It’s perfectly possible to make money in Israel and keep most of it. According to the OECD, Israeli tax revenues amounted to 32.2% of GDP in 2021, which was better than the OECD average of 34.1%. You are probably doing taxable business in Israel if you conduct business activities in Israel or operate in Israel via an agent who can commit you. Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.
Business tax rates
For 2023, the regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders and 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%-48.41%, subject to any tax treaty.
Preferred income derived by preferred industrial or tech enterprises is liable to company tax of 7.5% in development area A and 16% elsewhere in Israel. Dividends are generally taxed at 20%. The resulting combined tax burden on distributed profits is generally 26%-32.8%, subject to any tax treaty. Lower rates are possible for certain large enterprises with annual revenues over NIS 10 billion. R&D grants, typically 50%, are also available.
The VAT standard rate is 17%.
International agreements: Israel has income-tax treaties with 60 countries, including the UK.
Israel is a party to US FATCA and OECD CRS information-exchange arrangements.
Israel has free-trade agreements with the US, EU, UK, Canada, Columbia, the European Free Trade Association, Mexico, Panama, South Korea, Turkey, UAE and Ukraine.
National Insurance Institute (Social Security)
NII rates include:
- Resident employees: 3.5%-12%;
- Employers of resident employees: 3.55%-7.6%;
- Freelancers: 5.97%- 17.83% (52% is tax deductible);
- Not working: 9.61%-12% (52% is tax deductible);
- Monthly payment if no income: NIS 194.
The above is subject to any applicable social security (“totalization”) treaty.
- Olim: New residents and senior returning residents (lived abroad 10 years) are generally exempt from Israeli tax on non-Israeli-source income for 10 years. The exemption does NOT apply to income for work done in Israel.
Olim also enjoy an exemption for five to 20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank. On Israeli-source income, olim receive extra personal credits that reduce taxes by NIS 235, or NIS 705 per month for four and a half years.
- Foreign expatriates in Israel: Israel’s tax treaties sometimes grant an income-tax exemption for employees resident in those countries but working in Israel.
Otherwise, nonresidents working in Israel lawfully in their field of expertise for an employer as “foreign experts” who are paid at least NIS 14,300 per month may enjoy deductions for accommodation expenses and daily living expenses of NIS 350 for up to 12 months, provided they are invited by an Israeli employer that is not an employment agency.
- Tax registrations: A business must register for Israeli tax purposes as soon as the business activity starts.
- Pay tax as you go: Every year, a business or investor will receive demands to pay VAT, payroll taxes, income tax and tax installments on profits (mikdamot).
- Essential paperwork: There are strict bookkeeping and customer invoicing rules, and approved Israeli software or printed books must be used.
Employees and freelancers
Salaries and freelancers pay taxes at rates ranging up to 50%.
Once employees have worked three to six months at a firm, they are entitled to mandatory pension and severance funding. The minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% toward pension funding and 6% toward severance funding. The employee pays 6% toward pension funding. Separate pension rules apply to freelancers.
Under approved employee stock ownership plans, employees pay only 25%-28% tax if various conditions are met.
- Real estate: Home rental income of up to NIS 5,471 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, 10% flat tax, etc. Companies pay tax at regular rates.
Real-estate purchase-tax rates range up to 10%. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,919,155 may be exempt from purchase tax.
The gain from the sale of an only home in Israel by a resident individual may be exempt from tax, provided its value does not exceed NIS 4,846,000. Otherwise, real-estate sales are generally taxed at 25%-50%.
- Securities: Passive income derived by individuals from securities is taxed at rates of 25%-33%. Traders and companies pay tax at regular rates.
- Estates, inheritances and gifts: There is no tax in Israel on estate or inheritances – only on gifts to foreign residents.
Always consult experienced advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is an Israeli CPA at Harris Horoviz Consulting & Tax Ltd. in Ramat Gan.