Taxation in Israel is a complex and often confusing subject for many individuals and companies. In Israel, tax rules can seem even trickier due to the unique nature of the country's tax system.
In this article, we'll take a brief look at three key aspects of Israeli taxation: income tax, value-added tax (VAT) and tax benefits for foreign investors.
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Taxation Israel : Income tax
Tax rates in Israel is determined by the progressive income tax method.
Progressive taxation means that the higher an individual's gross taxable income, the higher the tax rate in Israel.
Understanding the tax rate in Israel.
Taxable income (i.e. a person's income after deductions, compensation and exemptions) is divided into "tax brackets", and each tax bracket has a different tax rate. These brackets represent the tax brackets in Israel.
Taxed on your worldwide, non-territorial income
Israeli residents are taxed on all their worldwide income, while non-residents are taxed only on their Israeli income.
Territorial taxation and worldwide taxation are two distinct tax concepts that affect how residents of a country are taxed on their income.
Territorial taxation refers to a tax system in which residents of a country are taxed only on their income and assets located in that country.
This means that only income generated within the country's borders is subject to tax. Consequently, residents are not required to declare or pay taxes on income earned abroad.
This is how it works for an Ole Hadash, who has just made Aliyah and therefore benefits from tax exemption for 10 years.
For example, if you are a resident of Israel and have income from sources in Israel, you will be taxed on this income in accordance with Israeli tax rules. However, if you also have income from abroad, such as interest from a foreign bank account or dividends from foreign shares, this income will not be subject to tax in Israel.
On the other hand, after the 10-year Aliyah period, worldwide taxation applies, in which case you are taxed in Israel on all your income, regardless of where it was generated.
Distinction between active and passive income
The tax system comprises several tax brackets, ranging from 10% to 50%.
Active" incomes are taxed in the lower brackets, while passive incomes are taxed in the higher brackets.
There is a distinction between income generated by the individual's own work and income created by another source that is not the individual's own work (e.g. rental income, interest or dividends). As a result, tax rates in Israel differ between these two "natures" of income:
- Active" income, derived from the taxpayer's direct work. This is generally income from salaries or self-employment (Ossek mourche or Ossek patour).
- Passive" income, requiring no direct involvement on the part of the taxpayer.
Your status and the number of children you have influence your tax liability
Income tax in Israel is also influenced by other factors such as marital status and the number of dependent children. Married taxpayers enjoy certain tax advantages, such as lower tax rates and additional deductions for dependent children. In addition, there are tax allowances for the elderly and disabled, which can reduce their tax burden.
Tax benefits for new immigrants
Tax benefits for new immigrants (Olim Hadashim) in Israel are designed to encourage immigration and attract talent and investment to the country. These benefits include tax exemption on income for a period of 10 years from the date of Aliyah, i.e. the moment a person settles in Israel as a new immigrant. During this period, new immigrants are not required to declare or pay taxes on their foreign income. This means that income generated outside Israel is not subject to income tax in Israel.
However, it should be noted that the tax exemption during the 10-year period does not apply to all types of income. Some specific income, such as passive income from sources in Israel, may still be subject to tax. It is important to consult a tax expert to understand the details and specifics of these tax benefits for new immigrants.
Good to know:
After the 10-year period, new immigrants become subject to worldwide taxation in Israel, which means they must declare and pay tax on all their worldwide income, regardless of where that income was generated.
These tax benefits for Olim Hadashim are designed to facilitate their integration into Israel, give them a period of financial adjustment and encourage them to contribute to the country's economy. They also provide an incentive to immigrate to Israel for those who wish to benefit from these tax advantages and seize the opportunities offered by the country's ecosystem.
Taxation Israel : VAT in Israel
Value-added tax (VAT) is an indirect tax levied on most goods and services in Israel. The standard VAT rate in Israel is currently 17%.
Companies registered in Israel are required to collect VAT on their sales and remit it to the government.
Good to know:
It is important to note that VAT does not generally apply to exports of goods and services, which encourages international trade.
VAT in Israel is also subject to specific rules for certain sectors, such as real estate and tourism.
For example, sales of real estate are subject to a full rate of VAT, even if the buyer is a tourist.
On the other hand, seasonal rentals are exempt from VAT in certain cases.
These specific rules are designed to stimulate certain sectors of the economy and encourage investment and capital inflows.
Tax benefits for foreign investors
Israel is known for its dynamic ecosystem of start-ups and technological innovation. To encourage foreign investment in the country, Israel offers attractive tax benefits for foreign investors. These include tax incentives for high-tech companies and tax breaks for investments in economically disadvantaged areas.
These measures are designed to stimulate the Israeli economy, create jobs and attract foreign investment. They also enable foreign investors to benefit from a favorable tax environment and optimize their returns.
In addition to tax advantages, Israel also offers a favorable ecosystem for foreign investment. The country boasts a modern infrastructure, a solid legal system and a skilled workforce. What's more, Israel is known for its entrepreneurial culture and support for start-ups, making it an attractive place to invest in innovative projects.
Good planning to reap all the benefits
Israel's tax system has its own peculiarities that require a thorough understanding for residents and companies operating in the country. Income tax, VAT and tax benefits for foreign investors are all important aspects to consider.
If you're considering moving to or investing in Israel, it's essential to consult a tax expert to guide you through the complexities of the Israeli tax system.
Proper tax planning can help you maximize your earnings, minimize your taxes and take full advantage of the benefits offered by the Israeli tax system.
A firm specializing in Israeli taxation
Dray & Natco specializes in Israeli taxation. With in-depth experience and precise knowledge of the tax system in Israel, our team of experts can guide and advise you on all aspects of Israeli taxation.
When you call on our services, you'll benefit from personalized support in navigating the complexities of taxation.
in Israel. Our accounting and tax experts are on hand to provide you with precise advice and help you make the right decisions.
Whether you need help understanding tax rules, optimizing your tax situation or complying with tax obligations, our team is here to support you every step of the way.
We understand that Israeli taxation can seem confusing, but with our expertise and experience, we'll help you navigate with confidence.