Israel Tax Authority has recently improved the withholding tax system regarding payments paid by Israeli entities to foreign firms that supply services.
The Old Withholding Tax system
Until recently, Israeli banks have been forced by the Israel Tax Authority to withhold tax, mostly at a rate of 25 percent, from the majority of overseas remittances. There are various exemptions to this withholding tax, for instance, when a tax treaty applies or when the payments are for services that are provided completely abroad.
An exemption or a reduced withholding tax rate may be obtained from the Israel Tax Authority when relevant. The process of obtaining the exemption from the Israel Tax Authority is relatively complex, and in some cases it may be very disappointing for the parties. Usually a tax lawyer is involved in this process.
Due to the complexity of the withholding tax system, various practices were developed in order to circumvent the Israel Tax Authority rules. These practices include, inter alia, credit card or PayPal payments. Usually, these practices were safeguarded by a legal opinion provided by an Israeli tax lawyer.
The New Withholding Tax system
The Israel Tax Authority was aware of the adequacy of the withholding tax system and on December 25, 2013, it announced that in the tax year 2014, no tax need be withheld from payments paid by Israeli entities to foreign firms of up to $250,000 per year for each receiver.
The new withholding tax rule by the Israel Tax Authority is good news for Israeli cross-border business. Basically, foreign entities and residents can receive $250,000 per year from Israeli residents for services rendered entirely abroad, without paying withholding tax.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion