When the Indian Prime Minister visited Israel recently and eulogies were written about Israel, my thought process needed more research on the tax aspect of Israel Vis – a – Vis U S taxation since both have been intertwined since its creation and a large number of Israelis do have twin citizenship from both the countries. For an Indian professional, it is important to know the current tax system in Israel so that when he would visit it as an expert engineer, scientist, capitalist or collaborator on defense projects, he is well prepared for his asset/wealth/income creation. It is not unusual to compare Indian brain with the best ones from Israel since both stimulate curious queries from others about their brilliance though both have no comparison in any other thing except their glorious civilizations.
U S taxation articles of mine are not new for Tax guru readers: however, the recent tax rate released by Internal Revenue Service, U S government does merit a recollection:
U S Taxation for 2017 quoted directly from irs.gov web site:
“The tax items for tax year 2017 of greatest interest to most taxpayers include the following dollar amounts:
- The standard deduction for married filing jointly rises to $12,700 for tax year 2017, up $100 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,350 in 2017, up from $6,300 in 2016, and for heads of households, the standard deduction will be $9,350 for tax year 2017, up from $9,300 for tax year 2016.
- The personal exemption for tax year 2017 remains as it was for 2016: $4,050. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $261,500 ($313,800 for married couples filing jointly). It phases out completely at $384,000 ($436,300 for married couples filing jointly.)
- For tax year 2017, the 39.6 percent tax rate affects single taxpayers whose income exceeds $418,400 ($470,700 for married taxpayers filing jointly), up from $415,050 and $466,950, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds for tax year 2017 are described in the revenue procedure.
- The limitation for itemized deductions to be claimed on tax year 2017 returns of individuals begins with incomes of $287,650 or more ($313,800 for married couples filing jointly).
- The Alternative Minimum Tax exemption amount for tax year 2017 is $54,300 and begins to phase out at $120,700 ($84,500, for married couples filing jointly for whom the exemption begins to phase out at $160,900). The 2016 exemption amount was $53,900 ($83,800 for married couples filing jointly). For tax year 2017, the 28 percent tax rate applies to taxpayers with taxable incomes above $187,800 ($93,900 for married individuals filing separately).
- The tax year 2017 maximum Earned Income Credit amount is $6,318 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,269 for tax year 2016. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
- For tax year 2017, the monthly limitation for the qualified transportation fringe benefit is $255, as is the monthly limitation for qualified parking,
- For calendar year 2017, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695.”
- limit for tax year 2016. For family coverage, the out of pocket expense limit is $8,250 for tax year 2017, an increase of $100 from tax year 2016.”
Now it is time to directly learn about Israeli Taxation.
Before we learn the high tax rates of taxation in Israel, it is to be kept in mind that it ranks first among many fields like innovation, creation of patents, very high level of defense production claiming parity with USA and also claiming the best revolution in water saving techniques raising curiosities from all countries in the world for maximum saving of water for agriculture keeping in mind the worst desert within which it struggles to exist. India recently took the lead to get professional help from Israel for updating its skills in soil study, water conservation and the latest R&D in agriculture.
Residency
For Israeli tax purposes, an Israeli resident is defined as an individual whose center of living is in Israel taking into account the person’s family, economic and social links.
An important presumption will apply in either the following circumstances:
- 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 living 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 regular 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:
- On the said date, stamped on the certificate issued by the Ministry of Aliyah and Integration,
- On the said date, the individual started living in a permanent home in Israel
- At the date, any member of his family started living in a permanent home in Israel.
Filing status
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.
An individual is resident if his “center of life” is in Israel as explained above.
A single filer will file a single assessment, while a married couple will file a joint assessment, but may opt out if the need arises.
A year for tax purposes for individuals is a calendar year who must file their annual tax returns by the 30 April of the following year.
Registered spouse:
The word registered spouse is used extensively in Israeli income tax (peculiar to Israel only). This is defined from their tax ordinance, (reference given below in the article, somewhere)
“The Assessing Officer may determine, by notification to both spouses, that one of them is a registered spouse for purposes of this Law, when his chargeable income – in the tax year two years before the tax year first under consideration for this purpose– was more than 50% of the total chargeable income of the two spouses.
(b) Notwithstanding the provisions of subsection (a), the two spouses together may notify the Assessing Officer in writing, at least three months before the beginning of a certain tax year, that they choose that the other spouse be deemed the registered spouse, on condition that his income in the tax year before the tax year in which the notification was given amounted to at least 25% of the income of his spouse; for purposes of this subsection and of subsection (d)(2): “income during the tax year” – exclusive of a spouse’s income from a source dependent on the source of income of his spouse according to section 66(d).
