Thank you to Avraham Deutsch’s office and Yair Givati for authoring this article.
For Israeli tax purposes, an Israeli resident is defined as an individual whose center of life is in Israel taking into account the person’s family, economic and social links.
An important presumption will apply in either of the following circumstances (the “days test”):
- The individual is present in Israel at least 183 days in a tax year ending 31 December,
- The individual is present in Israel at least 30 days in the current tax year, and 425 days cumulative in the current and two preceding tax years.
The “center of life test” is based on the following criteria:
- Location of permanent home
- Place of residence of the individual and his/her family
- Place where the individual regularly works or is employed
- Location of active and material economic interests
- Place where the individual is active in various organizations, associations or institutions
The Israeli tax authorities also published other facts on Circular 1/2011 that fiscal residency is based on the earliest dates as follows:
- The date stamped on the certificate issued by the Ministry of Absorption,
- The date the individual started living in a permanent home in Israel
- The date any member of his family started living in a permanent home in Israel.
A major change has been implemented in 2017. The Israeli tax authorities have published a Form 1348: “Residency Declaration”. The form is applicable to people who meet the criteria to be considered an Israeli tax resident according to the “days test”, but who claim to be a non-Israeli tax resident according to the “center of life” test.
The form needs to be filled out and attached to the Israeli tax return for the year in question and it is at the discretion of the Israeli tax authority to accept the claim.
Among others, the form includes the number of days the taxpayer spent in Israel and whether the taxpayer is a resident of any other foreign country, as well a detailed list of questions regarding family, business relationships and any other criteria that might affect the residency.
As a basis for income, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on their Israeli sourced income. Income includes employment, business income and passive income from bank deposits and savings.
A single filer will file a single assessment, while a married couple will file a joint assessment. A tax year for individuals is a calendar year. The initial filing due date is April 30th of the following year unless he is represented by an Israeli certified accountant and will then be granted an extension.
The ordinary marginal income tax rates on earned income for tax year 2020, per individual, are as follows:
The rates depend on various factors, such as whether the individual is: over age 60, a 10% shareholder or more, different rental income tax tracks, etc.
Credits for Tax Year 2020
Tax Credits: זיכויים
A tax credit is a direct decrease of the calculated tax liability.
Credit Points נקודות זיכוי,
a) Each resident is entitled to credit points (2¼ for a male; 2¾ for a female).
Each credit point is 2,628 NIS (as of 2020).
b) Child credit – Parents are allowed between 1 to 2.5 credit points for each child between ages 0-18. The credit point amounts vary between the mother and the father.
c) Oleh chadash – credit points as follows:
3 credit points for end 18 months from date of Aliyah.
2 credit points for the next 12 months.
1 credit point for the next 12 months.
d) Other points for post-graduation, single mother, disabled child or single parent, released soldiers, etc.
Charitable Contributions: תרומות
Tax credit of 35% of the amount paid, to a recognized Israeli if total contributions exceed 190 NIS for the year (as of 2020). Maximum contribution is the lesser of 30% of taxable income or 9,350,000 NIS.
Other credits are available for pension contributions, life insurance premiums, and additional credits for Israelis that lives in less central locations, etc…
Employment in Israel-Salary Package:
Below is a list of salary package an employee is entitled to get from his employee:
- Base salary
- Travel allowance (up to ceiling required by law)
- Annual vacation leave (up to number of days required by law and fixed by seniority)
- Sick leave-18 days per year up to 90 days cumulative
- Religious Holidays-as required by law
- Severance pay-one month’s salary for each year worked.
- Pension-As required by law; Since 2008, employers are required to fund a pension with equal contributions from the employer and employee. The stipulated minimum pension fund contributions is 18.5% of gross salary. The employer generally pays 6.5% towards pension funding and 6% towards severance funding. The employee pays 6% towards pension funding.
- Training Fund (Keren Hishtalmut)-Voluntary fund; The employer contributes 7.5 % of the base salary while the employee contributes 2.5 % of base salary (up to a maximum of salary as published for the specific year). The employer’s contribution is not taxable to the employee and the fund is not taxed on any income generated. After three years, the employee can withdraw all the contributions tax free if used for professional education. After six years, the contributions can be withdrawn tax free and used for anything.
- Car– It is not unusual for large companies to provide cars to certain management positions. Hi tech companies do likewise for technicians. The company purchases or leases the car and pays all expenses, including gas and maintenance. It can deduct expenses and claim back 2/3rds of the VAT. The employee is required to pay tax on the “benefit” “שווי רכב”. The “benefit” is a fixed monthly amount based on the size of the car for old cars. For cars purchased from 2010 and on, calculated as a percentage and price of the car.
Two jobs: תאום מס
If one is working for two employers, he is required by law to receive confirmation from the tax authorities regarding the amount of tax to be deducted on the additional salary.
A corporation is deemed to be subject to Israeli taxes if its activities are managed and controlled within the State of Israel or established under its laws. A domestic corporation is subject to taxation on its worldwide income. A foreign corporation with an Israeli subsidiary is only taxed on Israel based income.
A year for tax purposes is a calendar year, however businesses may request a different tax year. Businesses must file their annual tax returns within five months after the end of their year.
In 2018, the corporate rate was reduced to 23%. Dividends from the company to an individual are taxed at rates ranging from 25% to 33%, resulting in a combined distributed corporate profits from 42.25-48.41%. Special reduced corporate rates applied to technology enterprises.
Salaries and business profits of self-employed individuals are subject to individual; income taxes as outlined above and to Bituach Leumi rates.
Value-Added Tax (VAT) in Israel, is applied to most goods and services, including imported goods and services. As of 1 October 2015, the standard was lowered to 17%, from 18%. Certain items are zero-rated which includes exported goods and the provision of certain services to non-residents. The value of imported goods for VAT purposes includes the customs duty, purchase tax and other levies. Exempt dealers must have annual revenues below NIS 100,491
Electronic filing of VAT is mandatory in Israel.
Tax Registrations with Different Tax Authorities:
Registration needs to be done when a business starts. We do not suggest to wait until the end of the year, penalties can accrue substantially.
You need to first register with VAT authorities, by submitting a cancelled check of a business bank account, copy of rental agreement on your premises or purchase agreement, whichever is applicable. Upon registration with the VAT authorities if you are not an “exempt dealer”, you need to register with the tax authorities as self-employed individual or as a corporation as well as with Bituach Leumi.
An exempt dealer does not need to charge VAT to clients and claim VAT back on expenses. Other dealers issue tax invoices, offset VAT on expenses against VAT collected, and are required to maintain books in an approved accounting software to report monthly or bi-monthly VAT and income taxes.
Periodical Tax Payments
Every year, the business will get a monthly or bi-monthly payment booklet to make a payment to the different tax authorities VAT, Bituach Leumi and Income tax authorities on the 15th of the month or every other 15th of the month (no VAT in case of Exempt Dealers)
National Insurance (Social Security] including Basic Health Insurance
Current rates of National Insurance for employees, including health insurance and Bituach Leumi contributions (as of Jan 2020, in NIS)
Self-employed individuals pay between 5.97%-17.83%.
Taxes Related to Purchasing and Selling Real Estate:
As of January 2014, the new Land Appreciation Tax was enacted and by June 24, 2015, a new acquisition tax came into effect. Consequently, the purchase tax rate increased, and foreigners along with Israeli multiple home owners will be obligated to pay the capital gains tax on residential property investment.
Acquisition Tax Reform
Each individual that purchases a property in Israel will be generally subject to acquisition tax. However, this tax is imposed differently based on type of property owners: Israeli single home owner, non-Israeli making Aliyah (within 2 years) single home owner, Israeli multiple-home owner, and foreign resident property owners.
Acquisition Tax Brackets on residential property in Israel
Land Appreciation Tax Reform
An individual who sells property in Israel will be subject to land appreciation tax (equivalent to capital gains tax).
Prior to January 1, 2014, Section 49b (1) stated that anyone could be exempted from the capital gain tax on the selling of residential property as declared by law every four years regardless of how many properties owned or the length of time owned. Furthermore, Israeli tax law permitted all single residential property owners an exemption from capital gain tax every eighteen months provided that the owner did not own or inherit more than one apartment four years prior to the sale.
- For owners of more than one property: Land appreciation is usually taxed at 25%. If the property was purchased before 1.1.2014, then the linear portion of the gain attributed to the holding period before 1.1.2014 can be exempt from tax, according to the rules prior to 1.1.2014, as long as they haven’t used the exemption within the last 4 years prior to the sale.
- For single property owners: Israeli residents or non-Israeli residents making Aliyah (within two years) and residential owners may claim the above exemption every 18 months regardless of previous ownership, but the owner had to have owned the property at least 18 months prior the sale
- The above exemption is not allowed to foreign residents owning an Israeli property unless he could prove that he does own a house in his home country.
- Inherited property will not affect the single owner property tax exemption, however, certain exceptions apply to inherited property.
Step Up Basis
When an Israeli resident inherits (or receives an s a gift) a property from a foreign resident, the capital gain tax will apply upon sale of the property. By default, the new owner of the property will “step into the shoes” of the original owner and is taxed on the entire capital period during the entire holding period of the original owner and based on the original cost basis. However, The Israeli tax authorities allow for a possibility to apply for a “Step up Basis” through a special form. The form requires a specific list of documents to provide to approve the step up basis.
Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Alan and his associates specialize in income tax planning and compliance as well as in investment consulting. Alan has five office locations and can be reached at 02-999-2104, 03-527-3254, 09-746-0623 or 052-274-9999, or you can e-mail him at email@example.com. Please visit his website at www.ardcpa.com for more information.
Yair Givati is a partner in Haim Givati & Co. Law Offices, a boutique law firm with over 45 years of experience. Yair and his associates specialize in Real Estate, Corporate and Tax law, as well as other civil matters.
Yair can be reached at +972-2-9411001, +972-54-7564636, firstname.lastname@example.org, www.givatilaw.co.il