Updated: Jan 11, 2021
Tax laws are often difficult to grasp and even harder to navigate. At GPI we aim to keep our finger on the pulse of this developing area and help our clients unscramble the taxation laws of today.
Like the Israeli judicial system, the Israeli tax system has adopted many core principles from the UK tax system, with a number of considerable adjustments. The most recent adjustment came into effect in 2003, when a large tax reform was implemented, subjecting Israeli residents to tax on all sources of income and investments, whether drawn from Israel or abroad.
Corporate Income Tax
Israeli resident companies are subject to tax on international gains and profits, with the benefit of some tax credits granted for overseas taxes (depending on the country).
Conversely, a non-resident company is subject to tax on Israeli generated profits alone, including income drawn from a permanent Israeli establishment or income amassed and produced in Israel.
In January 2016 - as a way of encouraging growth and competition among Israeli business, Israeli corporate income tax was reduced from 26.5% to 25%. However, certain investments and companies are eligible for still further reduced corporate income tax rates depending on the type of enterprise. (For example, a Special Priority Enterprise is eligible for a lower tax rate ranging between 5-16% depending on meeting certain criteria).
Realized Gains & Foreign Investors
A realized gain is classified as the result of selling an asset at a greater price than the purchase price, or as an asset which is sold at a greater price than its carrying value.
While Israeli investors are taxed upon the realization of gain, foreign investors are not taxed in the Israeli capital market. With this in mind, foreign investors do not pay any tax on capital gains on bonds or stocks. However, both Israeli and foreign investors are still required to file taxes.
In all cases, foreign investors are expected to report their Israeli investments to their home country and pay taxes in their country of residence, fulfilling similar duties required when declaring local investments.
Tax on Mutual Funds
Foreign investors are immediately taxed, usually by the brokerage themselves, for gains procured from mutual funds and dividend payments on stocks that pay dividends. Israel's many tax treaties with a growing list of countries has opened up the opportunities available for foreign investors living in Israel by extending tax credits for taxes paid in Israel, avoiding the situation of being taxed twice on the same income.
It's possible to see Israel's taxation laws in the bigger, developing picture of the Israeli story. A growing country, founded on an entrepreneurial spirit that fosters growth, promotes development and seeks to attract foreign investment to its shores.
While local criticism is often levied at the unfair disparity between the benefits afforded to foreign and local investors, when comparing the Israeli investment and tax platform to that of other developed countries, it's widely considered that Israel is more investor-friendly for everyone. That said, like most things in Israel and beyond, there is room for continued improvement, for both sides.
For help navigating your investment journey in Israel, contact GPI