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Corporate Tax Guide: Israel
Israel

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The information is valid for the entire country except where indicated. For example, in the case of Malaysia, Labuan is part of Malaysia but has a special tax regime, so this is noted.
Israel – entire country.
The corporate tax rate shown is the typical corporate tax rate that a domestic corporation owned by non-resident persons would pay. The tax rate does not include withholding tax on dividends, but does include a distribution tax shown separately if applicable. Certain countries have a low corporate tax rate, but charge an additional tax when a dividend is distributed. Because this tax is paid by the corporation, and not deducted from the amount of the dividend itself, it is not a dividend withholding tax. As a result, it typically cannot be reduced by an international tax treaty.
24% - 2017.
The basis of taxation for a corporation will typically be one of:
  • World income (i.e. income from all sources)
  • Territorial (i.e. only income from within the jurisdiction)
  • Territorial and remittance (income earned within the jurisdiction and income remitted into the jurisdiction)
Other basis of taxation are possible, and, if applicable, they are noted.
Israeli Corporation: world income.
Foreign Corporation: Israel-sourced income.
Where non-resident corporation carries on business in a country, business profits may be subject to corporate tax. In addition, a branch profits tax may apply in lieu of dividend withholding tax. This branch profits tax applies to the after tax profits, typically at a fixed percentage. An international tax treaty may reduce the rate of branch profits tax, typically to the rate provided for dividend withholding.
There is no branch profit tax in Israel.
The common forms of business entity are noted. In addition, the entities which are flow through entities for U.S. tax purposes are indicated.
Corporation, Partnership, Limited Partnership, Trust, Trust Holding Company, Pass Through Companies.
Capital gains may be fully taxed, partially taxed or not at all. In certain countries, an exemption, called the participation exemption, will apply to exempt from tax a capital gain from disposition of a substantial holding of shares of a subsidiary. Where a participation exemption is applicable, it is noted together with a summary of the main conditions.
24% - 2017.
Certain countries allow group taxation, otherwise known as consolidated tax filing. Here the tax returns of a group of corporations in the country may be combined together, which can be useful. If group taxation is permitted, it is noted along with the main conditions.
Consolidated tax returns are not allowed under Israeli law; an exception applies, however, in the case of an Israeli-resident “industrial” company or a company that is a holding company of industrial companies.
Countries offer various kinds of special exemptions and incentives. Examples are a reduced tax rate, a tax holiday, a tax credit on the purchase of equipment, special accelerated deductions for deprecation, incentives for R&D, and various others. Here the major items are noted.
  • Reduced tax rate: Under the Encouragement of Capital Investments Law, corporations deemed as preferred or technological enterprises are entitled to reduced tax rates and other incentives.
  • Tax Holiday: Election year, 10-year benefit period for new immigrants/returning residents, foreign resident tax exemption upon sale of shares, subject to certain conditions.
  • Special Depreciation: Accelerated depreciation for certain assets used in the production of “preferred income”, acquired goodwill may be depreciated for a ten-year period, and know-how may be depreciated for an eight-year period. Investments in start-up companies may be subject to special, preferred deduction rules.
  • R&D: May be deducted immediately, subject to the approval of the OCS (otherwise may be deducted over a three-year period).
Many countries have thin capitalization rules which limit or deny the deduction of interest expense in certain circumstances. For example, if debt exceeds three times equity, a proportionate amount of interest expense may not be deductible. Limitations take various forms, restricting the interest expense deduction to a percentage of profit, deeming the debt to be equity and the interest to be a payment of dividends, and various other rules which may blend of these principles. Where a country has thin capitalization rules, they are briefly described.
There are no specific thin capitalization rules for Israeli tax purposes.
Many countries have transfer pricing rules. They very often follow the OECD guidelines and the arms length principle. Some countries have specific rules which apply in certain cases. In addition, some countries allow for a selection of the most appropriate transfer pricing methodology in the circumstances, while other countries follow a hierarchy of methods, with the CUP method (comparable uncontrolled price) often ranking first. The transfer pricing rules are briefly explained.
