Skip to content

Israel

Country Name: State of Israel
Currency: Israeli New Shekel (ILS)
Primary Tax Authority: Israel Tax Authority (ITA)
Key Legislation:

  • Income Tax Ordinance (ITO)
  • Value Added Tax Law (VAT)
  • Corporate Income Tax Law
  • Customs Law

Fiscal Authority Allocation

Centralized Fiscal System:
Israel operates a centralized tax system, with the Israel Tax Authority (ITA) responsible for administering and collecting taxes, including corporate income tax (CIT), personal income tax (PIT), value-added tax (VAT), and customs duties.

Corporate Income Tax (CIT)

Standard Rate: 23%
Israel imposes a corporate income tax rate of 23% on the net taxable income of resident companies. Foreign companies with permanent establishments (PEs) in Israel are taxed on their Israel-sourced income.

Corporate Forms and Taxation:

  1. Domestic Companies: Subject to a 23% CIT rate on worldwide income.
  2. Foreign Branches and Permanent Establishments (PEs): Taxed at the same CIT rate on Israel-sourced income.

Exemptions and Incentives:

  • Reduced Rates for Preferred Enterprises: Companies engaged in specific industries such as high-tech, manufacturing, and export-oriented businesses may qualify for reduced CIT rates of 7.5% to 16% under Israel’s Preferred Enterprise Regime, depending on their location and the nature of their operations.
  • R&D Incentives: Israel provides generous tax incentives for companies conducting research and development (R&D), including deductions for R&D expenses and grants from the Israel Innovation Authority.

Goods and Services Tax (GST) / Value-Added Tax (VAT)

Standard Rate: 17%
Israel applies a VAT rate of 17% on most goods and services. VAT is levied on the sale of goods, provision of services, and imports into Israel. Businesses are required to register for VAT and remit the tax on a periodic basis.

Exemptions:
Certain goods and services, such as healthcare, education, and financial services, are exempt from VAT. Exports are zero-rated, allowing businesses to reclaim VAT paid on inputs used to produce exported goods.

Personal Income Tax (PIT)

Progressive Rates:
Israel applies a progressive personal income tax system on individuals’ worldwide income. The rates for 2023 are as follows:

  • Up to ILS 79,560 (approximately USD 22,000): 10%
  • ILS 79,561 to ILS 114,240 (USD 22,000 to USD 31,500): 14%
  • ILS 114,241 to ILS 177,360 (USD 31,500 to USD 48,800): 20%
  • ILS 177,361 to ILS 249,480 (USD 48,800 to USD 68,500): 31%
  • ILS 249,481 to ILS 501,920 (USD 68,500 to USD 137,800): 35%
  • Above ILS 501,921 (over USD 137,800): 47%

Social Security Contributions:
In addition to PIT, individuals are required to contribute to Israel’s social security system, which provides pensions, healthcare, and other benefits.

  • Employer Contribution: Up to 7.5% of gross salary.
  • Employee Contribution: Up to 12% of gross salary, depending on income level.

Withholding Taxes

  • Dividends: 25% (or 30% for shareholders owning more than 10%).
  • Interest: 15% for individuals (30% for controlling shareholders).
  • Royalties: 23% for non-residents.
    Withholding tax rates may be reduced under Israel’s network of double taxation agreements (DTAs).

Transfer Pricing Rules

Israel follows the OECD guidelines on transfer pricing. All related-party transactions must adhere to the arm’s-length principle. Companies must maintain transfer pricing documentation to support the prices applied in cross-border transactions, particularly with related parties.

Special Tax Regimes

  • Preferred Enterprise Regime: Israel’s Preferred Enterprise Regime offers reduced CIT rates of 7.5% to 16% for qualifying companies engaged in manufacturing, technology, and export-related activities. Companies investing in less developed areas of Israel can access the lower end of the rate scale.
  • Approved Enterprise Regime: Businesses designated as “Approved Enterprises” under the Law for the Encouragement of Capital Investments may also benefit from reduced tax rates, tax holidays, and accelerated depreciation for qualifying capital investments.

Other Taxes

  • Customs Duties: Customs duties are imposed on goods imported into Israel. Rates vary depending on the type of goods, with essential goods such as food and medicine generally subject to lower or zero customs duties.
  • Excise Taxes: Excise taxes are levied on specific goods, including alcohol, tobacco, and fuel.
  • Real Estate Transfer Tax: A land betterment tax is imposed on capital gains derived from the sale of real estate, with the tax rate typically ranging from 20% to 47%.

Double Taxation Agreements (DTAs)

Israel has signed over 50 double taxation agreements (DTAs) with countries such as the United States, United Kingdom, Germany, India, and China. These agreements help reduce withholding taxes on cross-border income and prevent double taxation for companies and individuals earning income in Israel and other jurisdictions.

Local Taxes

Local municipalities in Israel impose Arnona, a property tax levied on owners and tenants of real estate. The tax rates vary by municipality and are based on the size and location of the property. Arnona is used to fund local infrastructure and services.

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed within five months of the end of the company’s fiscal year. Personal income tax returns are due by April 30 of the following tax year. VAT returns are typically filed on a monthly or bi-monthly basis.

Penalties for Late Filing:
Penalties apply for late filing or non-compliance with tax laws, including fines and interest on unpaid taxes. The Israel Tax Authority may impose additional penalties for underreporting or misreporting income.

Recent Developments

High-Tech Sector and R&D Incentives:
Israel is a global leader in the high-tech industry, and the government continues to provide significant tax incentives to support R&D activities. The Israel Innovation Authority offers grants and tax credits for companies conducting R&D in fields such as cybersecurity, biotechnology, and artificial intelligence.

OECD Compliance and BEPS:
Israel is fully aligned with the OECD’s Base Erosion and Profit Shifting (BEPS) project, including implementing transfer pricing documentation requirements, country-by-country reporting, and other international tax standards. These measures are designed to combat tax avoidance and ensure that multinational companies pay taxes in the jurisdictions where profits are earned.

Reforms to Real Estate Taxation:
Recent reforms to Israel’s real estate tax laws aim to encourage the development of affordable housing by reducing capital gains taxes on certain real estate transactions and offering tax incentives for property developers building residential units.

Subscribe to my free newsletter for regular updates on law, taxation and business worldwide.

Tags: