Companies in Israel are generally subject to company tax on their profits at the rate of 36 percent on taxable income. Distributed profits after company tax are subject to dividend withholding tax at rates of up to 25 percent in the case of individual and non-resident shareholders. Interest and royalties are also generally liable to withholding tax of 25 percent unless reduced by a tax treaty. Lower tax rates and other benefits are applicable under Israel’s investment incentive legislation.
Individuals are taxable on earned income at rates of up to 50%. The tax is imposed under the principle of personal global taxation which determines tax liability for an Israeli resident whether the income is accrued or received in Israel or abroad. Passive income is taxed at rates of 15% on interest and 25% on capital gains. Special rates apply to income derived from foreign securities or investments overseas which may be taxed at higher rates of 35% and up to 50%.
Generally, Israeli residents will be taxed on their full worldwide income (“personal” or “residency” basis of tax).
Non Israeli residents are subject to Israeli tax on Israeli source income.
Value Added Tax
Value Added Tax (VAT) is generally imposed on transactions conducted in Israel, as well as on transactions relating to assets or activities in Israel and imports. The standard rate of VAT in Israel is currently 18 percent, but exports are generally zero-rated. Special provisions apply to financial institutions and not-for-profit bodies.
Estate Tax and Gift Tax
Israel has no inheritance or gift tax. However, on the subsequent sale by the recipient of an asset which is assessable for capital gains tax, the asset cost (net of depreciation where applicable) and acquisition date of the testator or donor are taken into account in the computation of tax due.
Double Taxation Relief
The United States and Israel have a bilateral income tax treaty which is generally effective for fiscal years beginning in 1995.
The commercial relationship with the United States is of paramount importance to Israel. It is therefore appropriate that it have an income tax treaty with its most important trading partner. The tax treaty greatly improves the tax position of U.S. individuals wishing to invest in Israel, and this fact should increase the amount of U.S. investment in Israel.
Israel is a party to 37 double taxation treaties. The foreign investor who takes advantage of double taxation treaties can often withdraw profits earned in Israel under favorable tax treatment. Where a taxpayer is taxable both in Israel and abroad in respect of the same income, double taxation relief may be available either in accordance with a bilateral tax treaty (convention) or, in certain cases, unilaterally. In general, double taxation relief may take the form of a credit for overseas taxes (the credit method). Many of Israel’s tax treaties allow investors to take a full foreign tax credit even if the rate has been reduced in Israel as an investment incentive under the Encouragement of Capital Investments Law. This is known as “tax sparing” relief.
Alternatively, double tax relief may take the form of an exemption in the source country where income or gains arise, or in the taxpayer’s country of fiscal residency (the “exemption method” of double tax relief). In all cases, reference should be made to individual treaties (where applicable) and to local legislation to ascertain the exact details of the double taxation relief afforded and the conditions attaching thereto.
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