Pursuant to the Israel Tax Ordinance (New Version) 5721-1961 ("ITO"), when a special relationship exists between the parties to an international transaction, as a result of which the price of the transaction results in a smaller profit than would have been realized if the transaction price had been set on arm's length terms, the transaction must be reported and taxed on the basis of its fair market value. The preferred method is to compare the price of the transaction in question with the price of a similar international transaction between unrelated parties; otherwise, the profitability rate of the transaction must be compared to a similar transaction, or the profit/loss allocation should be compared to a similar transaction. If neither method is possible, any other suitable method of comparison may be used. The Israel Tax Authority ("ITA") may demand that the taxpayer submit the relevant transfer pricing study.
Many countries tax passive income earned in controlled foreign corporations (CFC’s) on an imputation basis while active income is not taxed. Such CFC rules are usually complex and vary significantly in what is considered passive income, and how foreign tax paid is taken into account. Some countries approach CFC rules on the basis of whether or not the foreign corporation is resident in a low tax jurisdiction or a tax haven. This may be done through a black list of countries.
The general overview of CFC rules is described in simple terms.
Yes. Applies to controlled foreign affiliate. When most of the income or profits are passive income the resident shareholder may become subject to CFC legislation as follows: The holding of a qualifying means of control is subject to tax on a pro rata portion of the CFC’s undistributed profits. “Passive income” in this context includes interest, dividends, royalties, rental fees and capital gains taxed effectively at a rate of 15% or less, provided that such income is not classified as business income under Israeli tax law. In addition, the minimum non-Israeli tax rate applicable to the company’s passive income may not exceed 15%.
Profits repatriated by way of dividends from a subsidiary to a parent company are typically taxed in one of three ways:
  • The dividends are exempt of tax.
  • The dividends are deductible from taxable income, but not fully (90%, for example, of the dividend is deductible).
  • The dividend is taxable, grossed up to the pre-tax amount, and a foreign tax credit claimed for foreign taxes paid.
The applicable method is noted.
  • Dividends received by Israeli individual: 25/30% (the higher rate for a controlling shareholder with over 10%*).
  • Dividends received by Israeli company from non-Israeli company: 25/30%.
  • Dividends received by Israeli company from Israeli company: exempt.
  • Dividends distributed from Israeli company to Israeli individuals/non-Israeli shareholders: 25/30%.
* additional 3% surtax may apply

Profit repatriation may be subject to different rates if treaty is applicable.
Most countries allow a foreign tax credit based on a formula, typically net foreign income over the net income times taxes payable. This limits the foreign tax credit to roughly the domestic tax otherwise applicable to the foreign income. There are numerous variations and technical rules in the details of foreign tax credit calculations. Where a foreign tax credit is allowed, the general principles are described.
Yes. Israel applies a basket system under which income is divided and taxed based on different categories of income (baskets), and the maximum Foreign Tax Credit (FTC) granted cannot exceed the Israeli corporate tax rate (currently 24%) applied to the net income within the basket. FTC is only available if paid to the foreign country within two years following the end of the year in which the Israeli tax is due. Unused FTC may generally be carried forward for five years, and used within its category (basket).
14. Losses
Losses typically can be carried forwards for a period of years, and sometimes can be carried back. Losses may be segregated into capital losses and non capital losses.
Losses generally segregated into capital and non-capital (business). No carry back, indefinite carry forward. Restrictions on a change of control.
It is not practical to list all of the tax treaties which a country has in a simple guide like this. Accordingly, a link is provided in each case to the tax treaties.
Some countries have entered into Tax Information Exchange Agreements (TIEA).
Treaties are more and more containing provisions that limit benefits (LOB provisions).
Yes.
  • Marginal Income Tax: approximately up to 50%.
  • Israel is a signatory of the CRS (entry into force in 2018) and of the convention on mutual administrative assistance in tax matters (entry into force in 2016), and has a FATCA agreement with the US.
  • LOB provisions: treaties have LOB or principal purpose tests.
Withholding tax rates vary considerably from treaty to treaty, and countries may have domestic exemptions applicable in certain circumstances (for example copyright royalties, interest paid to arm’s length persons, etc.). A table shows the typical rates but cannot adequately summarize all of the details. The applicable treaty should be consulted.
TREATYNON-TREATY
InterestGenerally 5% - 15%Generally 25%
DividendsGenerally 10% - 25%25/30%
Rental Real Estate-35%
Royalty0% - 15%24%
Some countries allow for the selection of year-end while other countries specify a particular year-end which all business entities must have. Normally the taxation year cannot exceed 12 months. Where it can exceed 12 months, this is noted.
