Income Tax in Israel

Taxes on personal income:

Israeli tax residents are taxable on their worldwide income.

Non-resident individuals are subject to income tax on Israeli-source income and to capital gains tax on capital gains from assets situated in Israel (subject to special exemptions for non-residents. Sourcing rules determine when income is to be regarded as being from an Israeli source.

Personal income tax rates:

Taxation of individuals is imposed in graduated rates. Non-residents are taxed at the same rates as Israeli residents. The annual tax brackets are an aggregation of the monthly brackets in force during the year, which are periodically updated for inflation. The annual bracket amounts for 2017 expressed in Israeli shekels (ILS) are as follows:

Annual taxable income (ILS)		Tax on column 1 (ILS)	Tax on excess (%)
Over (column 1)	Not over
0	74640	0	10
74640	107040	7464	14
107040	171840	12000	20
171840	238800	24960	31
238800	496920	45718	35
496920	640000	136060	47
640000		203308	50

A minimum tax rate of 31% generally applies to certain classes of passive income not derived from business or employment earned by a taxpayer under age 60.

Most types of interest, dividends, and capital gains have varying, fixed rates of tax set in the Income Tax Ordinance (ITO).

Income determination:

Employment income:

Under Israeli sourcing rules, employment income is regarded as being sourced at the place where the related work is performed. Accordingly, employment income derived by a foreign resident relating to the employee's performance of services in Israel would be subject to Israeli taxation, unless a tax treaty exemption is available in accordance with the relevant double tax treaty (DTT).

The definition of taxable employment income is broadly defined in the ITO and covers salary, bonuses, cost of living allowances, tax equalisation payments, and virtually all types of fringe benefits (including benefits from stock based compensation plans). The value of the use of an employer provided car as set in Israeli tax regulations is also included as employment income.

Israeli taxation of security based compensation for employees who relocate to or from Israel is a complex subject matter whose taxation depends upon the specific facts and circumstances of the benefit plan and the person's period of residency in Israel.

Employer contributions to approved pension and benefit schemes and to further education funds are exempt from income tax (subject to certain requirements and maximum levels of contribution).

Capital gains:

Capital gains tax is generally payable on capital gains by residents of Israel on the sale of assets (irrespective of the location of the assets) and by non-residents on the sale of the following:

·  Assets located in Israel.

· Assets located abroad that are essentially a direct or indirect right to an asset or to inventory, or that are an indirect right to a real estate right or to an asset in a real estate association located in Israel. Taxation applies only in respect of that part of the consideration that stems from the above property located in Israel.

· Assets that are a share or the right to a share in an Israeli entity.

· Assets that are a right in a foreign resident entity that is essentially a direct or indirect right to property located in Israel. Taxation applies only with respect to that part of the consideration that stems from the property located in Israel.

The cashless transfer of rights and assets arising from certain mergers, spin-offs, and asset transfers may be exempt from tax upon meeting various requirements.

Determination of the capital gain:

Tax on capital gains is imposed on the disposal of fixed and intangible assets where the disposal price is in excess of the depreciated cost.

Computation of real gain and inflationary components:

For tax purposes, the capital gain is generally calculated in local currency, and there are provisions for segregating the taxable gain into its real and inflationary components. The inflationary amount is the original cost of the asset, less depreciation (where applicable), multiplied by the percentage increase in the Israeli consumer price index (CPI) from the date of acquisition of the asset to the date of its sale. The inflationary amount component is exempt to the extent it accrued after 1 January 1994 and is generally subject to tax at the rate of 10% if it accrued before that date.

The real gain component, if any, will be taxed at the rates set out further below.

A non-resident who invests in capital assets with foreign currency may elect to calculate the inflationary amount in that foreign currency. Under this option, in the event of a sale of shares in an Israeli company, the inflationary amount attributable to exchange differences on the investment is always exempt from Israeli tax.

