Tax Number In Israel: An Expats Guide

Obtaining a tax number in Israel is a crucial step for anyone starting a business, working, or living in the country. Don’t Worry! We’ve got your back!

This guide provides a clear overview of the process, requirements, and benefits of having a tax number. Whether you’re an expat or a local resident, understanding how to navigate this process is essential for ensuring smooth financial and legal operations.

Let’s dive in!

What Types Of Taxation Does Israel Have?

Understanding the types of taxes you might encounter in Israel is crucial, especially for expats. Here’s a straightforward guide to the primary taxes in Israel:

Income Tax

Income tax in Israel is progressive, meaning the rate increases as your income rises. This tax applies to your earnings from work, business activities, and other income sources. Here’s how it generally works:

Individuals: Income tax rates for individuals range from 10% to 50%, depending on your income bracket. The more you earn, the higher the percentage of tax you’ll pay.
Corporations: Corporate income tax is set at a flat rate, currently 23%, and applies to profits earned by companies operating in Israel.

Value Added Tax (VAT)

VAT is a consumption tax added to most goods and services sold in Israel. The standard VAT rate is 17%. However, some goods and services, like essential food items, education, and health services, may be exempt or subject to a reduced rate.

Capital Gains Tax

When you sell an asset like stocks, real estate, or a business, you must pay capital gains tax on your profit. The rates are:

Individuals: The rate is generally 25% for individuals.
Corporations: For companies, the rate is 23%.

National Insurance Institute (Bituach Leumi)

This is similar to social security in other countries. Both employees and employers contribute to the National Insurance Institute.

Contributions go towards benefits like health insurance, unemployment, and pensions. The rates vary depending on your employment status and income level.

Real Estate Taxes

There are several taxes related to real estate in Israel:

Purchase Tax: When you buy property, you pay a purchase tax, which varies depending on the property’s value and whether it’s your first home.
Betterment Tax (Capital Gains On Real Estate): This tax is applied to the profit from selling real estate.
Arnona (Municipal Property Tax): This is a local property tax paid annually to the municipality where your property is located. The rate depends on the size and location of the property.

Inheritance And Gift Tax

Currently, Israel does not impose inheritance tax or gift tax. This means you do not have to pay taxes when you receive a gift or inherit property.

However, income from inherited property, like rent or interest, will be subject to income tax.

Who Needs To File Taxes In Israel?

Individuals spending more than 183 days in Israel during a calendar year or establishing their primary residency in the country, such as employment, family, or domicile, are classified as Israeli tax residents.

Consequently, they must declare and pay taxes on their global income.

Conversely, non-residents, for tax purposes, are solely accountable for taxes on income derived from Israeli sources, including employment within Israel or investments within its borders.

This distinction can benefit expatriates who want to maintain their financial interests abroad.

Furthermore, non-residents are exempt from capital gains taxes on the sale of shares in Israeli companies traded on the local stock exchange, presenting a notable advantage for Israeli investors.

Resolving one’s tax residency status can pose complexities. To ensure compliance with pertinent tax laws and regulations and optimize available benefits, it is advisable to seek guidance from reputable expatriate tax services, such as Greenback.

Who Qualifies As An Israeli Resident For Tax Purposes?

Determining who qualifies as an Israeli resident for tax purposes is crucial for understanding your tax obligations.

The ‘center of life’ test is the primary method for determining this. This test looks at various aspects of your life to decide where your true home is. Here’s a breakdown of the critical factors considered:

Permanent Home: Where is your permanent home located? This includes the physical place where you have set down roots.
Family Residence: Where do you and your family primarily live? This helps indicate your central place of living.
Place Of Business Or Employment: Where do you regularly work or conduct your business? This is a significant indicator of your primary economic ties.
Economic Interests: Where are your substantial economic interests, like investments, savings, or other financial assets, based?
Social Activities: Where do you engage in most of your social activities? This includes participation in local organizations, societies, and institutions. These factors collectively help to paint a picture of where your life is primarily centered.

