The Israeli taxation system is quite complex. The Israeli tax system is based manly on the characteristics of the individual producing the income and the income’s origin. The tax system separates the individuals taxation and the company’s taxation, where as the individual is committed to a progressive tax rate (the tax rate is 48% as of 2013), a company is obliged to a fixed tax rate of 25%. More over, there are other income sources with a limited tax rate or tax exempt from incomes from interests, dividends, leasing etc. Seeing every cooperate entity (an individual, company, partnership, Voluntary association etc) has a different taxation method it is recommended to consult with a tax expert before establishing a business in order to examine the company’s activity and to determine a low tax business course.
Before the amendment to section 132 to the IRS directive, the Israeli residents were liable for their income produced or derived from Israel only, a method taxing in Israeli territory only. Due to global development and international trading, it has been determined that as of 2003, an Israeli resident will be taxable for all his income worldwide, weather the income was produced in Israel or not., meaning the tax obligatory is based on the person producing the income. It should be mentioned that foreign residents before and after the amendment are taxable in Israel only for their income produced in Israel.
But things aren’t so simple and often so complicated that even tax experts have difficulties identifying the income origin and understanding which country is entitle to the tax payments, further information on this subject can be found in our international taxation chapter.
Another observation regarding the Israeli tax system is the origin of income such as: business profits, interests, dividend, capital gain etc. for every income source there are different taxation rules and tax rates, deduction of expenses, offsetting loses etc. seeing these issues are so complex there are no conclusive answers and every case must be studied individually.
The company taxation method – The taxation method for companies is a 2 step method, the income of the company is taxed on a fixed rate of 25% and when the company shares its profits with the share holders who are individuals the tax rate for the dividend is 30%. The distribution of dividend among companies in Israel does not cause a tax liability, meaning dividing dividends between a company and its parent company if they are both in Israel does not include a tax debt. The share holders of the company can withdraw the company’s profits in one of the following alternatives:
- Distributing dividend – A fixed tax rate of 25%. Dividend distributed to a significant share holder is taxed by 30%.
- Withdrawing a salary – An individual fixed tax rate.
- Management fee withdrawal – An individual fixed tax rate.
- Selling the company – A fixed tax rate of 25%, capital gain for a significant share holder is a tax rate of 30%.
Taxable income from a company is taxed by a rate of 25% from the business’s profits, interests, rent or capital gain (Updated for tax year 2013).
The individual taxation method – An individual taxable in Israel for his personal earnings will be taxed 48%, any income over 800 thousand NIS will be taxed an extra 2%. The individual’s income taxable in Israel that isn’t from personal earnings will be taxed starting from the fourth tax bracket, meaning the income will not be taxed according to the lover tax brackets and will subject to an initial tax rate of 31% (Updated for tax year 2013).
More over the individual’s income from interest, dividend, capital gain, rental income etc might be taxed in lower tax rates of benefit from a tax exempt.
More on this subject further on, it is recommended t update on these matters in our professional articles.
The Yanai Amir accounting office will be glad to give you personalized counseling regarding taxation methods best suitable for your business.