The taxation method due to be instituted in Israel will be the personal method, in which individual and corporate Israeli residents will be taxed on their total global income.
Foreign residents will be taxed on their income deriving from Israeli sources.
An Israeli resident individual will be deemed to be one whose life is centred in Israel. Formulas will be determined regarding the number of days of residence in Israel qualifying the individual as being an Israeli resident. Either the individual or the assessing officer may challenge these formulas.
Rules of origin will be established as regards provenance of income, for determining how much of the income of foreign residents is subject to tax in Israel, and how much foreign income will be entitled to double tax credit when derived by Israeli residents.
The principle of offsetting losses created overseas will be identical to the principle of offset based on the sources of income as provided by the Income Tax Ordinance. No distinction will be drawn between losses and income created in different places outside Israel. Losses created abroad will be set off (in accordance with their sources) firstly against income derived outside Israel in that year.
An Israeli resident who has paid foreign tax on income deriving from sources outside Israel will be entitled to offset from the tax amount he owes in Israel, the amount of foreign tax paid in respect of that income, in accordance with credit principles. Credit will be allowed on the basis of "baskets" to various income sources. Total income from abroad will be viewed in accordance with all these baskets jointly, regardless of the countries of origin from which the income derived.
Credit in respect of foreign tax in each year will not exceed the tax amount for which the taxpayer is liable in respect of income derived from abroad. The taxpayer will be allowed to transfer excess tax not utilised in the current year as a credit in the three preceding and the five following years.
Foreign companies owned by Israeli residents:- where Israeli resident companies and individuals hold more than 50% of a foreign company whose income is passive (such as interest, rent, capital gains), special provisions will apply. These provisions will apply to shareholders holding at least 10% of rights in the foreign company.
A provision will be formulated according to which an Israeli resident individual or company owning such a company will be deemed to have received the profits of that company as a dividend, in accordance with his holding in it, and in the following manner:
- In companies in which the total shareholding of Israeli residents is more than 50% and up to 75%, shareholders will be deemed to have received the company's profits as a dividend in the third tax year after their accrual.
- In companies in which the total shareholding of Israeli residents is over 75%, shareholders will be deemed to have received the company's profits as a dividend in the tax year in which they accrued.
- A dividend distributed by the foreign company will not be taxable on distribution, except for a dividend distributed by a company in which Israeli residents hold more than 50% and up to 75%. This will be taxed if distributed before the passage of three years from date of accrual of the profit. In that event, the income deemed to be a taxable dividend will be reduced accordingly.
- New immigrants will enjoy a tax exemption on income from sources or assets they held prior to immigration, for a period of ten years from date of immigration. The period of exemption from capital gains tax will be extended from seven to ten years.
Published by Israel's Business Arena on 4 May 2000