Additionally, specific conditions create a rebuttable presumption (a presumption that can be challenged) that you are an Israeli resident for tax purposes. These are:

If you spend 183 days or more in Israel during a tax year, it is presumed that your center of life is in Israel.
If you spend 30 or more days in Israel during a tax year, and the total days you have stayed in Israel during that year plus the two preceding years amount to 425 days or more, it is also presumed that your center of life is in Israel.This presumption means that, by default, you will be considered an Israeli resident for tax purposes under these conditions unless you can provide evidence to the contrary or the Israeli tax authorities decide otherwise.
If you live and work in Israel and your key life activities are based here, you will likely be considered a tax resident. This has significant implications, as Israeli tax residents are required to pay taxes on their worldwide income. For non-residents, the tax obligation is limited to income sourced within Israel.

Given the complexity of determining residency, consulting with a tax professional specializing in expatriate tax matters is often wise.

They can help you navigate the rules, comply with all relevant tax laws, and optimize your tax situation.

What Tax Credits And Deductions Are Available For Expats Living In Israel?

Living in Israel as an expat can come with some tax benefits. Here’s a simple guide to the leading tax credits and deductions you can take advantage of:

Personal Tax Credits: In Israel, tax credits are calculated using a system called points. Each point is worth ILS 223 per month. Every resident gets a minimum of 2.25 points, translating to a monthly credit of ILS 501.75. These credits help reduce the amount of income tax you owe.
Charitable Contributions: If you donate to recognized charities, you can get tax credits for your contributions. This means that giving to charity can lower your tax bill, making it a good deed and financially beneficial.
Foreign Expert Deductions: There are special deductions for a “foreign expert.” A foreign expert is a non-resident invited by an Israeli individual or company to work in Israel. To qualify, you must earn more than ILS 13,600 per month. If you fit this category, you can deduct certain expenses from your taxable income in Israel for up to 12 months:
Rent And Utilities: You can deduct documented costs for rent and utilities.
Daily Living Expenses: You can deduct daily living expenses up to ILS 340 per day or 50% of your gross pay, whichever is lower.
Additional Deductions: Expats might also benefit from other general deductions available to all residents, such as:
- Education Expenses: In some cases, education-related expenses might be deductible.
- Mortgage Interest: Interest paid on mortgages for your primary residence may be deductible.
- Pension Contributions: Contributions to approved pension plans can also reduce your taxable income.
Child Credits And Benefits: Families with children can get additional tax credits and benefits. The specifics depend on the number of children and their ages, which can significantly reduce your tax bill.

What Tax Returns Must Be Filed In Israel?

Navigating tax filing requirements can be complex, especially for expats. Here’s an easy-to-understand guide on tax returns you must file in Israel, along with some essential details for American expats.

General Tax Filing In Israel

In Israel, your employer deducts most taxes directly from your salary. This system is called withholding at source, and it often means you don’t need to file a tax return every year.

However, you might need to file a tax return in some situations. When required, you’ll use Form 1301.

This form is submitted to the Israel Tax Authority, which reviews it and sends you a tax assessment indicating how much tax you owe or the refund you are due.

When You Might Need To File Form 1301

You may need to file a tax return in Israel if:

You have income from sources other than your salary, such as investments, rental properties, or business income.
You are self-employed.
You have substantial foreign income.
You want to claim specific tax credits or deductions.
You’ve been asked by the Israel Tax Authority to file a return.

Tax Filing For American Expats

If you’re an American expat living in Israel, you have additional tax filing requirements to keep in mind:

Revenue Service (IRS)

IRS Form 1040 (Individual Income Tax Return): This is the main form you use to report your worldwide income to the IRS, including income earned in Israel.
IRS Form 8938 (Statement of Specified Foreign Financial Assets): You must file this form if your foreign financial assets exceed certain thresholds. It includes details about your foreign bank accounts, investment accounts, and other financial assets.

