Dr. Avi Nov Adv.
In principle, the Israeli tax law imposes capital gains tax on non-residents who sell shares in Israeli companies. The Israeli Capital Gains Tax is at a rate of 20% for individuals and 25% for companies. Furthermore, a non resident who sells shares in a non-Israeli company, the majority of whose assets are located in Israel, may be subject to Israeli capital gains tax. Nevertheless, Israel offers several exemptions from tax to non-Israeli investors.
The standard tax exemptions
There are various tax incentives for foreign residents that invest in Israeli companies, including the following:
· Tax exemption for non-residents selling shares listed for trading on a stock exchange, provided that the capital gains are derived from a non- Israeli permanent establishment of the foreign resident in Israel;
· Tax exemption for non-residents selling shares in "Research and Development Intensive Companies";
· Tax exemption provided to "treaty country" residents under the majority of Israel's tax treaties.
The new tax exemption
Section 97(B3) of the Israeli tax code exempts from capital gains tax, the sale of securities in Israeli or Israeli-related companies acquired on or after January 1, 2009 by non-resident individuals and entities, regardless of their entitlement for tax treaty benefits.
This exemption is subject to the following limitations and conditions:
· The tax exemption applies only to "capital gains" and not to the ordinary business income of a trader in securities.
· The tax exemption does not apply to the sale of shares purchased before January 1, 2009.
· The tax exemption does not apply to shares traded on the Tel Aviv Stock Exchange at the time of sale [another exemption applies in this case – see Section 97(B2)];
· The tax exemption does not apply to shares in companies whose assets consist mainly, directly or indirectly, of land or buildings;
· The shares being sold must not have been acquired from a related party or by way of certain tax free reorganizations;
· The shares must not have been held through a permanent establishment maintained in Israel by the non-resident investor;
· The tax exemption will not apply to a non-resident entity which is 25% or more controlled, directly or indirectly, by residents of Israel.
Generally, The Israeli tax authorities may deny the exemption under the "general anti-avoidance rule" where an "artificial" or "sham" transaction is involved.