(c) If neither of two spouses had any chargeable income in the tax year said in subsection (a), then the Assessing Officer may decide that one of them is the registered spouse, and that without derogating from their right to act under subsection (b).
(d) (1) Subject to the provisions of subsection (b), the determination or choice of the registered spouse shall remain in effect for no less than five tax years, except when the spouses no longer are spouses or by a decision of the Director.
Tax rates in Israel
Israel government has produced its web site in Hebrew which is its national language and the undersigned obviously lacks skills in the said language but ample number of CPAs with offices in Israel have given the basic information about Israel taxation. I have not quoted the exact language but the bare information for our discussion. It is obvious any one desirous of serious consultation, would contact a CPA practicing in Israel for professional guidance. The undersigned has taken maximum pains to get the statistics alright but for any omission, he profusely apologizes.
Individuals
2017 monthly income tax rates for employment and freelance income are given below:
NIS indicates an Israeli currency. It is known as Israeli New Shekel. One NIS equals 0.28 US $.
- 10% on NIS 6,220;
- 14% on NIS 6,221 – NIS 8,920
- 20% on NIS 8,921 – NIS 14,320
- 31% on NIS 14,321 – NIS 19,900
- 35% on NIS 19,901 – NIS 41,410
- 47% on NIS 41,411 – NIS 53,533
- 50% on income over NIS 53,533.
Passive income from securities have been taxed at rates in the range of 25% to 33% while special rates do apply for rental income.
What are the taxable income?
What categories are subject to income tax in general situations?
In general, all types of remuneration and benefits, whether in-cash or in-kind, arising from/attributable to employment services performed in Israel, subject to certain exemptions, are taxable. The following are some of the examples of elements of an expatriate remuneration package, which would be included as income for tax purposes. For obvious reasons, this does not include all the incomes that may be taxed and it is advisable to consult a CPA working in Israel for help in tax preparations:
- cost-of-living allowances
- housing allowances
- housing provided by the employer on a non-arm’s length basis
- reimbursement of taxes
- use of a company car
- reimbursement of unsubstantiated moving expenses
- cash allowances for home leave
- children education fees
- employer provided domestic assistance
- contribution to medical, dental, sickness, and disability plans
- the benefit of loans at reduced or zero-interest rates provided directly or indirectly by the employer
- contributions to life assurance plan
- contribution to profit sharing plans and certain pension plans
- employee stock purchase plans and stock option plans
Let us concentrate on other areas of interest too regarding income tax.
Investment income and Capital gains
An Israeli resident gets taxed for capital gain from sale of securities which ranges between 25% and no more than 30% in case the ownership of capital in the company works out to be minimum of 10%when the shares would be sold within 12 months of holding.
Dividends, interest, and rental income
Expectedly rental income gets taxed on a progressive scale which is revealed from the information collated below:
| Taxable income bracket | Total tax on income below bracket | Tax rate on income in bracket | |
| From NIS | To NIS | NIS | Percent |
| 0 | 238,800 | 73,470 | 31 |
| 238,801 | 496,920 | 88,168.8 | 35 |
| 496,921 | 640,000 | 147,168 | 47% |
| 640,001 | Over | 50% | |
NIS indicates Israeli currency. It is known as Israeli New Shekel. One NIS equals 0.28 US $.
What about income from dividend and interest income?
Dividends attract interest @ 25% which may go up to 30% if the holder owns substantial shareholding of 10% or more. Interest income attracts tax @ 15%.
Capital losses are adjusted against capital gains and left over is arraigned as capital loss of one NIS is adjusted against 3.5 NIS of taxable inflationary gains,
What are the general deductions from income being allowed in Israel?
In general, personal tax credits, popularly known as credit points, are granted to Israeli resident taxpayers and they then are deducted from the income tax liability. A taxpayer’s entitlement to credit points will depend on personal and family circumstances, and whether the spouse’s earnings are assessed separately. Further, there are some credits and deductions regarding deposits to recognized pension plans.
A foreign resident is also entitled to certain credit points (unless the he/she is classified as a foreign expert).
What are the general tax credits that may be claimed in Israel? Let us them as per the list below.
