The CFC rules are applicable to any foreign company controlled by Israeli Shareholders (50% of the shares) and that has accumulated undistributed passive income taxed at a rate below 20%. The Israeli shareholders will be assessed and taxed on their proportionate share of the undistributed income at a rate of 25%. This income will be considered as dividends. A tax credit will be granted for the amount of the foreign tax that would have been paid if the undistributed passive income had been distributed as such.

• Transfer pricing

Transfer pricing rules are applicable to transactions between a resident and a related non-resident party. On demand of the Tax authorities, taxpayers must provide a detailed transfer pricing study joint with their annual tax return to confirm the arm’s length nature of its transactions. Transfer pricing rules in Israel are based on the OECD guidelines.

• Group Consolidation

Israel doesn’t have any provision on Group Consolidation therefore consolidated return are not allowed. Each company in a group must file its own tax return. Certain type of companies qualified as “industrial companies” are allowed to file a consolidated return.

• Thin Capitalization

Israel does not have thin capitalization provisions.

If you require clarification/assistance with you tax situation in Israel, feel free to contact us here.

Double Taxation Prevention Treaty takes precedence, in all cases, over the Israeli Income Tax Ordinance. If certain income is taxable under the Israeli Income Tax Ordinance but there is an exemption or reduction under any Double Tax Agreement, the income is taxed, if at all, but only according to the provisions of the DTA.

• Taxable income

Corporate income is assessed on a worldwide basis for resident companies. Non-resident companies are assessed on income that is accrued in or derived from/in Israel. A corporation is considered to be resident in Israel if it is registered and organised under Israeli law or if it has it central management and control in Israel.

There is no branch tax in Israel. A foreign company operating via a branch will be assessed and taxed at the standard corporate rate only on income derived in Israel.

Income is generally classified in categories such as: ordinary income (taxed at the standard corporate rate) (e.g. income from business operations) and capital gains or passive income, such as dividends or interest.

Dividends arising from income produced or accrued in Israel and distributed by a resident company to another resident company are not taxed. Dividends derived from income produced or accrued outside Israel and/or from dividends derived abroad are taxed at the rate of 25%. A tax credit would be granted for the taxes withheld in the foreign jurisdiction.

Interests attributed to the business operations are taxed at the regular corporate tax rate.

The regular corporate tax rate was 44% in 2010 and will be progressively reduced by 2016 to 18% on a gradual basis: 1% to 5% / year.

• Deductions & Losses

Current revenue expenses incurred in producing income are deductible; capital and private expenses are not. This applies to royalties and interest. Dividends are not deductible from income (corporate taxes are paid on income before distribution of dividends).

Losses resulting from business can be carried forward indefinitely and offset against income derived from any source during the same fiscal year.

• Capital gains

The sale or transfer of most tangible and intangible property from which is derived Capital gains is subject to taxation. The nature of the seller, the purchase date and the nature of the asset are taken into consideration to determine the applicable tax rate. The common rate for capital gains tax is 25%.

Resident companies are taxed on capital gains derived from the sale of any of their assets located in or outside Israel.

Regardless of whether the seller is a resident of Israel for tax purposes, any capital gain derived from the transfer, sale or exchange of any type of capital assets located in Israel or which constitute a direct or an indirect interest ownership of assets in Israel are deemed to be Israeli sourced income and is subject to capital gains tax.

Shares or securities of resident companies as well as shares or other securities of non-resident companies holding assets in Israel, can be considered to be Israeli assets.

• Withholding taxes

Interests

Interests paid to non-residents are subject to withholding taxes at 15, 20 or 25%, depending on the loan qualification (linked or not to the index) as well as on the nature of the beneficiary. Withholding taxes can be reduced under a DTA (Double Tax Agreement).

Royalties

Royalties and other fees are subject to withholding tax at a rate of 25% that can be reduced under a DTA.

Dividends

Dividends paid to non-controlling foreign company (i.e. holding less than 10% of the resident company) are subject to withholding tax at a rate of 20%. Dividends paid to controlling foreign are subject to withholding tax at a rate of 25%.

• Value Added Tax (VAT)

“Homemade” or imported goods and services are subject to VAT at a rate of 16% (1/1/10). Exported goods certain services to non-residents, tourism services, cargo transportation, any transaction of Good and Services with the “Eilat free-trade zone” as well as transaction of fresh fruits & vegetables are not subject to Value Added Tax.

Financial institutions don’t pay Value Added Tax but pay a tax on profits and wages, at a similar rate. Non-profit organisations pay a tax on wages at 7.5%.

• Stamp Duty

Legal documents are subject to a stamp duty from 0.4 % to 1% depending on the nature of the document. Failure to pay the assessable stamp duty does not impinge on the validity of the legal document, unless payment of the duty is an express pre-condition intrinsically contained in the document. A document, for which stamp duty has not been paid, may not be accepted as evidence in a court of law or accepted by official government offices. Stamp duty not paid within thirty days will incur penalties.

• Municipality taxes & Real Estate Taxes

Real estate purchase Tax

The buyer of a real estate property was taxed at a rate varying between 3.5% and 5%. A resident purchasing his only residential apartment benefited from a reduced rate of 0.5%. This tax was abolished in 2010.

