Under the Israeli tax regime Israeli residents are subject to tax in Israel on their worldwide income, while foreign residents are subject to tax in Israel only on their Israel-sourced income.
An individual is considered an Israeli resident if his or her "centre of life" is in Israel. The "centre of life" test examines the connections that the taxpayer has to Israel, as well as the taxpayer's subjective intention. A company is regarded as an Israeli resident if it was incorporated in Israel or is managed and controlled from Israel.
Individuals are not necessarily required to file a tax return in Israel. Individuals who receive income which exceeds the amounts described in the tax regulations are required to submit an annual return. Other circumstances can also subject an individual to filing requirements. For example, holding a share of a corporation exceeding 10%, holding foreign bank accounts that exceeds a certain balance or holding foreign securities. Generally, individuals are required to file tax returns by April 30, although extensions are possible on a case-specific basis.
In general, a corporation in Israel is subject to corporate tax on its taxable income, whereas partnerships are treated as ‘pass-through’ entities and the partners are taxed on the partnership's income at the applicable rates. Israeli companies are subject to tax on all of their worldwide income, while dividends between Israeli companies are generally exempt. As a basic rule, corporations are required to file returns by May 31, but extensions are possible on a specific basis.
Tax rates and main exemptions at a glance (as of July 2018):
Corporate tax: 23%
Capital gains: 25%-30% (in certain cases up to 47%)
Dividends: 25-30%
Interest: 15-25% (in certain cases up to 47%)
Marginal income tax: up to 47%
Surtax, imposed on individuals, where an additional 3% is added to the above-mentioned rates for every taxpayer whose aggregated income, from all sources, exceeds ₪641,880, with respect to the part of income that exceeds ₪641,880
VAT: 17%
Israel also imposes indirect and municipal taxes
New immigrants and certain returning residents are entitled to various tax benefits, including an exemption from tax and reporting on all non-Israeli source income for a period of 10 years.
Main changes to Israeli tax law in 2018
Recently, number of amendments to the Israeli tax legislation became effective and a number of circulars and private rulings were published by the Israel Tax Authority (ITA), as well as important court decisions. The main ones include:
New Voluntary Disclosure Procedure
On December 12, 2017, the ITA published a New Voluntary Disclosure Procedure (VDP) which enables taxpayers to apply for a voluntary disclosure procedure with respect to their undeclared income or capital gains in three main routes:
Regular Route: Under this route, the taxpayer should submit an application to the Investigations Department of the ITA. The application should include the taxpayer's details, as well as full information regarding any undeclared income. This route is in force until December 31, 2019.
Anonymous Route: This route enables the submission of anonymous applications, without disclosing the details of the taxpayer to the tax authorities. After the conclusion of the negotiations regarding the tax liability, the name and details of the taxpayer are provided to the tax authorities. This route will be in force until December 31, 2018.
Shortened Route: In cases where the capital included in the voluntary disclosure application does not exceed ₪2 million and the taxable income derived from such capital does not exceed ₪500,000 in the relevant tax years, the voluntary disclosure application can be submitted by way of a shortened route. This route enables a submission of amended tax returns for the relevant years. This route is in force until December 31, 2019.
Under certain conditions, the VDP procedure provides the taxpayer with immunity from criminal proceedings. The main condition which applies under the VDP is that, at the time of submitting the application, no investigation or examination of any kind is being conducted with regard to the taxpayer. In addition, at the time of the submission of the application, the ITA is not in a possession of any information concerning the undeclared income of the taxpayer or such taxpayer's spouse, companies, or partnerships.
The VDP does not provide any reduction of the applicable tax liability and the taxpayer is required to pay the applicable tax liability on the declared income.
In addition, on February 15, 2018 the ITA published guidelines for the implementation of the VDP, which refer to, among other things, the requirement to attach relevant appendices, fines and sanctions, the timeline for finalising the VDP (maximum 270 days under the Anonymous Route and 180 under the other Routes) and the requirement to use carryforward losses and tax credits accumulated during the VDP period only against the undeclared income. The guidelines also provide that in addition to the taxation of income in the relevant years of the VDP, the assessing officers can also impose taxes on the opening balance of the capital which is being settled under the VDP (usually the balance of the accounts on December 31, 2006/7).
Capital gain calculation with respect to foreign securities held by a Family Company
Under Israeli tax law, a Family Company is a company the shareholders of which are all "Relatives" (generally, a close family member). Such a company can elect to allocate its income to one of its shareholders who holds the right to the largest part of the company's profits. In this way, the company is taxed in Israel as an individual. However, it still provides an estate tax blocker in foreign jurisdictions.
A decision of the Supreme Court published on May 6, 2018 determines that, for the purpose of calculating capital gains from the sale of securities, a Family Company should be treated as a company, namely the capital gain should be calculated in New Israeli Shekels (NIS), with the cost basis adjusted to the Israeli Consumer Price Index. This calculation creates a situation in which the built-in appreciation of the foreign currency is subject to tax, whilst losses arising from the depreciation in the value of the currency can be offset. For individuals, on the other hand, who hold securities that are denominated in foreign currency, or the value of which is linked to a foreign currency, the capital gain should be calculated based on the foreign currency exchange rate.
Minimum conditions for obtaining an Israeli residency certificate
The ITA published a new private tax ruling, describing the minimum conditions that must be fulfilled in order for an individual to receive an Israeli residency certificate and be regarded as an Israeli resident for tax purposes (both for the purpose of Israeli domestic tax law as well as under Israel's double taxation treaties). Such minimum conditions are, among others, a minimum stay of 142 days in Israel in each tax year, having a permanent residence in Israel, not having a non-Israeli resident spouse and having a supportive opinion from a CPA.
This new private ruling provides guidelines that, if followed, may provide a certain degree of certainty for potential new immigrants who can enjoy the special 10-year exemption from non-Israeli sourced income and capital gains provided under Israeli tax law to new immigrants.
Bitcoin and other cryptocurrencies will be subject to tax as assets
The ITA published a circular relating to the taxation of cryptocurrencies such as Bitcoin, Litecoin, etc. The ITA's position according to this circular is that for tax purposes cryptocurrencies should be treated as assets and not as currencies. Accordingly, with respect to cryptocurrency transactions, investors will be subject to capital gains tax rate of 25% on the appreciation of the cryptocurrencies (additional surtax will also apply). However, if the individual's cryptocurrency activity is substantive and significant enough to create a business income it will be subject to the marginal tax rates applicable to individuals (up to 50%). In addition, such business activity will be subject to the wage and profit taxes applicable to financial institutions.
New Israeli deemed distribution rules
New Israeli deemed distribution rules, which are set out under the new Section 3(i1) of the Ordinance that became effective on January 1, 2017, state that a loan from an Israeli company which is granted to its 10%-or-more shareholders, or to their related parties, may be deemed to have been distributed to these shareholders. The deemed distribution takes place at the end of the year following the year in which the loan was extended. The deemed distribution is considered as a dividend up to the amount of the Israeli company’s distributable earnings, as determined under Israeli corporate law, while the excess deemed distribution amount over such distributable earnings is considered in certain circumstances as employment or business income.
A recent amendment to the Ordinance effective retroactively since 1 January, 2017, clarifies that the new rules do not apply to loans to corporate shareholders which are not fiscally transparent. This amendment is consistent with the legislator’s intent to apply the deemed distribution rules only to shareholders who are individuals.
The new section also contains an important exception to the deemed distribution regime where the loan is between companies and is used to serve an economic purpose of the corporate borrower. This exception does not apply with respect to certain fiscally transparent borrowing entities and to the ITA’s position it does not apply to loans to direct shareholders.
