Several changes will affect the taxation of companies in Israel (and their shareholders)
Corporate income tax
The government has always wanted to reduce corporate tax in Israel. It even wanted to lower it to 18%, but the economic crisis of 2008 changed all that.
However, in the tax reforms for the years 2017-2018, the Israeli government wants to boost the economy by lowering corporate taxes.
The corporate tax rate will be 24% in 2017 and will decrease to 23% from 2018 (instead of 25% in 2016).
We're a long way from France's 26.5% corporate tax rate (in 2021). Well, there's still a long way to go to get to England's 19% tax rate.ALSO READ: Understanding the tax system for a company in Israel
Taxation of corporate shareholders' current accounts
It's a well-known fact that if you own a company, you can make as much money as you like from it, paying tax whenever you like.
Until now, the tax authorities have had no "legal pressure" to force shareholders to pay their taxes at the time of withdrawal.
This debt is of course recorded in the company's accounts, but from a tax point of view, the shareholder could defer the payment of royalties.
However, at Dray & Dray, we have always recommended that our clients pay taxes (particularly on the dividend) at the same time as the withdrawal, to avoid owing their company, or the taxman, several hundred thousand shekels.
For shareholders of companies in Israel, the party's over.
This will change from 2017. It is proposed to establish that the withdrawal of funds by a shareholder of a company, which has not been repaid to the company within a maximum period of three months, or before the end of the tax year, will be considered as salary or as a dividend distribution.
Consequences of this reform : Shareholders will have to meet their tax obligations much more quickly.ALSO READ: Employers' contributions in Israel: Online simulation
Taxation of retained earnings
Until now, shareholders could leave their profits in the company (after paying corporate income tax) and decide when to distribute any dividends.
It has been proposed that the Director of Taxes be empowered to require the distribution of dividends from retained earnings.
In other words, the tax authorities will now have the power to "force" a company to distribute dividends.
To put it plainly, shareholders will have to pay a lot of tax in 2017
To ease the burden, the tax authorities have decided to lower tax on the dividend to 25% for shareholders owning more than 10% in a company's shares ( instead of 30% in 2016).
The calculation is simple: if a shareholder owes 800,000 Nis to his company and decides to pay the dividend on January 1, 2017 instead of December 31, 2016, he will save a whopping 80,000 Nis in taxes.
As a result of the financial windfall expected by the government, Israel has decided to lower income taxes in 2017.