Corporate tax is generally assessed for the calendar year; however, the greater part of the tax is paid during the tax year through estimated advance payments. Certain entities may apply for permission to file their tax returns based on a different 12-month period.
This is the due date for filing a tax return. Where extensions are available, this is noted.
The final tax payment is made, together with the filing of the annual tax return, by 31 May following the end of the tax year. It is possible, in certain circumstances, to obtain an extension for the filing and payment deadline.
The typical tax instalment requirements are noted.
Corporate tax is generally assessed for the calendar year; however, the greater part of the tax is paid during the tax year through estimated advance payments. The advance payments are generally fixed by the Assessing Officer as a percentage of the turnover, although fixed amounts may be set in certain cases.
This is the date when the corporate tax owing for the year must be paid. It may be different from the tax return filing due date.
The final tax payment is made, together with the filing of the annual tax return, by 31 May following the end of the tax year. It is possible, in certain circumstances, to obtain an extension for the filing and payment deadline.
This is the period after which the tax department cannot in normal circumstances reassess a taxation year. It is sometimes referenced to the end of the taxation year and sometimes to the date of the first assessment of that taxation year.
Within four years from the end of the year in which the return was filed, the assessing officer may audit a company's tax return.
If a country has exchange controls, this is noted, together with the main requirements.
No.
23. VAT
A VAT tax system typically provides that the supply of goods and services is classified as taxable, tax exempt, or zero rated. Where a business is engaged in an activity which is taxable, it must charge VAT on its revenue, and can claim a refund of VAT on its expenditures. Where the activity is exempt, it does not charge VAT on its revenue, and cannot claim back VAT paid. Where the entity is engaged in activities which are zero rated (typically agriculture, food services and exports), then it can claim back VAT which it has paid on its expenditures, and does not charge VAT on its revenue.
If a country has a typical VAT system, this is noted. If a country has no VAT system but a sales tax system, this is indicated. Some countries may have a mixture, and taxes may apply at different levels (federal and state for example).
Yes. VAT is generally imposed on transactions in Israel and imported goods at a 17% rate.
Stamp duty, or land transfer tax, can apply on such things as the transfer of shares, land, or the issuance of bonds or debentures. This is described together with the applicable rates.
Stamp duty has been abolished with effect from 1 January 2006.
If capital tax is payable, this is described. Capital tax may apply in specialized industries, such as banking and insurance, even if a country does not generally apply a capital tax to corporations.
No capital tax is levied in Israel.
Where significant, other taxes are noted.
There is no payroll tax, except for the charge levied on not-for-profit organizations and financial institutions at the rate of 7.5% on wages, provided the total salary costs exceed NIS 177,787 (as of 2017) per year. Employers and employees must make social security contributions.
Anti-Avoidance Rules take many forms, the most common ones are a general anti-avoidance rule, treaty shopping limitations, the requirement for economic substance (or a business purpose in carrying out transaction) and specific anti-avoidance rules for particular purposes. A very brief overview of the anti-avoidance rules is described.
Yes. GAAR. Threshold is abusive tax avoidance that violates clear object and spirit of tax legislation.
Treaty Shopping: Tax Circular applies LOB, residency tests etc. to cases of treaty shopping.
Economic Substance: Required.
Other: Anti-avoidance rules and limitations.
Where a non-resident person holds shares of a corporation established in the country listed, the capital gain which results may be taxable or not taxable depending on the circumstances and, possibly, the existences of an international tax treaty. The general rules are noted.
As from 2009, capital gains derived by non-resident companies on the disposal of shares in resident companies are generally not subject to tax, provided that they do not have a permanent establishment in Israel; that the shares were not acquired via certain reorganizations or are publicly traded; or that the companies' assets do not consist mainly of real estate.
Where a corporation is acquired through the purchase of shares, sometimes a step up is allowed so that the cost of its assets can be revalued. The main rules are briefly summarized.
Revaluation of assets followed by certain distributions is deemed as a taxable sale and reacquisition, with tax and step-up implications.
In some countries, rulings are commonly used (and sometimes even required). In other countries the system is either unavailable or not commonly used except in special circumstances.
Generally, a taxpayer may obtain a pre-ruling from the ITA before the filing of a tax return.
31. Other
Other important aspects of the tax system are noted.
Extensive reporting required for Israeli corporation owning foreign subsidiaries and for transactions with related non-residents. The taxpayer must report, as part of the annual tax return, certain listed actions and transactions that constitute tax planning.