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Tax considerations for private clients
Residence and domicile
How is residence/domicile determined for tax liability purposes in your jurisdiction?
According to the Income Tax Ordinance, individuals are considered Israeli residents for tax purposes if the centre of their life is located in Israel. What constitutes the ‘centre of their life’ is vague, as the ordinance refers to a range of facts and circumstances, with no clear method of determination. As a rule, the ordinance provides a number of indications which can be used to determine a person’s main domicile, including:
- the location of their permanent home;
- where they and their family live;
- the location of their regular or permanent place of business or employment;
- the location of their active and substantive economic interests; and
- the location of organisations, unions or institutes of which they are members.
The centre of life test is circumstantial and factual (ie, the determination of an individual's centre of life is based on their specific circumstances and factual background). In addition, according to Israeli court decisions, it is mainly the objective rather than the subjective characteristics (eg, the place where the individual sees themselves as resident) that are considered when determining the location of their centre of life (although subjective characteristics are not ignored).
Along with the centre of life test, Israeli legislation stipulates two refutable presumptions, whereby an individual will be deemed an Israeli resident if, during the tax year, they spent:
- 183 days or more in Israel; or
- 30 days or more days in Israel and the total period of their stay in Israel in that tax year and the two preceding years was 425 days or more.
For this purpose, under the ordinance, a ‘day’ includes part of a day (ie, entrance and exit days are included in the day count).
Describe the income tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
Israeli resident individuals are subject to tax on their worldwide income from the following sources:
- business and vocation;
- dividends and interest;
- pensions and annuities;
- rental income;
- gains or profits derived from agriculture;
- patent and copyright;
- capital gains;
- earnings or profit from gambling, lotteries or prizes; and
- any other source not excluded under tax law.
Non-residents are subject to tax only on income derived from an Israeli source. This taxation may vary according to any applicable double-taxation treaty.
The income tax system for individuals in Israel is progressive and rates depend on the extent of the individual's personal income. As a rule, the highest marginal rate for ordinary income earned by an individual is 47% (as at 2018). An additional 3% surtax will be added for every individual taxpayer whose aggregate income, from all sources, exceeds NIS640,000 (adjusted yearly for inflation (NIS641,880 for 2018)), with respect to the part of the income which exceeds NIS640,000.
The following types of income are subject to lower rates:
- Dividend income – the rate of tax on dividends for shareholders who hold 10% or more of the company’s means of control (substantive shareholders) is 30% (25% otherwise). Dividends from certain companies that benefit from a tax incentive for industrial or technological companies may have lower rates.
- Interest income – interest income can be taxed at a reduced rate of 15% (on non-indexed, NIS denominated loans) or 25% if certain conditions are met; otherwise, the interest is taxed as ordinary income at the marginal rate (up to 50%).
- Rental income – income from the rental of real estate is taxed according to one of several alternatives:
- Rental income can be taxed at the ordinary income tax rates.
- An individual who leases an Israel-based residential apartment can elect to pay tax at a rate of 10%, provided that they claim no deductions for expenses or depreciation in connection with said rental income.
- Individuals may also be eligible for exemption on rental income from residential property, provided that their income does not exceed NIS5,030 per month.
- An Israeli individual receiving rental income from foreign-based real estate can elect to pay tax at a rate of 15%, but is precluded from deducting expenses, other than depreciation, or claiming credits for foreign tax.
The reporting implications vary for the various alternatives.
Israeli residents are entitled to personal tax credits against their tax liability according to their personal status. As of 2018, each point is worth NIS216 per month, with resident individuals being entitled to a minimum of 2.25 points. This does not apply to foreign residents.
Individuals are not always required to file tax returns in Israel; however, individuals receiving income exceeding the amounts permitted under the tax regulations must submit an annual return. Other circumstances can subject an individual to filing requirements – for example:
- holding 10% or more of a corporation’s means of control;
- having foreign bank accounts that exceed a certain balance; or
- holding foreign securities.
Special provisions apply to individuals who are Israeli residents and qualify as new immigrants or veteran returning residents. These individuals are entitled to an exemption from Israeli tax and reporting obligations on foreign-sourced income and on capital gains from the sale of foreign assets for a 10-year period from the date of their immigration to Israel.
The tax year is concurrent with the calendar year, commencing on 1 January and ending on 31 December each year. The filing deadline for tax returns is usually:
- 31 May of the following year for individuals filing returns online; and
- 30 April of the following year for others.
Extensions for filing can be requested from the Israeli Tax Authority.
Under the Income Tax Ordinance, individuals are also subject to exit tax when they cease to be Israeli residents, which is based on a deemed sale of their worldwide assets one day before they cease to be resident. At the taxpayer's discretion, the tax can be paid either when the individual leaves Israel or when the asset is sold, at which time the tax will be calculated on a linear basis on the appreciation for the period in which the individual was resident in Israel.
Describe the capital gains tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
Capital gains are generally subject to a fixed rate of 25% (30% for individuals who are substantial shareholders). An additional 3% surtax may also apply.
Inheritance and lifetime gifts
Describe the inheritance and gift tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
There is no inheritance or estate tax in Israel and death is not a taxable event. Nonetheless, heirs obtain a carry-over basis on the bequeathed asset (ie, the built-in gain in the asset will be subject to tax when the successors sell the asset).
Bona fide cash gifts are not subject to gift tax. Gifts of other assets to family members or others in good faith are not taxable, provided that the recipient is not a foreign resident, in which case the gift is treated as a deemed sale and subject to capital gains tax. Nonetheless, the individual who receives the gift obtains a carry-over basis on the asset.
What taxes apply to individuals’ acquisition and disposal of real estate in your jurisdiction?
Capital gains on the sale of real estate property in Israel are taxable under the Land Appreciation Tax Law, unless income tax is payable on the sale as business income. Upon the disposal of real estate located in Israel or of shares in a real estate association, the seller is subject to appreciation tax under the law. The tax is imposed on the appreciation in the value of the property with respect to the period between purchase and sale (the portion of appreciation reflecting the increase in the Consumer Price Index is exempt from tax). Individuals are subject to 25% land appreciation tax (or 30% in the case of a transfer of shares in a real estate association in which the individual is a substantive shareholder). An additional 3% surtax applies on the part of the capital exceeding NIS641,880 as at 2018. A foreign resident with no residential property in their country of residence (supported by a specific approval from the tax authorities) may be entitled to a complete tax exemption on the sale of residential property where the value does not exceed NIS4.5 million (as at 2018).
Upon the acquisition of real estate located in Israel or of shares in a real estate association, the buyer is subject to purchase tax, calculated as a percentage of the purchase price. The rate depends on the nature of the sold asset (ie, whether it is a residential asset) and is generally between 5% and 10%.
Non-real estate assets
Do any taxes apply to the acquisition and disposal of other assets apart from real estate?
The disposal of other assets (ie, not real estate) is subject to capital gains tax under the Income Tax Ordinance.
Other applicable tax regimes
Are any other direct or indirect tax regimes relevant to individuals?
Value added tax
In the case of individuals who are considered dealers for value added tax (VAT) purposes, VAT will be applied (currently at the rate of 17%). An individual who sells an asset or provides a service during their business may be regarded as a dealer for tax purposes.
Israel imposes customs duties and purchase tax on certain imported goods.
Individuals must also pay national insurance (social security) and health insurance contributions. The current rates (which depend on an individual’s income) are as follows:
- resident employees – 3.45% to 12%;
- employers of resident employees – 3.45% to 7.5%;
- non-resident employees – 0.04% to 0.87%;
- employers of non-resident employees – 0.49% to 2.55%;
- self-employed individuals – 5.97% to 17.83%;
- individuals with additional income – 9.61% to 12%; and
- unemployed individuals – fixed amount of NIS172 per month.
Local municipalities impose a local property tax paid by each household. The rate varies widely and depends on the municipal authority and property location. The amount is determined according to the property’s size.
Are there any special tax planning considerations for individuals with a link to your jurisdiction?
There are many tax planning considerations depending on the situation – for example, the potential creation of a permanent establishment. New immigrants benefit from an exemption from tax and reporting obligations on their foreign (non-Israeli) income for 10 years from their date of arrival. However, the Income Tax Ordinance provides no exemption for a permanent establishment in Israel. Accordingly, when a new immigrant operates from Israel for a foreign company or makes a significant investment from within Israel, this activity may create a permanent establishment – meaning that part of the foreign company’s income or that which arises from said investments could be subject to tax in Israel – and will therefore require appropriate planning.
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