Taxes in Israel

The Israeli tax system has undergone several reforms in the past. Since the early 2000s, the government has begun to take steps to create a more favorable climate for entrepreneurship. The tax burden has been changed from direct to indirect, and social contributions have been cut to give people incentives to get employed. After 2015, the VAT rate was reduced from 18% to 17%, and income tax from 26.5% to 23%. Families were given various tax incentives.

The end of the tax year is December 31st. The official currency of Israel is the new shekel – ₪ (NIS).

Taxes for individuals

The Israeli income tax system (PIT) uses a progressive scale. Income is divided into active and passive. The first is the one that a person receives from employment or business. The second is formed from the use of various assets: dividends or renting out an apartment. For persons over 60 years of age, the upper limit of taxation is set at 31%.

The taxable amount includes all income from work or self-employment, including various benefits, additional payments and allowances, as well as passive income – for example, from bank deposits.

This may include:

• Rental Income;
• Interest on deposits;
• Dividends;
• capital gain;
• Lottery winnings.

Individual taxpayers who file income tax returns must do so by April 30th. A declaration is required in cases where a person has several sources of income or his annual income exceeds a certain threshold. Non-residents who receive income in Israel are also required to file a tax return if the source did not withhold income tax.

Tax resident status

A resident of Israel is a person who has been in the country for at least 183 days in a calendar year or if the total period of his stay in Israel was at least 425 days for the reporting year and 2 previous years.

If a person spends at least 183 days abroad per year for two consecutive years, and during all this time the center of his life is outside Israel, then he will be considered a foreign resident.

Foreign professionals and employees who are in Israel on a B-1 visa are not treated as residents by the tax authorities and are subject to taxation as non-residents.

Residents are taxed on income received both in the country and abroad. Non-residents are required to pay taxes in Israel only on income from local sources.

Income tax
Income tax in Israel – personal income tax, or mas akhnasa – is required to pay only those who are employed or self-employed. A progressive scale for calculating personal income tax is applied. Since January 1, 2023, due to inflation, it has been revised upwards. The lowest rate today is 10% and the highest is 50%.

Below are the tax rates for various incomes:

• up to 6790 shekels per month – 10%
• from 6791 to 9730 shekels – 14%
• from 9731 to 15620 shekels – 20%
• from 15621 to 21710 shekels – 31%
• from 21711 to 45180 shekels – 35%
• from 45181 to 58190 shekels – 47%
• 58191 shekels and above – 50% (47% + 3% extra)

The amount of personal income tax is calculated in a stepwise way: from each part of the income that fits into the tax framework. That is, when earning 9,000 shekels, a tax of 10% will be calculated on the amount of 6,790 shekels and 14% on the remaining amount.

Benefits for residents

Israeli tax residents receive personal tax credits, known as “concessionary units” or nekudot zikuy. In 2023, one such unit is equal to 235 shekels per month. By default, they are provided to all residents of Israel: 2.25 points for men and 2.75 for women.

In addition, there are certain categories of persons who are eligible for additional units, in particular:

• Parent with a child under the age of 1 year 1.5 units;
• Parent with a child 1-5 years old 2.5 units;
• Single parents 1 unit;
• Persons who have completed military service in the army up to 2 units;
• A new immigrant during the first 18 months after moving to Israel receives 3 preferential tax units, in the second year – 2, and in the third year – one.

Some localities in Israel offer income tax discounts to their residents – they can be as high as 20% in cities such as Kiryat Shmona or Sderot.

All these points and benefits are summed up and once a year income tax refund is made.
The income received from the placement of funds in the so-called “development fund” – Keren Ishtalmut – is exempt from taxes. However, for this, the money must be kept in the account for at least 6 years.

In Israel, there is a tax on the purchase of a car, which can reach half the cost or more. In 2023, significant benefits were introduced for the purchase of electric and hybrid vehicles. In the first case, the cost of a car up to 60,000 shekels is taxed at a reduced rate, in the second, up to 35,000 shekels. There is a discount for the presence of security systems in the car, which can reach 2400 shekels.