Taxes in Israel are a hot topic in political discussions, and many Israelis are not shy about expressing their frustration with the high tax rates. If you're a new immigrant, you might be eligible for tax reductions or even exemptions.
Individuals with tax residency in Israel must pay taxes on their entire income, whether earned within Israel or abroad. In contrast, others will only be taxed on their income generated within Israel.
To be recognized as a tax resident, a person must initially possess the appropriate visa or hold Israeli nationality, and their primary life commitments should be centered in Israel. This means their primary residence, family, and children's schooling are all based in Israel. However, there are also more straightforward criteria that tax authorities can use to determine tax residency. A person is considered a tax resident if they have spent a minimum of 183 days in Israel during the specific tax year or at least 30 days in that year and a total of 425 days in the country across the tax year in question and the two preceding years.
Ninety-nine countries, among them France, Belgium, Canada, Liechtenstein, Luxembourg, and Switzerland (for French-speaking nations), have entered into tax treaties with Israel. These agreements ensure taxpayers aren't subject to double taxation in both countries. Beyond the convenience they offer taxpayers, these treaties also serve as practical tools for monitoring and preventing tax evasion.
In Israel, there are various forms of tax: income tax, property tax, corporate tax, local tax, and VAT. On the other hand, there is no wealth tax.
Income tax in Israel
The income tax rate in Israel ranges from 10% to 50% based on a person's income. For employee income, the employer automatically withholds this tax directly from the wages without requiring individuals to file a separate tax declaration.
Tax for monthly correspondence in shekels and annual income in shekels:
- 10% for up to 6,790, for up to 81,480;
- 14% for 6,791–9,730, from 81,841–116,760;
- 20% for 9,731–15,620, from 116,760–187,440;
- 31% for 15,621–21,710, from 187,441–260,520;
- 35% for 21,711–45,180, from 260,521–542,160;
- 47 % for 45,181–58,190, from 542,161–698,280;
- 50% for more than 58,191, more than 698,281.
Israeli residents can enjoy a monthly tax reduction of 2.25 points, with women eligible for an additional 0.50-point deduction. New immigrants, on the other hand, are entitled to a more substantial reduction for a duration of four and a half years following their arrival in Israel. It's important to note that the years when a new immigrant is studying or serving in the army do not count toward this four-and-a-half-year period.
Overview in shekels of these tax deductions in Israel
Israeli residents are entitled to deduct 6,345 shekels from their income; women: 1,410 shekels; and Israeli women: 7,755 shekels.
For children aged 1 to 5; 4,230 shekels are deductible, in addition to the deduction for each child under 18, which is proportional to income.
Self-employed individuals are responsible for submitting their tax returns, personally or through an accountant. These tax declarations are required annually and must be filed for the preceding year no later than May 31st.
Tax on passive income in Israel
Passive income - dividends and capital - is also taxed.
Tax for annual income in shekels:
- 31% for less than 260,520;
- 35% for 260,521–542,160;
- 47% for 542,161–698,280;
- 50% for more than 698,281.
Dividends are taxed at a rate of 20%; capital gains from securities are also subject to a 20% tax, and the tax on the sale of real estate ranges from 20% to 25%.
Corporate tax or Mas Havarot in Israel
Companies in Israel are subject to a 23% tax rate, calculated based on their annual profits. This tax is paid in advance every month, with the advanced payments later deducted from the total amount owed. When the company's year-end financial statement is submitted, any remaining balance is settled with the tax authorities. If there has been an overpayment, the company may receive a refund. Israeli companies are taxed on their income both within Israel and internationally, while foreign companies are only taxed on the revenue they generate within Israel.
Shareholders can compensate themselves either through a salary or by receiving dividends. From a tax perspective, choosing the salary option tends to be more favorable because the tax rate on dividends can range from 25% to 30%, depending on individual circumstances.
Value-added tax in Israel
A standard VAT rate of 17% applies to all products except those meant for export. Companies with annual revenues under 1.5 million shekels pay VAT every two months, while those with incomes exceeding this threshold must pay it monthly. Companies can reclaim VAT on their expenses but are not required to pay VAT on their profits.
Property tax in Israel
In Israel, there are various forms of property taxation. The first type applies when purchasing real estate, the second when selling it, the third applies to rental income (as long as it exceeds a certain threshold, which is currently 5500 shekels), and the final one is the municipal tax, also known as Arnona.
The purchase tax in Israel is determined by the property's price. If the property's price is below 1,919,155 shekels (approximately $520,000), the buyer is exempt from the tax. For properties priced up to 2,276,360 shekels, the tax rate is 3.5%. For properties up to 5,872,725 shekels, it's 5%, and for those up to 19,575,755 shekels, it's 8%. Beyond this threshold, if the property price exceeds 19,575,755 shekels, the buyer must pay a 10% tax on the property's purchase price.
Rental income falls under the category of “passive income”. The municipal tax is determined individually by each municipality and takes into account factors such as the apartment's size and its location. The rates can differ from town to town and, in larger cities, even from district to district. While landlords are typically responsible for this tax, many pass it on to their tenants. It's crucial to clarify this arrangement when signing your rental contract.
New immigrants can access various tax benefits, making it crucial to declare their immigrant status when they start a job as salaried employees. One noteworthy advantage is that entrepreneurs who have their businesses established abroad will be exempt from corporate income tax in Israel for a duration of 10 years.
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