Traded and non-traded securities acquired from 1 January 2003 and thereafter:

The real gain, if any, realised upon the sale of shares purchased on or after 1 January 2003 is generally taxed at a rate of 25%. This rate is increased to 30% where the seller was a 10% or more shareholder at the date of sale or during any of the 12 months preceding the sale; detailed definitional rules apply (hereinafter ‘10% or more shareholder’).

Traded and non-traded securities acquired before 2003:

A blended tax rate shall apply, as follows:

· The ordinary individual tax rate (determined in accordance with the individual’s marginal tax rate in the range of 31% to 50%) will be applied to the gain amount that bears the same ratio to the total gain realised as the ratio the holding period commencing at the acquisition date and terminating on 1 January 2003 bears to the total holding period.

·  The remainder of the gain realised will be subject to capital gains tax at a 25% rate (or 30% rate where a 10% or more shareholder).

Special rule for retained profits upon sale of shares:

Special provisions apply to part of the real gain that is attributed to the seller’s share of retained profits in the case of a sale of (i) non-traded shares that were acquired prior to 1 January 2003 or (ii) publicly traded shares where the seller was a 10% or more shareholder.

The share of ‘retained profits’ is the amount of gain equal to the proportional part of the retained profits of the company that the seller of the shares would have rights to by virtue of those shares. Detailed rules apply in determining this profit component.

·  The part of the retained profits that is attributed to the period ending on 31 December 2002 will be subject to tax at a reduced rate of 10%.

· Generally, the seller’s proportionate part of the company’s retained profits will be taxed as if this amount had been received as dividends immediately before the sale (e.g. at a tax rate of 25% or at a tax rate of 30% where the seller is a 10% or more shareholder).

Special exemptions for non-residents:

Non-resident are exempt from tax on capital gains from a sale of shares of an Israeli company traded on the Israeli stock exchange or on a foreign stock exchange.

For non-traded shares of an Israeli company acquired from 1 January 2009 and thereafter, a non-resident shall be exempt from tax on capital gains, provided that the following conditions are met:

· The investment is not in a company in which, on the date of its purchase and in the two preceding years, the main value of the assets held by the company, directly or indirectly, were sourced from an interest in (i) real estate or in a real estate association (as defined in the ITO); (ii) the use in real estate or any asset attached to land; (iii) exploitation of natural resources in Israel; or (iv) produce from land in Israel.

· The investment is not in a company the majority of whose assets are real estate assets in Israel.

· The shares were not purchased from a relative.

For non-traded shares acquired in the period 2005 to 2008, the exemption is also conditioned on the seller having been a resident of a tax treaty country for at least ten years prior to the sale, the seller filing a tax report in their local country of residency reporting the sale, and that notice of the purchase of the shares was given by the person to the ITA within 30 days of the purchase of the security, and subject to additional conditions. Detailed rules apply.

A foreign resident may also be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty.

Capital losses:

Capital losses may offset all capital gains (including gains from Israeli or foreign securities) and gains from the sale of property (whether Israeli or foreign source).

Where the capital loss is from a non-Israeli asset, the loss must first be offset against foreign-source capital gains.

Capital losses derived from the sale of securities may also be offset against interest and dividend income generated from the sold security and also against interest and dividend income received from other securities (where the income was not subject to tax of more than 25%).

Capital losses can generally be carried forward indefinitely and set off only against capital gains. Capital losses carried forward from the sale of a foreign asset should first be offset against foreign-source capital gains arising in the carryforward year.

Exit tax:

When an Israeli tax resident ceases to be an Israeli resident for tax purposes, the individual's assets shall be deemed to have been sold one day before the individual ceased being an Israeli resident.

Any gain attributable to the deemed sale of assets may be paid on the day the residency ceased or it may be postponed until the date the assets are actually realised. The amount of the Israeli capital gain portion shall be determined by taking the real capital gain at the time of realisation, multiplied by the period of ownership from the day on which it acquired the asset until the day it ceased being an Israeli resident, divided by the entire period from the day of the asset's acquisition until the day or realisation. The Minister of Finance has been authorised to prescribe provisions for the implementation of the exit tax, including provisions for the prevention of double taxation and the submission of tax reports, but no provisions have yet been issued.

Dividend income:

Dividends shall generally be subject to tax at the rate of 25% (or 30% in the case of a 10% or more shareholder).

A Temporary Order allowed for a reduced tax rate of 25% (instead of 30%) on the distribution of dividends by a company to a substantial shareholder (a shareholder who holds 10% or more of the shares of the company) from profits accumulated until 31 December 2016. The surtax of 3% is not applicable on this distribution. This preferential tax rate only applies for dividend distributions made between 1 January 2017 and 30 September 2017. A qualifying condition for the reduced tax rate is that each year, during 2017 through 2019, the substantial shareholder does not receive a reduced amount in salary, management fees, interest payments, or other payments compared to the average amount the shareholder received in 2015 and 2016.

For a non-resident, the tax rate may be reduced by an applicable tax treaty.

A 15% to 20% rate generally applies for dividends distributed from approved enterprises (this is a special regime applicable for certain enterprises qualifying under The Law for the Encouragement of Capital Investments). A lower rate may be available under a relevant tax treaty.

Under the controlled foreign corporation (CFC) regime in Israeli tax law, an Israeli individual may be taxed on a proportion of the undistributed profits of certain Israeli-controlled non-resident companies in which the Israeli shareholder has a controlling interest (10% or more of any of the CFC’s ‘means of control’). A CFC is a company to which a number of cumulative conditions apply. These include the fact that most of its income or profits in the tax year derive from passive sources (e.g. capital gains, interest, rental, dividend, royalties) and such passive income has been subject to an effective tax rate that does not exceed 15%.

Cash withdrawals or personal use of company assets:

Effective 1 January 2017, withdrawals from a company by a 10% or more shareholder of (i) cash whose accumulated balance during any year exceeds ILS 100,000 (including certain shareholder loans and guarantees) or (ii) the personal use by such shareholder of an apartment, art, jewellery, airplanes, or boats owned by the company (or of other company assets as will be published by the Finance Ministry) shall be taxed to the shareholder as a dividend, as salary in the case where the company has no retained earnings and there is an employer-relationship, or as other taxable income. These rules also apply when the recipient is a relative of the 10% or more shareholder as defined in the tax law. This provision applies as well to loans between companies unless the recipient company is not transparent and there is an economic purpose for the cash withdrawal.

For cash withdrawals, the tax event will arise if the withdrawn money has not been repaid to the company by the end of the tax year following the tax year in which the withdrawal was made. When there is a use of other company assets, the tax event shall be at the end of each tax year in which the asset was used for personal use until the asset is returned to the company.

Detailed rules apply.

Interest income:

Interest income shall generally be subject to tax at a rate of 25%.

Interest from investments in financial institutions or in traded securities that are not linked to the CPI may be eligible for a 15% rate.

For a non-resident, the tax rate may be reduced under an applicable tax treaty.

Interest paid to a non-resident from deposits of foreign currency with an Israel bank is exempt from tax, subject to certain conditions.

In order to promote foreign investment in the Israeli corporate bonds market, an exemption from tax is provided with respect to interest income received by foreign investors on or after 1 January 2009 on their commercial investments in Israeli corporate bonds traded on the Tel Aviv Stock Exchange (TASE), subject to certain conditions.

Rental income:

Individual landlords of residential homes are eligible, under certain conditions, to select one of the following taxation alternatives.

· Individual landlords are eligible, under certain conditions, for a complete exemption from income tax for rental income (from Israeli homes) not exceeding a prescribed amount per month (ILS 5,010 in 2017). No special approval is needed to qualify for this exemption. If the rental income is higher than the prescribed amount, then a certain portion of the rental income will be taxed at the individual’s marginal tax rate.

· For rental income derived from Israeli residential property, individual landlords are eligible, under certain conditions, to elect to pay tax at the rate of 10% on their gross rental income from homes (no deductions are allowed). For rental income from residential property abroad, the rate is 15%.

