Israel Tax Update 2010

There are some significant changes to the Israeli tax system in 2010. Israel's corporate income tax rate is now 25% down from the previous rate of 26%. The corporate tax rate will be further reduced to 24% in 2011 and eventually down to 18% in 2016.

Individual income tax rates in 2010 are 10% - 45%. The top marginal income tax rate for individuals will be reduced to 44% in 2012 and eventually down to 39% in 2016. There are reduced tax rates for passive income, e.g. flat rental and interest.

Personal Income Tax

The basic tax brackets for individuals in 2010 are presented in the following table:

Tax % Income (IS)
10% 1-57,240
14% 57,241-101,640
23% 101,641-152,640
30% 152,641-219,000
33% 219,001-472,080
45% 472,081 and over

The tax brackets for passive income are presented in the following table:

Tax % Income (IS)
30% 1-152,640
33% 152,641-472,080
45% 472,681 and over

Corporate Tax

Corporate tax, including income tax and corporate tax is fixed at the rate of 25% in 2010 down from the previous rate of26%. This rate refers to the undistributed profits of the corporation. In certain cases, a reduced rate of tax is payable or an exemption granted, mainly to certain industrial companies defined as "approved enterprises".

Companies investing in national priority zones (called Approved Investments) can enjoy either grants or tax benefits. The tax benefit option is divided into three tracks, the "alternative track", "the "Ireland track" and the "strategic track". Companies under the tax option can enjoy 0%-20% corporate tax rate and 4%-15% tax rate on dividends distributed, depending on the location of the priority zone and the percentage of the foreign shareholders in the investing company.

Capital Gains

Individuals pay 20% for sale of assets bought after January 1, 2003. Companies pay the general rate of 25%. Sale of non-traded shares bought after January 1, 2003 is taxed at 20% for individuals. When the seller holds 10% or more of the shares sold the tax rate is 25%.

Sale of shares traded in the stock market, regardless of the date of purchase, is taxed at the same rates as for non-traded shares, for both individuals and companies. Capital gain of non-residents from the sale of shares of Israeli companies bought from January 1, 2009 onwards is tax exempt, subject to certain terms.

Dividend Income

Individuals normally pay 20% tax for dividend income, but pay 25% when the shareholding is 10% or more. Dividends between two Israeli companies are tax exempt. Dividends received by an Israel company from a foreign company are taxed at 25%.

By September 30, 2010 when an Israeli company pays dividends related to the retained earnings of the company prior to December 31, 2002, the dividend is subject to a final 12% tax rate, instead of the general 25% rate. The reduced 12% tax rate is subject to certain terms, e.g. the shares were bought before December 31, 2002 and the salary income of the shareholder receiving such dividend must exceed, in each of the years 2009-2012, his average 2007-2008 salary income from the company paying the dividends.

Israel Social Security

Social security payments are subject to a monthly ceiling of ILS (Israeli New Shekel) 76,830.

The top rates are:
• Employer - 5.43%
• Employee -12.0%

The new monthly ceiling of IS 76,830 (which is double the prevailing ceiling up to August 1, 2009) will be in force until December 31, 2010.

Israel Double Taxation Agreements

In January 2010 Israel signed three new double taxation agreements with Estonia, Taiwan and Vietnam. In addition Israel has previous double tax agreements with 48 other counties. Two of the previous agreements with Argentina and Bulgaria are not in force yet.

Value Added Tax

From January 1, 2010 the new standard value added tax (VAT) rate in Israel is 16%, compared to the previous 16.5%. The VAT rate will be further reduced to 15.5% starting January 1, 2011. There are no reduced VAT rates in Israel.

From January 1, 2010 companies with annual turnover exceeding IS 4 million are obliged to online reporting to the VAT authorities. The report must include details of each invoice, including the corporate and VAT registration number of each customer/supplier. From July 1, 2010 the online reporting would also include non-profit organizations employing more than 600 employees in 2009. From January 1, 2011 the online reporting would include any business with annual turnover exceeding IS 1 million. From January 1, 2012 all businesses would be subject to such reporting.