Taxation in Israel
The taxation regime in Israel includes a number of sources including income tax, capital gains tax, value-added tax and land appreciation tax. The primary law on income taxes in Israel is codified in the Income Tax Ordinance.
As a basis for income, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on their Israeli sourced income.
A corporation is deemed to be resident in Israel for Israeli taxes purposes if its activities are managed and controlled within the State of Israel or established under its laws. A resident corporation is subject to taxation on its worldwide income. An Israeli branch of a non-resident corporation is taxed on income generated by the branch, while a non-resident company without a subsidiary is only taxed on income sourced in Israel. The corporate tax rate since 2019 for incorporated businesses is 23%.
The Israeli source rules determines that business income is deemed as sourced in Israel if the business activity took place in Israel. With respect to other types of income: interest, royalties and dividends are sourced at the location in which the payer is, whereas rent and service fees – at the location in which the asset is used or the service is provided.
A year for tax purposes is a calendar year, however businesses may request a different schedule, in certain conditions. Businesses must file their annual tax returns five months after the end of the year, with special extensions granted of up to 15 months after the end of the tax year.
Value-added tax (VAT) in Israel of 17% is applied to most goods and services, including imported goods and services. The value of imported goods, for VAT purposes, includes the customs duty, purchase tax and other levies. Certain items are subject to a 0% rate including export goods, intangible goods and the provision of certain services to non-residents (i.e. tourism services), transport of cargo to and from Israel, the sale of goods and services to the Eilat free-trade zone and the sale of fresh fruits and vegetables. Multinational companies that provide services to Israel through the Internet, such as Google and Facebook, must pay the VAT tax rate. An approved dealer may offset its input and output VAT.
Electronic filing of VAT is mandatory in Israel. An Israeli company, or a foreign company conducting business in Israel, generally must register for VAT purposes. A non-registered foreign company operating in Israel generally must register within 30 days. Furthermore, a foreign company registered in Israel or a nonregistered foreign company that carries on an activity or business in Israel must appoint a local representative for VAT purposes within 30 days of commencing its domestic activities and must notify the VAT office closest to its place of business.
The State of Israel offers incentives in order to encourage investments in Israel. According to the Law for the Encouragement of Industrial Research and Development, an Israeli company engaging in R&D can receive, inter alia, the following benefits:
- Reduced tax rates (6%/7.5%/12%/16% - depending on the company's status and exact location in Israel);
- Reduced capital gains tax rates for companies under certain conditions (6%/12%); and
- Reduced dividend tax rates (up to 4%).
There are also tax benefits for non-Israeli resident companies that apply specifically in connection with R&D companies, such as reduced dividend rates of 4% for dividends from an R&D company to a non-Israeli company that holds at least 90% of the R&D company's shares (subject to certain conditions provided in the law).
The tax treaty between Australia and Israel came into force on 1 January 2020, reducing taxation barriers that could impede economic activity between the two countries, providing greater certainty for taxpayers in both countries and improving the integrity of the tax system. It also provides a framework for the revenue authorities of Australia and Israel to cooperate, and better tackle tax avoidance practices by giving effect to the Base Erosion and Profit Shifting (BEPS) recommendations made by the G20 and OECD. A Mutual Agreement Procedure is established between the competent authorities of the two countries, in order to resolve conflicts which are not otherwise resolved under the agreed rules.
Focused on rules for relieving double taxation, the treaty relates to income tax, fringe benefits tax and resource rent taxes.
Dividends may be taxed in the source (of the dividend) country up to the following limits:
- 0%: for dividends derived by governments (including government investment funds), central banks, tax exempt pension funds or Australian residents carrying out complying superannuation activities on direct holdings of no more than 10 percent;
- 5%: of the gross amount of the dividend for intercorporate dividends paid to companies that hold 10 percent or more of the paying company throughout a 365 day period;
- 15%: for all other dividends.
In practice, Australia only imposes dividend withholding tax on payments of unfranked dividends.
Interest may be taxed in the source (of the interest) country up to the following limits:
- 0%: for interest derived by government bodies (including government investment funds) and central banks;
- 5%: for interest derived by recognised pension funds, Australian residents carrying out complying superannuation activities and unrelated financial institutions; and
- 10%: for all other interest.
Under the Tax Treaty, royalties arising in either Israel or Australia and paid to a resident of the other State, may be taxed in that other State. However, such royalties may also be taxed in the State in which it arises, and the withholding tax rate will be limited to 5% of the gross amount of the royalty.