INTRODUCTION TO THE TAXATION SYSTEM IN ISRAEL
1. INTRODUCTION
The Israeli tax system is based on UK tax principles with substantial
modification. On January 1, 2003, Israel introduced a substantial tax reform that
makes Israeli residents subject to Israeli tax on worldwide income. Previously, a
modified territorial basis was applicable.
2. TAX SYSTEM
a. General concepts of tax liability
i. Companies
Resident companies are subject to Israeli tax on their worldwide income.
A company is resident in Israel for Israeli tax purposes if it is incorporated
in Israel, or its business is controlled and managed in Israel.
In principle, expenses are deductible if they are wholly and exclusively
incurred for the production of taxable income. Additional rules apply to
some expenses.
ii. Individuals
Resident individuals are subject to tax on their worldwide income and
capital gains.
An Israeli resident is defined as an individual whose centre of living is in
Israel, taking into account the person’s family, economic and social links,
including the following considerations:
• permanent home, even if someone else temporarily occupies it;
• place of residence of the individual and that individual’s family;
• habitual place of business, permanent place of employment and the
place where assets and investments are situated; and
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• place of membership in organizations, associations and
institutions.
A rebuttable presumption of Israeli residency will apply in either of the
following circumstances:
• the individual is present in Israel at least 183 days in a tax year
ending December 31; or
• 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.
New immigrants enjoy certain income tax, capital gains tax, import tax
and other benefits for specified periods.
b. Rates and tax incentives
i. Companies - ordinary income
Regular rates:
The regular rate of company tax is currently scheduled to be 34% in 2005,
32% in 2006 and 30% in 2007 and thereafter. Proposals exist to further
reduce the regular rate of company tax to 31% in 2006, 29% in 2007, 27%
in 2008, 26% in 2009 and 25% in 2010 and thereafter Readers should
check the latest situation in specific cases.
Incentives:
Companies in industry or tourism can choose between various incentives
as follows:
• Tax holiday package - for a “Privileged Enterprise”: Tax
exemption applies to undistributed profits for 2-15 years depending
on location and foreign ownership. Low company tax rates (10% -
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25%) apply to distributed and subsequent profits. The total period
of tax benefits is 7 – 15 years.
or
• Grant / low tax package - for an “Approved Enterprise”: Fixed
asset grants (up to 32%) and low company tax rates (0% to 25%)
for 7 to 15 years.
Dividend withholding tax also applies at a rate of 4% or 15%
depending on the package selected.
The tax holiday package can be elected for a “Privileged Enterprise”
if certain conditions are met, without needing to obtain approval. In
particular, a minimum qualifying investment must be made in fixed
assets in industry or in a hotel in Israel.
There is an optional advance ruling procedure if investors wish to
check eligibility for Privileged Enterprise benefits.
In addition, Privileged Enterprises and Approved Enterprises must
be competitive and not be overly dependent on the market of any one
country.
Large investments (NIS 600 - 900 million = US$ 137 - 206 million
approx) in Privileged Enterprises by large groups in certain areas of
Israel may qualify exemption from company tax for both retained
and distributed profits as well as exemption from dividend
withholding tax. This only applies to groups with annual revenues
exceeding NIS 13 – 20 billion (US$ 3 – 4.6 billion approx.)
Approved enterprise status has been available many years, but
taxpayers may now choose Privileged Enterprise status for new and
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expanded enterprises with a year of election of 2004 or thereafter,
unless the Investment Center granted Approved Enterprise status by
the end of 2004.