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Taxes in Israel

October 12, 2023 615 Time to read: 14 min.

The principle of residency is a fundamental factor of the taxation system. It means a special form of relationship between the taxpayer and the state. In practice, it is not related to obtaining citizenship, the presence of permanent registration or the availability of documents confirming the amount of taxes paid. The obligation to regularly pay fiscal payments falls on the shoulders of citizens living in Israel for more than 183 days (about 6 months).

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    According to the current legislation, new repatriates have an adaptation period. As a result, they receive a temporary exemption from paying taxes, including payments for property ownership or for income that a citizen earns from business abroad. Why the Israel tax system requires a detailed study: it provides benefits for different categories of citizens.

    It is interesting to note that even before the 2015 reforms, VAT was 18%, while at the moment it has been reduced to 17%. And the income tax that all entrepreneurs have to pay was 3.5% higher compared to its level today – 23%.

    Types of Taxes in Israel

    The residency principle provides for the tax liability of both an individual and a legal entity at the location of its tax domicile. For calculating fiscal payments, all sources of income that a citizen receives as a result of conducting a certain type of activity on the territory of Israel and abroad are taken into account. Under current laws, non-residents are also required to pay taxes. But unlike those who have received official resident status, people who do not have it are responsible for payments that the state charges on the basis of income that a person receives only on the territory of the country.

    Since 2000, public services have initiated several reforms related to taxes in Israel. This was done to create a more favorable climate for doing business.

    Direct taxation was replaced with indirect one to simplify the system. It means that the seller of goods or services puts a tax on Israel on the cost of the goods. They also include excise taxes on alcohol products.

    Income Tax

    In order to calculate the income tax of individuals, a progressive scale is used. It is customary to distinguish two types of income. If a person receives income as a result of labor activity or from doing business, such income is called active. Tangible assets obtained from the use of assets, for example, the payment of dividends or as a result of renting out real estate, are called passive income. There is a tax limit for residents over 60 years of age: it is 31%.

    The amount of payments consists of all the income of an individual, including any employment and entrepreneurial activity. Benefits, allowances and passive income are also taken into account.

    What is considered passive income: rent, dividends, interest accrued from deposits, any fixation of capital gains, winnings (lottery, competitions).

    The duty of filing taxes in Israel lies with taxpayers until April 30. It is important to understand that the declaration will be necessary in cases where the annual income of a citizen exceeds the threshold established by law (when the annual earnings exceed 590000 shekels). Also, this filling in according to the accepted norms will be required, provided that a person has several sources of income. Non-residents who receive income from activities in Israel are also required to file a declaration within the prescribed period, provided that the income has not been withheld by the source.

    Taxation functions in such a way that the rate can progress. This happens, taking into account the income of the citizen. By law, earnings over 647,640 shekels are subject to an additional 3% tax. With official employment, a resident does not need to worry about anything. Issues related to taxation are taken over by the employer.

    The peculiarity of income tax is graduation. This means that interest is set on different income boundaries. The salary is placed in several stages, with each of which a certain percentage is deducted.

    At the beginning of 2023, the rate was revised. The government explained this decision by progressive inflation. Depending on the level of income, payments can range from 10-50%.

    The table below shows examples of current rates:

    Income level/ shekels per month % rate for personal income tax calculation
    up to 6790 ₪ 10
    from 6791-9730 ₪ 14
    from 9731 – 15620 ₪ 20
    from 15621 – 21710 ₪ 31
    from 21711 – 45180 ₪ 35
    from 45181 – 58190 ₪ 47
    58191 ₪ and more 50

    Tax benefits can be used by foreign citizens who have been invited to the country as qualified experts in a certain field. They can be professors, researchers, foreign journalists, athletes. During the first year of their stay in Israel, such specialists, when submitting a declaration, can deduct from it the confirmed income for renting an apartment. The amount can be calculated in two ways:

    • up to 340 shekels per day;
    • up to 50% of the remuneration specified in the contract with the host party.

    Corporate Tax

    According to the current law, corporate tax is levied on legal entities, which is 23%. Companies that are officially registered in Israel have income received in different countries of the world considered for taxation. While the branches that were opened by foreign companies take into account the income that was accrued in Israel.

    The situation with the taxation of dividends requires special attention. Depending on where they were accrued, the order of calculation will change:

    1.   If the dividends are accrued taking into account the income received in Israel, the payments will be exempt from tax.
    2.   If payments are received from abroad, they are taxed at a fixed rate of 25%.