General credits include, but are not limited to, the following:
- Contribution to a public institution
- Credit for children
- Credit for Israel resident
- Credit for Oleh (new immigrant)
- Credit for women credit for a spouse (in certain cases)
- Credit for discharged soldier
- Credit point for juvenile
- Credit for insurance premiums and benefit fund contributions
- Credits for a foreign worker (subject to conditions)
As the writer explained in the beginning of the article, one can’t just jump up and start calculating the income tax from the information collected by myself with great difficulty due to Hebrew information given by Israeli authorities. However, the author has tried to simplify the situation to make them readable and also appreciable in nature. The writer has great pleasure to reproduce some information from the government web site on tax information.
https://taxes.gov.il/IncomeTax/Pages/LobbyLayoutIncomeTax.aspx
Some information of interest culled out from above web site are as under:
“Income tax is paid, subject to the provisions of the Income Tax Ordinance, for each tax year, at the rates specified in the Ordinance, on the income of a resident of Israel who was or was born in Israel or abroad, and the income of a foreign resident that was produced or derived in Israel from the sources enumerated in the Ordinance, including: business, occupation, Wages, interest, dividends, assets, patents, copyrights.
https://taxes.gov.il/taxesformslist/itc928yarok.pdf contains the information on forms like927, 926 and others.
The following guides are available for the tax payer though they have been written in Hebrew. It has been mentioned in the web site of the government that immigrants on arrival have to spend sufficient time to learn Hebrew at the cost of the government.
The guides are as under:
- A guide to payment and tax relief on the income of an individual from renting an apartment in Israel.
- Submitting a request for tax relief and tax coordination
- Tax benefits for parents with small children
- Know your rights
More interesting titbits about tax from the tax ordinance issued by Israeli tax authority as per the web site given below:
http://www.financeisrael.mof.gov.il/FinanceIsrael/Docs/En/legislation/FiscalIssues/5721-1961_Income_Tax_Ordinance_[New_Version].pdf
(Pdf consists of 253 pages and some of the tax rates quoted may not be up-to-date but as a tax treatise, it is worth reading by all chartered accountants. It is a Master piece. Of course, I tried to refer this treatise several times and have also quoted directly at several places.)
Jews migrated to Rome before 63 BCE. Hence, one can appreciate that they produce some of the best tax treatise in the world.
- “
1. Transfer prices in an international transaction:
If, in an international transaction, there are special relationships between the parties to the transaction, because of which the price for the asset, right, service or credit was determined, or other conditions for the transaction were set so that a smaller profit was realized therefrom than would have been realized, under the circumstances of the case, if the price or the conditions had been set between parties without a special relationship (hereafter: market terms), then the transaction shall be reported in accordance with market terms and charged tax accordingly.
2. Bonus shares
When a person sells bonus, shares allotted to him or the shares on which the bonus shares were allotted (hereafter: principal shares), then the following provisions shall apply:
(1) a bonus share shall be treated as if it had been acquired on the day on which the principal share was acquired;
(2) the original cost of a single bonus share or a single principal share shall be an amount proportional to the original cost of the total of bonus shares and principal shares, in the ratio of the nominal value of that individual share to the nominal value of the total of those shares. The provisions of this subsection shall apply, mutatis mutandis, to units of a joint investment trust fund, within its meaning in the Joint Investment Trusts Law.
3. Assessing the income of a deceased person
If a person died during the tax year and if that person, had he not died, would have been chargeable to tax for that tax year, or if a person died within three years after the end of a tax year and no assessment had been made for him for that year, then his legal personal representative shall be liable for the tax with which that person would have been chargeable if he were alive, and he shall pay it and shall also be responsible for the performance of all those acts and things for which that person would have been responsible under this Ordinance, if he were alive.”
Conclusion
Stimulated by the excellent reception of our Prime Minister and his vast knowledge/passion about Israel, I tried to study the income tax system from the tax ordinance issued by the Israeli tax authorities, several web sites of Israeli government, the web site of KPMG, the leader in international taxation and several other veteran CPAs who have offices in Israel/Middle East and have been serving the world since long. I thank them for their professional guidance.
I could not do justice to the vast information on Israeli income tax since it is an economically developed country and view the future ahead of all other countries: particularly, being small in geographical size, they are the largest supplier of advanced armaments to India by competing on global basis.
My purpose is served if some readers read the tax system in Israel with passion to upgrade their professional knowledge and competence. Who knows to fulfill the ambition of our Prime Minister, some of our Chartered Accountants my open their offices in Israel to compete with the best in the world.
Finally, can you explain the word “registered spouse”?
Reference
- http://www.financeisrael.mof.gov.il/FinanceIsrael/Docs/En/legislation/FiscalIssues/5721-1961_Income_Tax_Ordinance_[New_Version].pdf
- https://taxes.gov.il/taxesformslist/itc928yarok.pdf
- Nefesh B Nefesh, famous Israeli web site “ https://events.nbn.org.il/”
- https://home.kpmg.com/xx/en/home/insights/2011/12/israel-income-tax.html (web site of KPMG on Israel Income Tax.)
- irs.gov
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