Depreciation is generally allowable on a straight-line basis for expenditures on buildings, but not on land. Detailed rules apply.

Passive losses from leasing a building may only be used to offset rental income from the same building in future years, or land appreciation realised upon disposal of that building. Detailed rules apply.

Losses from an active property rental business operation may be used to offset other taxable income in the same year from any source, or against future active business income and certain capital gains.

Residence:

The ITO defines an Israeli resident as a person whose ‘centre of life’ is in Israel. Various factors are analysed in determining where the individual’s centre of life is located.

In addition, the following are refutable (by either the tax officer or the taxpayer) presumptions regarding the determination of an individual’s ‘centre of life’:

· Any individual who has been present in Israel during a certain tax year for 183 days or more shall be presumed to have their centre of life in Israel (and consequently be an Israeli tax resident) in such tax year.

·  Any individual who has been present in Israel during a tax year for 30 days or more, and a total of 425 days or more during such tax year and the two previous tax years (on aggregate), shall be presumed to have their centre of life in Israel in such tax year.

It should be emphasised that the main defining test under the ITO remains the ‘centre of life’ test. The presumptions mentioned above (regarding the length of stay in Israel) will merely assist in reaching a conclusion. Even if the ‘days tests’ provided by these presumptions are not met, it may still be concluded that the individual is an Israeli tax resident.

Should an individual be deemed to be an Israeli resident while at the same time resident of another country, the tie-breaker tests set out in the applicable treaty will determine in which country the individual will be viewed as resident. Generally, the treaties focus on factors relating to where the person’s permanent home is maintained, in which country the person’s personal and economic relations are closest (‘centre of vital interests’ test), and in which country the person is a national.

A ‘foreign tax resident’ is generally defined in the ITO as anyone who is not considered an Israeli tax resident and also includes an individual who has met the following tests:

· The person has spent at least 183 days outside of Israel in both the tax year in question and in the following year.

· Such person's centre of life had not been in Israel in the following (third and fourth) years.

Therefore, when an individual will meet the 183 days test for the first two years (without necessarily meeting the centre of life test during the first two years) and the centre of life test during the next two years, the person would be regarded as a foreign tax resident for this entire period.

In order to allow individuals moving to Israel to reach an informed decision about where they wish to live, a new immigrant and a returning resident (following ten years of foreign residency) are entitled to a one-year acclimation period from the date of their arrival. During this year, these individuals can request not to be considered a resident of Israel for income tax purposes. This election request requires the person to notify the Israel Tax Authority (ITA) within 90 days of arriving in Israel. Detailed rules apply.

When an Israeli tax resident ceases to be an Israeli resident for tax purposes, exit tax provisions apply.

Tax administration:

Taxable period:

Tax returns are filed on a calendar-year basis.

Tax returns:

Subject to certain exceptions, as detailed below, an individual who is a resident of Israel is required to file an annual tax return. Should a tax return be required, 30 April is the prescribed filing due date, subject to extensions.

A resident taxpayer whose income consists solely of earnings from employment is generally not required to file a tax return where tax is withheld at source from one’s wages and at the prescribed levels from other specified sources (e.g. rent, dividends, interest, and capital gains) unless the taxpayer meets one of the following exceptions, in which case the individual would be required to file a tax return (detailed rules apply; certain further exceptions may also be applicable) (amounts for FY 2016 tax return):

· Wages exceeded ILS 641,000.

·  Any of the following categories of income exceeded ILS 333,000:

o   Rental income.

o   Foreign income.

o   Non-exempt foreign pension income.

·        Certain other income (detailed definitional rules apply).

· Income from the sale of traded securities (turnover) exceeded ILS 803,520.

· Interest income exceeded ILS 636,000.

· The taxpayer together with one’s spouse and children under age 18 at any time during the year owned:

o   shares of a foreign non-publicly traded company

o   foreign assets having a value of at least ILS 1,850,000, or

o   deposits with a foreign banking institution of ILS 1,850,000 or more.

The taxpayer is the settlor or beneficiary of a trust during the tax year.

The taxpayer received a distribution (direct/indirect) from a trust or from the creation of a trust an amount of more than ILS 100,000 (cash/equivalent), even if not subject to tax in Israel.

These amounts are periodically updated.

Married couples are permitted to file separate or joint returns. In the latter case, a separate calculation may still be obtained for tax on income from personal exertion in any business or vocation or from employment, provided the income is from independent sources.

A non-Israeli tax resident employee will generally not be required to file an Israeli income tax return if proper withholdings are remitted to the tax authorities and the employee has no other Israeli-source income.

Payment of tax:

Payroll withholding of income and social tax is statutory, irrespective of the residence of the employer or employee. In general, withholding taxes in respect of salary payments effected from the 14th day of one month to the 13th day of the following month are payable on the 15th day of that following month.

Tax advances are required to be paid by an individual for interest, dividends, capital gains, and rental income in amounts and according to specific deadlines set out in detailed Israeli tax rules.

Self-employed individuals are generally required to make monthly or bimonthly advance tax payments, usually based on a percentage of turnover.

Statute of limitations:

The statute of limitation period for taxation of individuals is generally four years from the end of the tax year in which the relevant tax return is filed.

Taxes on corporate income:

Israel-incorporated companies and foreign companies that have a branch presence in Israel are both subject to Israeli corporate tax. An Israeli-resident entity is subject to Israeli corporate tax on worldwide income while a non-resident entity is subject to Israeli corporate tax only on income accrued or derived in Israel. Income sourcing rules determine when income is to be considered from an Israeli source.

The corporate tax rate is 24% in 2017, and will be 23% in 2018.

Business operations qualifying under the Encouragement of Capital Investments Law are entitled to reduced rates of tax depending upon their location and other conditions (see the Tax credits and incentives section).

‘Wallet’ companies:

Effective 1 January 2017, a new tax provision effectively lifts the corporate tax veil of a company that meets the definition of a ‘minority company’ that provides services to another company (the ‘other company’). A ‘minority company’ is generally defined as a company that is directly or indirectly held or controlled by no more than five individuals (taking into account certain relatives). This provision is generally intended for situations when an individual in the minority company (‘individual’) is providing officer or management type services to the other company. In such a case, the income shall not be taxed to the minority company but, rather, shall be taxed to the individual as employment income, business income, or other income, depending upon the circumstances. The employment income classification shall apply if 70% or more of the total income or taxable income of the minority company in the tax year is sourced from the services performed by the individual or the individual's relatives during a period of at least 30 months during a four-year period or if the individual's services performed for the other company are of the type that is performed in an employer-employee relationship.

Corporate -Income determination:

In general, the annual results (i.e. the excess of income over expenses or vice versa) of an Israeli company or branch, as detailed in the taxpayer’s financial statements, form the basis for computing the taxable income of the business.

The base amount is then adjusted pursuant to the provisions of the tax law to arrive at ‘taxable income’.

Inventory valuation:

Inventories are generally valued at the lower of cost or market value (i.e. net realisable value). Conformity is required between book and tax reporting of inventory. The first in first out (FIFO) or weighted-average basis of valuation is acceptable; the last in first out (LIFO) method is not accepted.

Capital gains:

Capital gains tax is generally payable on capital gains by residents of Israel on the sale of assets (irrespective of the location of the assets) and by non-residents on the sale of the following:

·  Assets located in Israel.

·  Assets located abroad that are essentially a direct or indirect right to an asset or to inventory, or that are an indirect right to a real estate right or to an asset in a real estate association, located in Israel. Taxation applies only in respect of that part of the consideration that stems from the above property located in Israel.

· Assets that are a share or the right to a share in an Israeli entity.

· Assets that are a right in a foreign resident entity that is essentially a direct or indirect right to property located in Israel. Taxation applies only with respect to that part of the consideration that stems from the property located in Israel.

The cashless transfer of rights and assets arising from certain mergers, spin-offs, and asset transfers may be exempt from tax upon meeting various requirements.

Determination of the capital gain:

Corporate tax on capital gains is imposed on the disposal of fixed and intangible assets where the disposal price is in excess of the depreciated cost.

Computation of real gain and inflationary components:

For tax purposes, the capital gain is generally calculated in local currency, and there are provisions for segregating the taxable gain into its real and inflationary components. The inflationary amount is the original cost of the asset, less depreciation (where applicable), multiplied by the percentage increase in the Israeli consumer price index (CPI) from the date of acquisition of the asset to the date of its sale. The inflationary amount component is exempt to the extent it accrued after 1 January 1994 and is generally subject to tax at the rate of 10% if it accrued before that date.

The real gain component, if any, is taxed at the rates set out further below.

A non-resident that invests in capital assets with foreign currency may elect to calculate the inflationary amount in that foreign currency. Under this option, in the event of a sale of shares in an Israeli company, the inflationary amount attributable to exchange differences on the investment is always exempt from Israeli tax.

Sale of assets (including publicly and non-publicly traded shares):

The real gain is generally subject to tax at the corporate tax rate applicable in the year of the gain (24% in 2017 and 23% in 2018). Special exemptions may apply for non-residents.

Special rule for retained profits upon sale of shares:

Special provisions apply to part of the real gain that is attributed to the seller’s share of retained profits in the case of a sale of (i) non-traded shares that were acquired prior to 1 January 2003 or (ii) publicly traded shares where the seller was a 10% or more shareholder.

In the case of a disposal by corporations of (i) non-traded shares and (ii) traded shares when the seller generally directly or indirectly holds at least 10% of the sold Israeli company during the 12-month period preceding the sale, special provisions apply to such part of the real gain that is attributed to the seller’s share of retained profits. The share of retained profits is the amount of gain equal to the proportional part of the retained profits of the company that the seller of the shares would have rights to by virtue of those shares. Detailed rules apply in determining this profit component.

Generally, the seller’s proportionate part of the company’s retained profits is taxed as if this amount had been received as dividends immediately before the sale (i.e. at a tax rate of 0% in the case of an Israeli-resident corporate shareholder or at a tax rate of 30% when the seller is a non-Israeli resident corporate shareholder that generally holds 10% or more in the rights of the Israeli company [it is unclear if this 30% rate may be reduced by an applicable tax treaty]). The part of the retained profits that is attributed to the period ending on 31 December 2002 is subject to tax at the rate of 10%.

Special exemptions for non-residents:

Publicly traded Israeli shares:

Non-residents corporations not having a PE in Israel are exempt from tax on capital gains from the sale of shares of an Israeli company traded on the Israeli stock exchange or on a foreign stock exchange. Certain exceptions apply.

Where the shares were purchased by the non-resident prior to being publicly traded, subject to the availability of exemptions detailed below, capital gains tax might apply for the portion of the gain that was generated up to the day of the share’s public listing but not to exceed the capital gain actually arising upon the sale of the share and provided that the value on the day of public listing was more than their value on the date of purchase and that the proceeds upon sale exceeded the value on the date of purchase.

Non-publicly traded shares:

For purchases after 1 January 2009, an exemption exists under domestic law for non-residents, regardless of their percentage holding in an Israeli company, from gains derived from the sale of securities not traded on a stock exchange, provided the following conditions are met:

· The investment is not in a company in which, on the date of its purchase and in the two preceding years, the main value of the assets held by the company, directly or indirectly, were sourced from an interest in (i) real estate or in a real estate association (as defined in the Income Tax Ordinance [ITO]); (ii) the use in real estate or any asset attached to land; (iii) exploitation of natural resources in Israel; or (iv) produce from land in Israel.

· The capital gains were not derived by the seller’s PE in Israel.

· The shares were not purchased from a relative (as defined in the ITO) or by means of a tax-free reorganisation.

A non-resident company shall not be eligible for this exemption if Israeli residents are controlling shareholders or benefit or are entitled to 25% or more of the income or profits of the non-resident company, either directly or indirectly.

For shares purchased between 1 July 2005 and 1 January 2009, more restrictive conditions apply in order to be eligible for the exemption. Detailed rules apply.

Treaty exemption:

Non-residents may qualify for a tax treaty capital gain exemption, depending upon the particular circumstances and the provisions of the applicable tax treaty (e.g. in some tax treaties, no capital gains exemption is allowed where the holding in the sold Israeli company exceeds a certain percentage).

When assets are attributable to an Israeli PE or are real estate rights (including rights in a real estate association), a treaty exemption will generally not be available.

The ITA is very sensitive to treaty shopping, and it will be necessary to demonstrate to the ITA that the foreign holding entity has business substance in its country of residence and that the structuring of the holding through that entity was not implemented for tax treaty benefit purposes.

Capital losses:

Capital losses may offset all capital gains (including gains from Israeli or foreign securities) and gains from the sale of property (whether Israeli or foreign source).

Where the capital loss is from a non-Israeli asset (including when carried forward into future years), the loss must first be offset against foreign-source capital gains.

Capital losses derived from the sale of securities may also be offset against interest and dividend income generated from the sold security and also against interest and dividend income received from other securities (where the income was not subject to tax of more than 25%).

Capital losses from the sale of shares are generally reduced by any dividends received by the selling corporation during the 24 months preceding the sale, unless tax on the dividends of at least 15% was paid.

Capital losses can generally be carried forward indefinitely and set-off only against capital gains.

Exit tax:

When an Israeli tax resident, including a company, ceases to be an Israeli resident for tax purposes, its assets are deemed to have been sold one day before it ceased being an Israeli resident. Although exit tax is primarily applicable to individuals, this might also apply to corporations incorporated outside of Israel whose management and control is transferred from Israel to another jurisdiction at a particular time.

Any gain attributable to the deemed sale of assets may be paid on the day the residency ceased or it may be postponed until the date the assets are actually realised. When the tax event is deferred to the sale date of the assets, the amount of the Israeli capital gain portion is determined by taking the real capital gain at the time of realisation, multiplied by the period of ownership from the day on which it acquired the asset until the day it ceased being an Israeli resident, divided by the entire period from the day of the asset’s acquisition until the day of realisation. The Minister of Finance is authorised to prescribe provisions for the implementation of the exit tax, including provisions for the prevention of double taxation and the submission of tax reports, but no provisions have yet been issued.

Dividend income:

Received by an Israeli-resident company:

Dividends received by an Israeli-resident company from another Israeli-resident company that originate from income accrued or derived in Israel are exempt from corporate tax, except for dividends paid from income of an AE. This affords the opportunity to transfer after tax profits within an Israeli group of companies for further investment.

Dividends received by an Israeli-resident company from a non-resident company, as well as dividends received from an Israeli company that arise from foreign-source income of the distributing company, are generally taxable for the receiving company at the rate of 24%. Under certain circumstances, the receiving company may elect to be taxed on such dividends at the corporate tax rate, in which case it will also be entitled to a foreign tax credit with respect to corporate taxes paid by the company distributing the dividend (i.e. an ‘underlying’ tax credit).

Received by a non-resident shareholder:

Dividends received by a non-resident shareholder from an Israeli company are generally subject to tax at the rate of 25% (30% if paid to a 10% or more shareholder), subject to a reduced rate of tax under an applicable tax treaty.

Several of Israel’s tax treaties have very beneficial withholding tax (WHT) rates for dividends being paid from Israel. The ITA is very sensitive to treaty shopping, and it will be necessary to demonstrate to the ITA that the foreign holding entity has business substance in its country of residence that will support its residency for treaty purposes and that the structuring of the holding through that entity was not implemented for tax treaty benefit purposes. Furthermore, many of the treaties contain a beneficial ownership clause as a condition to enjoying the treaty WHT rates.

Interest income:

Received by an Israeli-resident company:

Interest income received by an Israeli-resident company is subject to the regular corporate tax rate (24% in 2017 and 23% in 2018).