    Some enterprises whose activities meet certain requirements are eligible for priority status. It entitles you to reduced rates. If the company operates in the territory of the priority area, the rate will be 7.5%, in all other areas – 16%.

    The main condition for obtaining benefits: the company’s activities should be aimed at developing the economic potential of the country. The allocation of new jobs may also be considered for lowering the rate.

    Value-Added Tax (VAT)

    It is worth noting that all goods and services are subject to Israeli VAT of 17%. However, there are some types of tourism services that are not taxed. Also, VAT is not charged on the sale of fruits and vegetables.

    Every seller of goods or services is obliged to receive a VAT number Israel. If it is not submitted, the company will receive a fine for conducting illegal activities.

    Property Tax

    Every property owner is obliged to take part in the municipal collection. Its size may vary for different taxpayers. What it depends on the area of the object and its location.

    For an apartment of average size, its owner needs to pay about 200 shekels per month. Subject to the improvement of housing, a citizen needs to pay a special tax “ethel ashkhabad”.

    It will be equal to 50% of the amount by which the value of the previous object has increased. The fee is charged not only from the owners, but also from long-term tenants. What can be the reason for the accrual: reconstruction, repair work and any other procedures, thanks to which the cost of the object has become higher.

    Land Appreciation Tax

    Real estate sellers are required to pay payments to increase the value of land. In fact, the tax refers to the capital gain over the time of ownership. In 2023, amendments were made to the law in force since 2014. They relate to the exemption of citizens from paying tax, which is now valid only for the first 4,495,00 shekels of the total price. Non-residents are not eligible for exemption from payment. Repatriates and single property owners can exercise the right to exemption from such payments every 1.5 years. However, to obtain such a right, a citizen must be the owner of an apartment for at least 1.5 years.

    Who Qualifies as an Israeli Resident for Tax Purposes?

    As it was said at the beginning of the article, a person who has spent at least 183 days in the country will be recognized as a tax resident. Or this status can be assigned to a citizen whose total period of stay for the current year and the two previous years is 425 days. Specialists from other countries who carry out activities on the territory of the country on a B-1 visa are considered non-residents.

    How to File Income Taxes in Israel

    The declaration form for Israel income tax can be submitted online on the tax authorities website. Provided that a citizen cannot fill out the form on his own, he should contact the specialists of the tax service personally for help. You should not postpone until the end of the deadline, if you do not submit data, a fine will be imposed on you. Use the step-by-step filling instructions provided below:

    1
    Step

    First you need to understand all the requirements that apply to your income category.

    2
    Step

    Keep copies of documents confirming income. They may be needed if the tax authorities decide to conduct an audit.

    3
    Step

    When filing a declaration, take into account the tax deductions that are due. Study their list before you start filling out.

    4
    Step

    When completing the document, make sure that all sources of income are taken into account.

    1 Step

    First you need to understand all the requirements that apply to your income category.

    2 Step

    Keep copies of documents confirming income. They may be needed if the tax authorities decide to conduct an audit.

    3 Step

    When filing a declaration, take into account the tax deductions that are due. Study their list before you start filling out.

    4 Step

    When completing the document, make sure that all sources of income are taken into account.

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    In the absence of confidence in the correctness of their actions, it is better to consult a specialist. With the help of a competent consultant, you will be able to avoid mistakes and minimize the likelihood of problems with the tax service.

    Israeli Tax Law for Foreign Residents

    All foreign residents are eligible to receive preferential units. Every year, the amount of non-quota zikui is recalculated taking into account inflation. In 2023, it is 235 shekels per month. Special categories of citizens are entitled to additional units. For example, a parent of a child under 1 year old will receive 1.5 units. If a child is 1-5 years old – 2.5 units. Each single parent receives support from the state in the amount of 1 unit.

    Corporate Tax Rates and Regulations

    The status of privileged companies is taken into account in the taxation system. While the standard Israel corporate tax rate is 23%, in some cases, if certain conditions are met, the payout can be reduced to 0%.Enterprises that have a confirmed annual turnover of at least 10 billion. Shekels can apply for a reduced rate from 5-8%. Its size depends on the location of the organization. If the company belongs to the privileged technological enterprises, then it can pay an annual tax at the rate of 6%.

