Meir Linzen, Guy Katz
An individual is considered an Israeli resident if his or her "centre of life" is in Israel. The "centre of life" test examines the connections that the taxpayer has to Israel as well as the taxpayer's subjective intention. A company is regarded as an Israeli resident if it is incorporated in Israel or managed and controlled from Israel.
Individuals are not invariably required to file a tax return in Israel. Individuals who receive income which exceeds the amounts described in the tax regulations are required to submit an annual return. Other circumstances can also subject an individual to filing requirements, such as holding 10% or more in a corporation, holding foreign bank accounts which exceed a certain balance, or holding foreign securities. Individuals are required to file tax returns by April 30 although extensions are possible on a case-specific basis.
In general, a corporation in Israel is subject to corporate tax on its taxable income, whereas partnerships are treated as "pass-through" entities, and the partners are taxed on the partnership's income at the applicable rates. Israeli companies are subject to tax on all of their worldwide income, while dividends between Israeli companies are usually exempt. As a basic rule, corporations are required to file returns by May 31, extensions are possible on a case specific basis.
The budget, released once every two years, and the new legislation which is attached to it under the proposed Economic Plan Law for the years 2017 and 2018 (the Budget Bill), are expected to be discussed and approved by the Knesset (Israel's Parliament) between September and November 2016.
The Budget Bill includes few revolutionary proposals. The most important of them are listed below.
The Budget Bill proposes to reduce the corporate tax rate, commencing in 2017, to 24% and from 2018 to 23%.
It is also suggested to change the tax brackets applicable to individuals. With regard to the lower tax rates, the tax brackets will increase and for the higher rates, the maximal marginal rate will be reduced to 47%. However, the wealth tax will increase to 3% and will be imposed on any income which exceeds NIS 639,966 ($169,000).
It is proposed that the taxable income of a close-held corporation (a company which is controlled by up to five people), which results from the activity of its individual shareholder (whether directly or indirectly, including through a relative), will be considered as the individual's personal earned income, where the company's income results from:
It is proposed that a withdrawal of cash from a company, including by way of a loan or by way of providing security for a loan, and the constant use of a company's assets by a substantial individual shareholder, shall be regarded as an income of such an individual shareholder, unless such cash or asset has been returned to the company within a period of 90 days.
The proposed legislation introduces a rebuttable presumption, pursuant to which a foreign company would be deemed managed and controlled from Israel, if Israeli residents hold, directly or indirectly, more than 50% of such company's means of control and the final tax rate applicable to the foreign company's profits is 15% or less. In addition, the foreign company must either:
Companies which take the view that they are not residents of Israel for tax purposes, despite the fact that such a presumption applies, must report this in their tax return.
The Budget Bill proposes to expand the reporting obligations of multinational corporations which operate in Israel and to include certain reporting obligations with respect to the non-Israeli operations of big multinational corporations (defined as corporations with a turnover of more than NIS 3.4 billion) headed by an Israeli company.
It is suggested that the depreciation of intangible assets will be over a period of 20 years, unless the taxpayer may use the intangible asset for another period of time, under law or under a contract, in which case, it will be depreciated over such other period of time.
It is suggested that deposits by an employer to compensation funds with respect to salaries which exceed three times the average wage shall not be exempted from tax at the time of deposit.
It has been proposed that as of January 1 2017, an additional annual tax will be imposed on owners of residential properties who own three properties or more. The tax will apply for each residential property beginning with the third property. The imposed tax will be 1% of the value of the cheapest properties (i.e. will not include the value of the two expensive properties), and will not exceed NIS 1,500 per month per property.
The Israeli Tax Authority (ITA) has been increasingly interested in cross-border transactions, and is especially looking to tax companies with digital activity in Israel.
In recent years, there has been a significant increase in e-commerce globally, and Israel is no different. Non-resident internet companies are carrying out internet transactions either directly or indirectly, providing business support and technical services such as advertising and agency services, as well as selling goods to Israeli customers.
In this regard, the ITA published a digital economy circular in April 2016 which reflects a new and broader interpretation of digital activity, expanding tax obligations in the sector. The circular looked into the situation in a twofold system. Firstly, the income of foreign resident companies through the internet will be viewed as the income of a permanent establishment (PE) in Israel and so is applicable to the Israeli rules for the income to a PE.
Secondly, the circular proposed an obligation to foreign companies to pay Israeli VAT on internet transactions through sales of goods and services to Israeli customers. "Such broader interpretation would expand Israel's taxing jurisdiction by attributing a portion of the profits of such companies to Israel," said Meir Linzen, head of tax at Herzog Fox & Neeman. "The ITA's position in the circular is that it has the power to demand information from non-Israeli companies for the purpose of determining whether these conditions are met."
"In addition, the circular applies unprecedented broad interpretation with respect to the VAT. Pursuant to the circular, certain activities of a representative of the non-Israeli company in Israel, such as identifying potential clients, marketing activities and client relationship management activities, will trigger the registration obligation with the tax authority and subject such companies to VAT."
Alona Meiron of Deloitte added: "Recently, this circular caused Israeli banks to stop making payments to big digital MNEs such as Google and Facebook and to ask for a withholding tax certificate for each payment. We think there is still more to come on this matter."
Israel has continued its efforts to increase transparency and prevent tax evasion and money laundering. The Ministry of Finance has confirmed that Israel will adopt the common reporting standard (CRS) including automatic exchange of information by the end of 2018.
Following the announcement, various circulars were issued by the Bank of Israel, stating that Israeli banks must make all foreign account holders sign declarations confirming that they pay all relevant taxes as well waivers of confidentiality allowing Israeli banks to release and receive information to and from tax authorities abroad. Banks in Israel will have the power to freeze the accounts or restrict the banking services and deny the execution of withdrawals.
In March 2016, a bill for increasing tax collection and improving tools for enforcing tax payment and deterring money laundering, was approved. "The Bill opened the channels for the sharing of information between the tax authorities and the authority on 'anti-money laundering', said Henriette Fuchs of Pearl Cohen. "It sets tough penalties and it allows for certain far-reaching enforcement measures awarded to the authorities in the prohibition on money laundering to be used also regarding evading taxpayers."
In addition, the ITA strengthened its reporting obligation on tax advice at the beginning of 2016, forcing taxpayers to report the receipt of certain tax advice and opinions received with the purpose of tax savings. Those who do not report will be subjected to penalties.
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Ernst & Young (Israel) Ltd
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|Corporate Income Tax||26.5%||A|
|Capital Gains Tax||26.5%||A|
|Net Operating Losses (years)|
|Dividends||0%||15%||20%||25, 30||B C|
|Interest||0%||26.5%||A B D E|
|Royalties from, for example, patents, know-how||26.5%||A B D|
|Branch Remittance Tax||0%|
Source: Ernst & Young Law
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|Tier 1 - Israel|
|Gornitzky & Co|
|Herzog Fox & Neeman|
|Tier 2 - Israel|
|Goldfarb Seligman & Co|
|Meitar Loquirnik Geva Leshem Tal|
|Shekel & Co|
|Tier 3 - Israel|
|Alter Attorneys at Law|
|Eitan, Mehulal & Sadot|
|Fahn Kanne & Co – Grant Thornton|
|Fischer Behar Chen Well Orion & Co|
|Pearl Cohen Zedek Latzer Baratz|
|Professor Bein & Co|
|Ziv Sharon & Co|
|Tier 4 - Israel|
|Barnea & Co|