All questions

Direct taxation of businesses

i Tax on profitsDetermination of taxable profit

Israeli companies are taxed in Israel on their worldwide income. Foreign (i.e., non-Israeli) companies are subject to tax in Israel only with respect to their Israeli-sourced income.

The tax base for the Israeli corporate tax is the company's net income as determined under Israeli accounting principles and adjusted in accordance with the provisions of the Ordinance and regulations. As a general rule, Israeli companies must report their income for accounting and tax purposes according to the accrual method of accounting. Corporate tax is generally assessed for the calendar year.

Expenses are deductible only if they are incurred in the production of taxable income. Expenses that were not incurred in the production of income, such as private expenses, are not allowed as a deduction.

In most cases, the assets of a business are depreciated for tax purposes pursuant to the straight-line method of depreciation. The annual depreciation amount is calculated based on a percentage of the cost of the asset, depending on the type of asset. Subject to the aforementioned general rule, depreciation deductions are allowed only with respect to assets used in the production of income.

There are differences between the accounting rules and the tax rules, which are set out in the Ordinance and the regulations. The principal differences are as follows:

  1. rate of depreciation and amortisation;
  2. certain kinds of expenses being limited in respect of the ability to be deducted from income, such as expenses attributable to overseas travel, car expenses and similar expenses that are determined under relevant regulations; and
  3. accounting income that derives under the grouping rules being eliminated for the purpose of the tax return.
Capital and income

Special rules apply in the case of the recognition of capital gains and losses by Israeli companies. These rules are set out in Part E of the Ordinance. The corporate tax rate is equal to the tax rate imposed on real capital gains derived by a company. As of 2018, this tax rate is 23 per cent. Capital gains and losses arising from real estate transactions located in Israel (including real estate associations) are taxed in accordance with the Real Estate Taxation Law (Capital Gains and Purchase) 1963.


The losses a company recognises from a trade or business may be used to offset any other income recognised by the company in the same tax year. Ordinary losses can be used against capital gains; however, capital losses are not allowed to be used against ordinary income. The losses of a company from foreign sources can only be used against foreign-sourced income, pursuant to a 'basket' system (e.g., passive loss can only be used to deduct passive income). Net operating losses of a company may be carried forward; however, they are not allowed to be carried back. There is no limitation on the carry-forward period.

While net operating loss carry-forwards survive a company's change of ownership, the courts in Israel held that when the sole objective of the acquisition of the company's stock was the use of its loss carry-forwards, such losses will not be allowed to be used against income recognised by the company following the change of ownership. The courts based their decisions on the anti-avoidance provisions of Section 86 of the Ordinance, which is discussed below.


The tax rate on corporate profits in Israel decreased to 23 per cent in 2018. The rate of corporate tax on profits derived from a 'preferred enterprise' may be either 7.5 or 16 per cent (depending on the location of the enterprise), and for a 'special preferred enterprise' – either 5 or 8 per cent, as further discussed below. Income derived from a 'preferred technological enterprise' will be subject to a tax rate of 7.5 per cent or 12 per cent (depending on the location of the enterprise), and a 'special preferred technological enterprise' will be subject to tax rate of 6 per cent (regardless of its location).


Israel has a single tax authority that is responsible for collecting both the direct and indirect taxes. A municipal tax is imposed on real property by local authorities.

Corporate tax is generally assessed for the calendar year; however, the greater part of the tax is paid during the tax year through estimated advance payments. The final tax payment is made, together with the filing of the annual tax return, by 31 May following the end of the tax year. It is possible, in certain circumstances, to obtain an extension for the filing and payment deadline.

Within four years, and in certain circumstances five years, from the year in which a return was filed, the assessing officer may audit the company's tax return. The assessment of the officer may be appealed to another officer within the same local office. The decision of the second officer is subject to appeal to the district court. The decision of the district court may then be appealed to the Supreme Court.

Tax grouping

Consolidated tax returns are not allowed under Israeli law; an exception applies, however, in the case of an Israeli-resident 'industrial' company or a company that is a holding company of industrial companies. An industrial company is a company that receives at least 90 per cent of its revenues from an industrial facility engaged in manufacturing activities. An industrial company, or an industrial holding company, may file a single consolidated tax return in respect of itself and its subsidiaries, which are by themselves industrial companies, provided that all the industrial companies included in the consolidated group are part of a single assembly line or manufacturing process. An industrial holding company that has subsidiaries engaged in different assembly lines is entitled to consolidate its return only with the company or companies having a single assembly line in which it has the largest capital investment.

ii Other relevant taxes

Israel has a value added tax (VAT) charged on transactions in Israel and on the importation of goods into Israel, the standard rate of which is currently 17 per cent (as from 1 October 2015). A transaction that is a sale of goods is deemed to take place in Israel if, in the case of a tangible asset, it was delivered in Israel or exported, and if, in the case of intangible assets, the seller is an Israeli resident. Certain transactions are subject to a zero-rate tax (principally exports of goods and services) or exempt (such as certain financial services and certain real estate transactions). Financial institutions are subject to a profit tax and a tax on paid salaries (salary tax), both at a rate of 17 per cent, subject to certain adjustments. Businesses are entitled to recover input VAT costs in connection with goods or services used by the business to create their taxable (including a zero-rated) supply.

Israel imposes customs duties on certain imported goods and sales tax on certain imported and domestic goods. Israel also imposes various duties, such as trade levies and dumping levies, pursuant to the Trade Levy Law.

Israel also imposes an additional 3 per cent 'wealth tax' on taxable income and gains in excess of 640,000 new Israeli shekels (adjusted yearly for inflation, 641,880 new Israeli shekels as of 2018).