Israel Tax System: How It works
Navigating the tax system in a new country can feel like deciphering a foreign language. But Fret Not! We’ve got you covered for this!
If you’ve recently moved to Israel, you’re probably finding out that their tax system is no exception. From understanding VAT to figuring out income tax brackets, this guide will help demystify the intricacies of Israel’s tax laws and make sure you stay on the right side of the Shekel.
Let’s dive in!
Who Needs To File Taxes In Israel?
Generally speaking, a person is deemed to be an Israeli tax resident and is liable to Israeli taxes on their worldwide income if they have a “center of life” in Israel or spend more than 183 days in Israel every year.
However, for taxation purposes, non-residents of Israel are only obligated to pay taxes on their income that originates in Israel, such as money received from investments made in Israel or from employment done there.
This can be a big benefit for foreign nationals who still have income sources in the US or other nations.
Furthermore, for tax reasons, capital gains taxes on the sale of Israeli firm shares traded on the Israeli stock exchange are waived for non-residents of Israel.
Those who make investments in the Israeli stock market may find this to be highly advantageous.
It’s crucial to remember that figuring out one’s residency status for tax purposes can be complicated.
People should speak with an expat tax expert service to ensure compliance with all applicable tax laws and regulations.
Who Qualifies As An Israeli Resident For Tax Purposes?
The “center of life” criteria is crucial in determining a person’s residency status in Israel for taxation purposes.
The “center of life” test considers all of a person’s social, familial, and economic connections when determining where they should live. These factors include:
- The place of the person’s permanent home
- The person’s and the person’s family’s place of residence
- The person’s regular or permanent place of business or the place of the person’s permanent employment
- The place of the person’s active and substantive economic interests and
- The place of the person’s activity in organizations, societies, and various institutions.
A person will be considered an Israeli resident for tax purposes if there is a rebuttable presumption that the focus of their existence during a tax year is in Israel (which they can refute either by themselves or by Israeli tax officials).
This presumption applies if:
- During the tax year, the person spent 183 or more days in Israel or
- During the tax year, the person spent 30 or more days in Israel, and the total period of the person’s stay in Israel in the tax year and in the two years before was 425 days or more.
What Types Of Taxation Does Israel Have?
Personal Income Tax
Israel levies income taxes on individuals based on a progressive scale, with a maximum income tax rate of 50%.
Lower tax rates may apply to capital gains; these rates typically range from 15% to 30%, depending on the type of asset that is subject to capital gains tax.
Additionally, Israel typically separates the inflationary component of a capital gain, which is free from taxation to the extent that it was earned after January 1, 1994.
It is based on the percentage increase in the Israeli consumer price index between the asset’s acquisition date and sale date.
Dividend income (from 15% to 30%) and interest income (from 15% to 25%) can also be subject to lower tax rates.
There are no local income taxes in Israel.
For new immigrants and returning residents (those who were foreign residents for a continuous period of at least ten years and subsequently returned to Israel).
There are a number of exclusions from personal income tax that apply after they become an Israeli tax resident.
These exemptions include the following:
- Exemption from Israeli taxation for ten years on foreign source passive income (including dividends, interest, and rent);
- Exemption from Israeli taxation for ten years on income from a business, vocation, or salary that is accrued or derived from outside of Israel; and
- Exemption from Israeli capital gains taxation for ten years on the sale of assets located outside of Israel.
Furthermore, for a maximum of three years and a possible five-year extension, “approved specialists.”
Foreigners designated by the Ministry of Industry and Trade to carry out tasks or supply talents that Israeli nationals cannot are subject to a 25% income tax rate.
Property Tax
Property taxes are enforced at the municipal level and are often levied against the owner of unoccupied property and the occupier of residential and commercial property.
Land Appreciation Tax
Israel levies a land appreciation tax on profits from the sale of real estate located in Israel.
Capital gains taxation is used to calculate the tax burden under the land appreciation tax.
Value-Added Tax
Israel assesses a value-added consumption tax at the rate of 17%.
Estate, Inheritance, and Gift Taxes
Israel does not impose any estate, inheritance, or gift taxes.
Corporate Income Taxes
Corporate income tax applies to both international corporations with an Israeli branch and Israeli enterprises that are incorporated.
While non-resident entities in Israel only have their corporate income tax basis consisting of money earned or derived within Israel, Israeli-resident entities have their corporate income tax base consisting of all worldwide income.
There is a 23% corporate income tax rate.
What Tax Credits And Deductions Are Available For Expats Living In Israel?
Personal tax credits based on “points” are available to Israeli tax residents. The monthly value of each “point” is ILS 223. Residents are guaranteed a minimum of 2.25 “points.”
Additionally, tax credits are offered for donations made to charities.
Furthermore, for a maximum of 12 months of employment in Israel, a “foreign expert,” who is typically a non-resident, was invited to perform services in an area of expertise while abroad by an Israeli individual.
Or, an Israeli resident entity who earned more than ILS 13,600 per month for the performance of the services in Israel may deduct the following from Israeli taxable income:
- Documented rent and utility costs and
- Daily living expenses (limited to the lower of ILS 340 or 50% of the employee’s gross remuneration.)
What Tax Returns Must Be Filed In Israel?
In Israel, the majority of income tax is derived from taxes withheld at the source. Therefore, tax returns are not always necessary.
If a tax return is necessary, Form 1301 will be used to report it. Form 1301 is filed with the Israel Tax Authority. The Israel Tax Authority then sends a tax assessment to the taxpayer
What Is The Israeli Tax Filing Deadline?
The deadline for filing an Israeli tax return, if one is necessary, is April 30 (subject to extensions).
What Are Tax Benefits For Foreign Investors?
Israel is renowned for its vibrant startup scene and cutting-edge technology. To lure international investment, Israel offers foreign investors alluring tax breaks.
These consist of tax reductions for investments made in economically disadvantaged areas and tax incentives for high-tech businesses.
These policies aim to boost employment in Israel, draw in foreign capital, and enhance the country’s economy.
Additionally, they allow international investors to maximize their returns and take advantage of a favorable tax environment.
Conclusion
Mastering the Israeli tax system might seem daunting at first, but with the right information, it becomes manageable.
Remember, staying informed and proactive about your taxes not only keeps you compliant but can also save you money in the long run.
Tax Tamed!
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