Israeli Capital Gains Tax: the Exemptions
foreign resident|Tax Ordinance|U.S.
Dr. Avi Nov, Adv.
In general, a foreign resident is subject to Israeli tax only on income accrued or derived in Israel (income from an Israeli source). A foreign resident may be also subject to Israeli capital gains tax. However, with regards to capital gains, there are various tax exemptions. In this article I analyze the tax implications in Israel that may arise from a sale of shares in an Israeli company by a foreign resident. Assuming the seller is a US resident, I will analyze, first, the Israel U.S. Tax Treaty
, and thereafter the relevant tax exemptions available in the Israeli Income Tax Ordinance. Please note that there are different tax exemptions under other Israeli Tax Treaties
A. The U.S.-Israel Income Tax Treaty
Pursuant to the Treaty between the Government of the United States of America and the Government of Israel with Respect to Taxes on income, the sale of shares by a person who qualifies as a resident of the United States within the meaning of the treaty and who is entitled to claim the benefits afforded to a resident by the treaty will not be subject to Israeli capital gains tax.
This exemption does not apply if (i) the person holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the applicable sale; or (ii) the capital gains from such sale can be allocated to a permanent establishment in Israel.
This means that a sale, exchange or disposition of shares by a U.S. Resident who held, directly or indirectly, shares representing 10% or more of our voting power at any time during the 12-month period preceding the sale, exchange or disposition will be subject to Israeli capital gains tax.
B. Sale of Shares in an R&D Corporation
Section 97(b1) of the Israeli Income Tax Ordinance provides that a foreign resident, who sells shares in a corporation which was at the time of the allotment domiciled in Israel and is an "R&D intensive corporation", shall be exempt from Israeli Capital Gains Tax.
Basically, a "R&D intensive corporation" is a company whose principal operation is Research and Development, whose assets all serve the R&D activity and at least 75% of whose R&D expenses are expended in Israel. See also: Research and development intensive company
C. General Exemption
Section 97(b3) of the Israeli Income Tax Ordinance generally exempts nonresidents from tax on capital gains from the sale of shares, provided that those shares were purchased between July 1, 2005, and December 31, 2008, and that certain additional conditions are met, mainly:
- The capital gains were not derived by the seller’s permanent establishment in Israel;
- For 10 continuous years preceding the date of purchase of the security, the individual seller was a resident of a country having an effective tax treaty with Israel. In the case of a sale by a foreign company, at least 75 percent of any of its “means of control,” directly or indirectly, must have been held by individuals who were residents of a tax treaty country for 10 continuous years preceding the purchase of the security;
- The securities must not have been purchased from a related person or been acquired by means of a tax-free reorganization; and
- The nonresident must comply with certain reporting and tax filing requirements.
D. New Tax Exemption
The Section 97(B3) of the Israeli Income Tax Ordinance 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. For more details, see: New Israeli Tax Incentive for Foreign Residents
It should be noted that if the seller is liable to pay capital gains tax in Israel, he would be permitted to claim a credit for the capital gains tax paid in Israel against the U.S. federal income tax imposed with respect to the applicable sale, subject to the limitations in U.S. laws applicable to foreign tax credits.
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