Tax Points - Globes

On this page:

Corporate Taxation Outline
Tax Points for Overseas Investors
Further Information

The following is a very brief outline of the main direct and indirect taxes on businesses in Israel.

Company tax - The rate is 36%. The tax applies to:

Companies incorporated in Israel and with their principal activity in Israel;
Foreign companies that elect residency and register in Israel as foreign companies;
Companies controlled and managed in Israel.

Expenses incurred wholly and exclusively in the production of taxable income are deductible. Depreciation and amortisation of tangible and intangible assets are allowed at prescribed rates. An inflation allowance is deductible from capital gains.

Value added tax (VAT) - an indirect tax imposed on nearly all transactions, including imports. The general rate is 17%, but some transactions, including exports, are zero-rated. A business registered for VAT may generally credit its input VAT (the VAT it pays) against its output VAT (the VAT it collects) and remit only the net amount to the tax authorities.

Local taxes - There is no local income tax. Local government is financed by municipal rates based on property size.

2. Tax Points for Overseas Investors

by Eliot Sacks, Herzog Fox Ne�eman

Distributions and Investment Incentives

If dividends are paid to a foreign resident shareholder, they are generally subject to withholding tax at the rate of 25%.
Under the Encouragement of Capital Investments Law, companies with "approved enterprise" status are entitled to reduced tax rates for a period of years. The rate of tax depends on the level of foreign investment in the company.
If a company which is paying reduced tax rates on its profits by virtue of being an approved enterprise pays a dividend out of those profits, the dividend is subject to 15% tax instead of 25%.
There is also an alternative route under the Encouragement of Capital Investments Law under which a company can elect for a tax holiday instead of government grants etc. The tax holiday route is usually taken by companies, including some high-tech companies, which do not require heavy investment. The tax holiday is for undistributed profits. If profits are distributed, they become subject to tax (at both the company level and the dividend level) as if the company had not opted for the alternative route.
Generally, benefits under the Encouragement of Capital Investments Law depend on the level of foreign investment and on the location of the enterprise. High-tech companies have generally been eligible for benefits under the Law. (Note, there is also the Chief Scientist law which is very significant as far as Israeli R&D is concerned, but that law does not offer tax breaks.)
Where a foreign resident sells shares in a private Israeli company, this is subject to Israeli capital gains tax. This differs from many other jurisdictions, where such a sale would be exempt from tax.

International Taxation Aspects

Israel has an extensive list of double tax treaties. It has treaties with most developed countries.
The treaties usually provide for a tax exemption on business profits other than those carried out through a permanent establishment in Israel. If a foreign company carries out R&D activities in Israel, profits deriving from these activities will certainly be subject to full Israeli tax: If they are carried on through a local branch, the branch will be a permanent establishment. If they are carried on through an Israeli subsidiary, the subsidiary is in any event an Israeli entity which is subject to Israeli tax.
Treaties generally offer reduced withholding tax rates on dividends and reduced rates or complete exemptions from capital gains tax. The reliefs vary from treaty to treaty. Some treaties, for example the treaty with Holland, are more generous than others. However, the Israeli tax authorities are nowadays very alert to the practice of "treaty shopping" (i.e. carrying out an investment through a straw company set up in a jurisdiction solely for the purpose of taking advantage of the beneficial double tax treaty which that jurisdiction has with Israel). Therefore, if an investment is carried out through a Dutch company, for example, the Israeli authorities will look to see whether the company has a substantial Dutch presence or whether it is merely a "conduit company".
Another very important international tax issue is "transfer pricing", ie the pricing policy which exists between a foreign company and its Israeli associate which determines how profits are apportioned between the foreign company and the Israeli company. It is usual for an Israeli R&D operation to charge on what is known as a "cost plus" basis; that is, it will charge a percentage mark-up over its costs. This guarantees a small but certain level of profits to the Israeli company which will be subject to income tax. This reflects the fact that the R&D centre does not take on any financial risk of its own. The cost plus basis is accepted by the Israeli tax authorities as the generally accepted method for taxing local R&D operations. However, if the authorities suspect that the Israeli company is doing more than pure R&D activity, ie it is playing a more active role in generating the profits for its overseas parent company, the tax authorities may want to bring a larger slice of the profits within the scope of Israeli tax.
Some of Israel's treaties have a "tax sparing" clause; that is, if an entity enjoys a low rate of tax in one jurisdiction on account of encouragement of investment laws or such like, it will be treated in the other country as if it had paid full rate tax in the first country, thus preserving the benefit of the tax break. The treaty with the UK, for example, has such a clause but the treaty with the US does not (in line with general US treaty policy).

3. Further Information

The Ministry of Finance site (path: �State Revenue Administration� - �Annual State Revenues� - �The Israel Tax System�) gives a detailed description of the tax system, with up-to-date tables of rates.