for foreign residents on capital gains from the sale of short-term Bank of Israel debt ("Makam") and short-term Government bonds registered for trade on an Israeli stock exchange bearing a date of maturity not exceeding 13 full months from the issue date ("short-term state bond") and on capital gains from futures transactions registered for trade on an Israeli stock exchange in which the base asset is directly or indirectly a short term state bond ("affected traded derivatives").

See also: Repeal of Israeli tax exemptions for foreign residents

Entering into force

The elimination of the tax exemption will enter into force 30 days from publication, that is December 16th 2011 and will apply to the sale of short-term state bonds and to capital gains from affected traded derivatives, that have been purchased or sold within two years of this date: Taxation will apply to securities purchased before 16.12.2011 and sold after 16.12.2011 and to securities purchased within two years from this date. During the 30 days until the new law enters into force, holders are given the opportunity to consider their steps following the amendment, after which date their entire capital gain would be subject to Israeli tax.

Israeli Tax Regulations

The repeal of this exemption joins the withdrawal of the Israeli Tax Regulations exemption for foreign residents on interest paid on these securities and the repeal of exemption for foreign residents on capital gains derived indirectly from short-term state bond, that is, via mutual funds and certain futures transactions. Termination of these Israeli tax exemptions entered into force on July 7th 2011.

Note that these tax exemptions were granted in the past with intent to encourage foreign investor activity in the Israeli capital market and had it not been granted, these profits would be subject to Israeli tax at a rate of 15% or 20% or corporate tax, as applicable.

The rational for repealing the tax exemptions

The repeal of the tax exemptions was due, inter alia, to 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.

Note that there are no changes to other tax exemptions available for foreign residents.
On these tax exemptions, see: New Israeli Tax Incentive for Foreign Residents.

Dr. Avi Nov, Adv., is an expert in Israeli & international tax law, and can be reached at avinov@bezeqint.net

This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion.

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