Received by a non-resident:

Interest income received by a non-resident company is generally subject to tax at the rate of 24% or subject to a reduced rate of tax under an applicable tax treaty.

Interest received by a non-resident from deposits of foreign currency with an Israeli bank is exempt from tax, subject to certain conditions.

Rent/royalties income:

Rent and royalty income, less allowable deductions for tax purposes, is subject to tax at the regular corporate tax rate (24% in 2017 and 23% in 2018).

Partnership income:

From an Israeli tax perspective, a partnership is, in principle, a fiscally transparent vehicle. Accordingly, Israeli tax law does not tax partnerships as such; however, generally, each partner is taxed in respect of its share of the partnership income, with the taxable income allocated to a corporate partner taxed at the regular corporate tax rate. Consequently, the actual distribution of partnership income to a partner is a non-taxable event.

Foreign income:

An Israeli-resident company is liable for tax on its worldwide income. Double taxation is avoided by way of a foreign tax credit mechanism that also applies unilaterally in the absence of an applicable double taxation treaty (DTT).

Under the controlled foreign company (CFC) regime in Israeli tax law, an Israeli company or individual may be taxed on a proportion of the undistributed profits of certain Israeli-controlled, non-resident companies in which the Israeli shareholder has a controlling interest (10% or more of any of the CFC’s ‘means of control’).

Corporate residence:

The following are considered to be resident in Israel:

· A company incorporated in Israel.

· A company whose business is managed and controlled from Israel.

In the absence of a definition of the term ‘management and control’ either in Israeli legislation or a direct discussion of this term by the Israeli courts, it may be difficult to determine whether a company that is incorporated outside of Israel shall be viewed as managed and controlled from Israel. This is a complex subject that needs to be addressed on a case-by-case basis. When an entity is both an Israeli tax resident and a resident of a foreign jurisdiction that is party to an income tax treaty with Israel, most treaties provide a tiebreaker test in the determination of an entity’s tax residency.

Permanent establishment (PE):

Foreign resident entities might be exempt from corporate tax to the extent that its activities do not constitute a PE under the tax treaty applicable between Israel and the foreign resident’s country of residency.

Whether a non-resident has a taxable presence under Israeli domestic tax law is far less clear than the definition of PE under a relevant tax treaty. There is no detailed legislation or Israeli court decisions that directly address this issue. In general, where there is no tax treaty protection, a non-resident is subject to tax on income accrued or derived in Israel, which is a taxation threshold lower than the PE criterion.

Tax administration:

Taxable period:

The tax year is generally the calendar year. Certain entities may apply to have their tax year-end on different dates, specifically mutual funds, government companies, quoted companies, and subsidiaries of foreign publicly listed companies.

Tax returns:

The Israeli system is based on a combined form of assessment and self-assessment.

The statutory filing date is five months following the end of the tax year, which for a calendar year taxpayer would be 31 May. It is possible, however, to secure extensions of the filing date.

Payment of tax:

Generally, 12 monthly advance payments are levied at a fixed ratio of the company’s turnover. Alternatively, a company may be required to make ten monthly payments beginning in the second month of its tax year, each payment being a fixed percentage of the previous year’s tax assessment.

Penalties:

Penalties are imposed on overdue advance payments and on delays in the submission of tax returns. For any tax due for a certain year that has not been paid by the end of that tax year, the taxpayer shall be charged interest at a rate of 4% and linkage differentials for the period from the end of the tax year until the date of payment. If the balance due is paid by the end of the first month following the end of the tax year, the taxpayer should receive a full exemption from any interest and linkage differentials.

When the ITA determines that a taxpayer has a tax deficiency exceeding 50% of the total tax due and the taxpayer has not proven to the satisfaction of the ITA that it was not negligent in its tax reports filed (or where there was a failure to file reports), a penalty equal to 15% of the tax deficiency shall be imposed.

A penalty equal to 30% of the tax deficiency may be imposed when an additional tax liability exceeding ILS 500,000 is issued by the ITA further to a tax assessment and the tax deficiency is more than 50% of the total tax due.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.