FinCEN Form 114 (FBAR – Report Of Foreign Bank And Financial Accounts):

This form must be filed if the total value of your foreign financial accounts exceeds $10,000 at any time during the year.

It’s submitted to the Financial Crimes Enforcement Network (FinCEN), not the IRS, but is part of your overall tax compliance.

Why Filing These Forms Is Important

Filing the appropriate tax forms in Israel and the United States ensures you comply with both countries’ tax laws. This can help you avoid penalties and potential legal issues.

Additionally, proper filing may allow you to take advantage of tax credits and deductions, such as the Foreign Earned Income Exclusion or Foreign Tax Credit, which can reduce your overall tax burden.

What Is The Israeli Tax Filing Deadline?

If you need to file a tax return in Israel, knowing the key dates to stay compliant and avoid penalties is essential. Here’s what you need to know about the Israeli tax filing deadline:

Standard Filing Deadline

The standard due date for filing a tax return in Israel is April 30, the year following the tax year. For example, for income earned in the 2023 tax year, your tax return would be due by April 30, 2024.

Extensions

You can apply for an extension if you need more time to prepare your tax return. Extensions might give you additional months to file your return, but applying for this before the original deadline is crucial.

However, remember that while an extension gives you more time to file, it does not extend the time to pay any taxes owed. Interest and penalties may accrue on any unpaid tax after April 30.

For American Expats

If you are an American expat, it’s also essential to remember your U.S. tax filing deadlines:

IRS Form 1040 is typically due on April 15, with an automatic extension to June 15 for expats. Further extensions can be requested until October 15.

FinCEN Form 114 (FBAR) is due on April 15, with an automatic extension to October 15.

IRS Form 8938 is filed with your Form 1040 and follows the same deadlines.

Benefits

✅ Avoiding Penalties And Interest: By filing your tax return on time, you can avoid late filing penalties and interest charges on unpaid taxes. This ensures you comply with Israeli tax laws and avoid unnecessary financial burdens.

✅ Access To Tax Refunds: If you have overpaid your taxes throughout the year, timely filing can result in receiving tax refunds sooner. This can improve your cash flow and provide extra funds for personal or business use.

✅ Utilizing Tax Credits And Deductions: Filing on time allows you to take advantage of various tax credits and deductions, such as personal tax credits, charitable contributions, and foreign expert deductions. These can significantly reduce your taxable income and overall tax liability.

✅ Maintaining Good Tax Records: Filing your tax returns on time helps maintain accurate and organized financial records. This can benefit future financial planning, loan applications, and audits.

✅ Compliance With Israeli Law: Meeting the tax filing deadline ensures compliance with Israeli tax regulations, which can protect you from legal issues and maintain your good standing with the Israel Tax Authority.

✅ Eligibility For Extensions: By filing your tax return or requesting an extension by the deadline, you can gain additional time to ensure your tax return is accurate and complete. This can help you avoid mistakes and ensure all income and deductions are correctly reported.

✅ Peace Of Mind: Knowing you have met your tax obligations can reduce stress and give you peace of mind. You can rest assured that you are in good standing with the tax authorities and can focus on other aspects of your life or business.

✅ Strategic Tax Planning: Timely tax filing allows for better strategic tax planning. Understanding your tax position early in the year can help you make informed financial decisions, such as investments, retirement planning, and other financial strategies.

✅ Financial Transparency: Regular and timely tax filing promotes financial transparency, which benefits personal and business finances. It ensures that all economic activities are adequately documented and reported.

✅ Facilitates Future Tax Filings: Meeting the current year’s tax filing deadline sets a positive precedent for future filings. It helps establish a routine and makes it easier to stay on top of your tax obligations in subsequent years, ensuring continued compliance and financial health.

Conclusion

Securing your tax number in Israel is a straightforward yet vital task for anyone engaging in economic activities within the country.

By following the steps outlined in this guide, you can ensure compliance with Israeli tax regulations and avoid potential legal issues.

Tax Simplified!

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