Sales Tax to be paid by the seller

The sale of property is taxed in the hand of the seller at a rate of 2.5% of the value of the sale or at 0.8% on the sale of a residential apartment by a building contractor.

In many cases, the sale of an apartment by a private individual is exempt from sales tax.

Betterment Tax

The “Land Appreciation Tax” or betterment tax is applicable to the sale of real estate. It is quite similar to capital gains tax.

This tax is applicable when the sale concerns commercial real estate, or a private apartment that is not exempt from tax.

Exemptions on residential and private apartments are available on the sale of one apartment every 4 years as well as special exemptions during 2011-2012 for selling up to 2 apartments below 2.2 million each.

If you require clarification/assistance with you tax situation in Israel, feel free to contact us here.

The 1st of January 2008, the Israeli Ministry of Finance approved a tax reform regarding benefits to be granted to Israeli new immigrants as well as “returning residents”. The reform, initiated by the Israeli Tax Authorities and the ministry of absorption, was formed as part of a vast project known under the name of “returning home- Israel’s 60th”.

The reform is aimed to encourage the Israelis and Jews leaving abroad to relocate to Israel by providing them with extensive tax benefits. It is also supposed to be an incentive for investments in Israel, and would contribute to Israel’s financial and social strength.

The reform expands, simplifies and elaborates a line of tax benefits regarding the tax liability and reporting obligations of new immigrants, and returning residents in relation to their income sourced outside Israel and/or from their country of origin.

This new Tax Amendment seems to be revolutionary and contradictive, as it actually creates a defined “tax-haven” under Israel’s domestic law via unusual tax benefits.

If you require clarification/assistance with you tax situation in Israel, feel free to contact us here.

The income tax burden falls on gross income. In regard to employees, the tax is deducted at the source each month based on wages paid by the employer, who bears the burden of the payment of all taxes the 15^th of each month or every two months depending on the size of the company. The Israeli income tax system is thus quite different than the declarative system found in most western countries like France. Self-employed and limited liability companies must fill up an annual declaration of their income against which they must pay tax in advance on basis of earnings of the previous year.

In 2010, the marginal personal income tax rate was 44%. By 2016 it will be progressively reduced to 39% on a gradual basis: 1% to 2% / year.

Capital income is not subject to overall taxation, but is taxed separately and subjected to specific rates.

• A tax exemptions, deductions and deductible expenses for social reasons:

For reasons largely justified by social concerns some type of income is not subject to taxation. It includes all income of blind and disabled people, benefits paid by the Department of Defence, disability benefits and old age pensions paid by National Insurance Institute (except for maternity allowance and unemployment benefits), interest on certain pension funds (when not liquidated prior to retirement). Interest earned on savings plans, once exempt, are subject to income tax since the 2003 reform.

• Tax rates on investment income and capital gains

The tax reform of 2005, redefined tax rates on capital income.

Interest and dividends

Interests from bonds of financial products, savings, bank deposits etc… indexed to the Consumer Price Index (CPI) or to foreign currencies, are taxed at 20%. Interests not indexed are taxed at 15%.

Capital gains on securities

Capital gains realized on securities listed or not on a stock exchange, are taxed at a flat rate of 20%.

Non-resident individuals are exempt from capital gains tax on gains derived from the sale of shares traded on the “Tel Aviv stock exchange” as well as on gains derived from the sale of shares of Israeli resident companies traded on any other stock exchange market in the world, unless the gain is attributable to a permanent establishment maintained by the seller.

Property income

Gains from the sale of real estate are subject to a tax rate ranging from 20% to 25% depending on the situation of the taxpayer.

Gains from the sale of a residential apartment are completely exempt from tax. Every 4 years residents can sale any residential investment property free of capital gain taxes. Residential rental income is taxed at a rate of 10%.
Since the 1^st of November 2007, the purchase of residential real estate is exempt from tax if the price of purchase is below NIS 1,350,000.00. The tax rate is 3.5% between NIS 1,350,000.00 and NIS 1,610,210.00.  The sale of commercial properties or land is taxed at 5%.

Israeli residents are subject to individual income tax, capital gains tax and social security tax  on a worldwide basis. Non-residents are taxed only on income sourced in Israel.

An individual is a resident of Israel for tax purposes if his/her “centre of vital interests” is in Israel.

The Israeli Tax Authority looks at the family, economic and social relations of the individual. To resolve this issue, various criteria will be taken into account, including the following:

• The location of a permanent home, where the taxpayer can go as whenever he wants and that is ready for him to live in.
• The location of the taxpayer’s actual home and where the members of his family are (actual place of residence).
• The location of the of the taxpayer’s permanent business/work.
• The location of the of the taxpayer’s economic interests.
• The location of the taxpayer’s social activities (organizations, associations or institutions).

In addition to the above criteria, the number of days an individual spends in Israel and overseas also affects his residence status: an individual will be considered to be resident if he/she spends 183 days or more in Israel or if he/she was present in Israel for 30 days or more in a certain tax year, and total presence in Israel of 425 days or more during that tax year and the two previous ones.