    VAT in Israel

    It is important to clarify that VAT is created at each stage of the production process. The tax is paid to the budget as a variety of goods and services are sold. The standard rate is 17%. At the same time, the sale of fruits and vegetables is regulated by a 0% rate. This type of activity is referred to as tax free Israel.

    Foreign tourists traveling outside the country are entitled to a VAT refund for purchases made in the country. For what types of tourist services value added tax Israel is not included:

    • rental of transport for travel;
    • guide-interpreter services and organization of excursions;
    • booking accommodation in hotels;
    • accommodation on the territory of the hostel.

    VAT is not refunded for the provision of these services, since it is not included in the price. VAT is refunded provided that the purchase amount is about $ 10. As the amount increases, the refund percentage decreases. For example, 17% will be refunded from a purchase worth $ 100, and 13% from the amount paid for goods up to $ 250.

    If a tourist has been provided with medical services on the territory of the country, then according to the legislation he will be able to refund VAT from the cost of services. However, in this matter it is necessary to remain vigilant: in practice, only the Change Place company returns the money. You need to make sure that the medical institution has a contract with this organization.

    Excisable goods are: fuel, cigarettes, alcohol. Representatives of the tax services do not require mandatory registration of importers of these goods to transport them through customs.

    Property Taxes in Israel

    Mandatory for all Israelis is the land tax (arnona). Even residents of apartment buildings pay it. The payment is calculated taking into account the area of the property that belongs to the taxpayer. The amount of tax differs in different cities, its calculation is carried out by municipal authorities. The fee can be paid at a time (once in the reporting period) or once every two months.

    For reference, the highest bid is used to calculate payments for residents of Jerusalem. It is equal to 74 shekels per square meter of area per year. Arnona is the main source of replenishment of the budget of municipalities.

    If the apartment is rented out, the tenant is obliged to pay the tax. In this case, the owner is exempt from regular payments.

    Tax Benefits for Olim

    The purpose of introducing tax benefits for repatriates is to encourage people with Jewish blood to immigrate. Repatriates have significant advantages in this matter compared to the local population. They get credit points for 3.5 years. Within a year and a half, an immigrant will be able to use 3 points, then within the next year – 2 points, and in the third year of residence he will receive 1 point.

    According to the current legislation, new repatriates and elderly Israelis returning to their homeland are exempt from paying taxes that were received from foreign sources.

    The term for which the release is granted is 10 years. In some cases, the term may be extended twice. The law applies when the interest income from deposits made in the currency of another state is considered. It is interesting to note that the exemption applies to different types of income. These can be dividends, material funds received for renting housing, remuneration for copyrights.

    Tax Evasion and Penalties

    Offenders who do not comply with the norms of tax law are treated very strictly in the country. Those who intentionally violated the submission of reports will have to pay a fine of 1 million shekels.

    If it is revealed that there has been non-payment of taxes for 4 years, the fine will amount to 2.5 million. Violation of the law for 4 years is considered a crime, for it can be imprisoned for 10 years.

    If inaccuracies are found in the declaration, a fine is imposed on the taxpayer. If it is not paid in due time, then the accrual of penalties begins. Every Israeli is obliged to declare taxes. If there are difficulties with filling out the declaration, it is better to contact a qualified specialist at the time than to deal with the consequences of non-payment, which can be quite serious.

    The most common issues that concern people when it comes to taxation are written below.

    FAQ
    Who is required to pay income taxes in Israel?

    It must be paid by both employed citizens on hiring and self-employed.

    What is VAT and what is the current rate?

    It is usually referred to as a consumption tax. Before the 2015 reforms, it was 18%, at the moment the tax has been reduced to 17%.

    Are there any tax exemptions or benefits for new immigrants?

    Yes, they are exempt from the need to pay taxes and report on assets received in other countries. This right can be used for 10 years after entering Israel. Also, repatriates are entitled to preferential units when paying personal income tax. They can be used for 3.5 years.

    Do foreign companies pay taxes in Israel?

    If a legal entity is registered as a resident of Israel, then its profit, including those received worldwide, will be subject to corporate Israel tax on foreign income. Branches of foreign companies are taxed on income earned only on the territory of the country.

    Can I claim tax credits for charitable donations?

    Yes, they will definitely be provided if there are confirmations of charitable donations made.

    What is the Israeli Tax Filing Deadline?

    Taxpayers need to pay off all debts by April 30.

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