The Israel tax system is governed by the Israel Tax Ordinance. Income earned in Israel by new Olim is taxable in Israel, whether as a wage earner, as a self-employed individual, or as a corporate shareholder.
As of 2003, Israel also changed its tax regime for reporting foreign (non-Israeli) income to a worldwide income basis akin to the U.S. In addition to the regular tax on Israeli source income, Israel structures its tax system on residency which is based upon your “center of vital interests”. Factors to determine residency include objective and subjective tests, including:
- Days spent in Israel
- Where the work is performed
- Where your family resides
- Where your assets are held
- Where your social networks are maintained.
New Olim have a ten-year tax exemption from Israeli tax on passive income derived outside of Israel (e.g. interest, dividends, capital gains, rentals, pass-through income and pensions). Wages or self-employment income earned in Israel is subject to Israeli tax immediately, but reduced Israeli income tax rate exists for new Olim (generally phased out over the first 3 ½ years after aliyah). Wages earned while physically present in the U.S. or any other country are generally exempt from Israeli tax for ten years. The Deadline for filing an Israeli income tax return is generally April 30, but extensions are available.
New businesses in Israel must generally open and maintain 3 files with the Israeli tax authorities:
- VAT (Value Added Tax)
- Income Tax (Mas Hachnasa)
- Bituach Leumi (Social Security).
Please contact your tax advisor for more details on how (and whether) to open a sole proprietorship or an Israeli corporation or other entity.
It is imperative that you familiarize yourselves with certain concepts regarding both U.S. and Israeli income tax law and how they may affect your personal situation. Proper tax planning and minimization of your taxes requires an analysis of many important issues, including the interplay between the U.S. and Israeli foreign income tax credit rules, the foreign earned income exclusion rules, and also how the applicable provisions of the U.S. – Israel income tax treaty affects your tax situation.