An individual is not considered a resident if he/she left Israel for 2 consecutive years (183 days in each year), followed by two consecutive years in which his/her centre of vital interests was abroad.

Non-residents don’t need to file a tax return but might be subject to withholding taxes.

If you require clarification/assistance with you tax situation in Israel, feel free to contact us here.

From 2001 there is a tax credit system for most personal allowances.The personal allowance is about 1,650.00 for 2011, and doubled for married people. Mortgage interest and pension contributions are also deductible.

Income includes employment income and benefits, income from property, income from a trade or profession, and investment income. A major exemption applies to the earnings of Irish-resident artists from works of cultural or artistic merit. Overseas workers can deduct a proportion of income relating to the work executed overseas.

Income tax is attributed by Self-assessment, except in relation to employees, whose tax is deducted by their employers through a ‘PAYE’-style scheme.

All employees working in Ireland are subject to Irish PAYE, even if they are already paying PAYE in their home country. In 2007 the Irish Revenue Commissioners has attenuated this. Workers on assignments of up to 6 months in Ireland will not be liable for Irish PAYE. Employees normally living and working in Northern Ireland will pay PAYE as usual under the UK tax rules, provided their period of employment does not exceed 6 months.

In 2009, a 2% levy was introduced for incomes greater than 100,100.00 € (1,925,00 €/week), with an additional 1% on incomes above 250,120.00 € (4,810.00 €/week). Income below 18,304.00 € are exempt from income levy, as well as single and married pensioners respectively with income below 20,000.00 € and 40,000.00 €.

In May 2009 in response to the financial and economic crisis, the income levy rates were doubled to 2%, 4% and 6%. The 4% rate applies to income above 75,036.00 € and the 6% rate to income above 174,980.00 €. The exemption threshold was also lowered to 15,028.00 €.

In 2011 to replace the health and income levy, a Universal Social Contribution (USC) was introduced for all employed and self-employed individuals if their annual income exceeds 4,004.00 € The USC rates range from 2% for income up to 10,036.00 € 4% from 10,037.00 € to 16,016.00 € and 7% on income above 16,016.00 €. The maximum rate for those aged 70 or over and for medical card holders is 4%.

Trading profits from dealing in or developing residential development land is taxed at the person’s relevant marginal rates of income tax or the 25% rate of corporation tax.

In 2004, the European Savings Tax Directive was integrated into Irish law. The Directive required domestic banks to establish the identity and residence of beneficial owners of all new bank accounts opened in Ireland.

Irish banks must now pass on details of savings income for taxation purposes to the Revenue Commission who are tasked with passing this information on to the tax authorities of the EU member state where the client is a resident for tax purposes.

Ireland Residence & Tax Liability Rules

Irish taxation of individuals is based on residence and domicile.

Residence is depending on presence in Ireland for more than 1/2 of a tax year, or for 280 days in 2 consecutive years. An individual’s domicile is in the country where he maintains his permanent home and where he regards himself as belonging. Domicile in Ireland is acquired from an Irish-domiciled father, but can be changed to another country by establishing a life there. Resident foreign employees are not normally considered Irish Resident for tax purposes.

Any person who is a resident and domiciled in Ireland pays tax on his worldwide income; a person who is considered a resident but is not domiciled in Ireland pays tax on his foreign income only if it is remitted to Ireland. A non-resident pays income tax only on Irish-sourced income, and is liable to capital gains tax only on gains arising in Ireland or remitted to Ireland, unless he is domiciled in Ireland in which case he is liable of capital gains taxes for all is gains.

Before December 2000, Irish tax-payers were assessed annually to tax on gains in investment funds, at the rate of 20% for Irish-resident funds and 40% for foreign funds. Now there is instead an ‘exit tax’ of 26% (increased from 23% in the Finance Act 2009) on encashment or maturity, for domestic and foreign funds alike. For non-residents this tax will apply only to Irish-source income.

From 2010 on, an ‘Irish domicile levy’ of 200,000.00 € has been introduced on Irish nationals and domiciled individuals whose worldwide income exceeds 1,000,000.00 € and whose Irish-located capital is greater than 5,000,000.00 € regardless of where they are tax resident.

In May 2011 the government announced the introduction of a pension levy, which will be payable by pension funds and plans approved under Irish legislation, namely occupational pension schemes, Retirement Annuity Contracts, and Personal Retirement Savings Accounts. The 0.6% levy is to take the form of a stamp duty on all capital value assets under management, which is calculated on figures from the 1st day of 2011, or the last date of the accounting period ending in the 12 months preceding that date, effectively backdating the tax’s imposition. The tax will not affect the provision of retirement benefits to non-residents; and will not apply to those funds which had already formally resolved to wind up before May 2011.

For a joint stock company, dividends are allocated as a fixed amount per share. Therefore, a shareholder receives dividends in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company’s balance sheet – the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends.

Cooperatives, on the other hand, allocate dividends according to member’s activity, so their dividends are often considered to be a pre-tax expense.

Dividends are usually paid in the form of cash, store credits (common among retail consumer’s cooperatives) and shares in the company (newly created shares or existing shares at market price). Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholders.