israeli tax systen sando
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The Israeli tax system
and tax benefits for
foreign residents Eyal Sando – C.P.A. (Isr.), LL.B.
02.04.2012
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The Israeli tax system
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The Israeli tax system - General
• As of 2003, income Tax in Israel is levied
based on a personal method. Accordingly,
Israeli residents are liable to tax in respect
of their income worldwide.
• Foreign residents are also liable to tax in
Israel with respect to income generated or
derived therein (according to source rules)
and subject to conventions for prevention of
double taxation between Israel and the
relevant countries.
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Israeli resident - Individuals
• An individual is considered an Israeli resident if his “center of life” is located therein; in this regard, the following considerations are observed:
– location of his permanent home (individual & family members).
– Location of his economic and social connections.
– Location of his permanent or usual employment/ business activity.
– Location of his active and substantive economic interests.
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Israeli resident - Individuals
• The Israeli law sets 2 legal presumptions - an individual's “center of life” is located in Israel in the following cases: – During the tax year he was present in Israel for 183 days
or more, or -
– During the tax year he was present in Israel for 30 days or more, and his total presence in Israel during that year and 2 previous years amounts to 425 days or more.
• Foreign residency from “Day 1”, if during the two first tax years the individual was present in Israel for less than 183 days, and his “center of life” was outside of Israel for the following 2 tax years.
• Marginal Tax rates: 48% (from 2012).
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Israeli resident – Body of persons
• A person other than an individual is considered an
Israeli resident if either one of the following is met:
– It was incorporated in Israel.
– the “management and control” over its business is
exercised within Israel.
• Corporate tax rate:
– 25% (from 2012).
– This tax rate applies also to Capital Gains.
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Rental income from Israel
• Tax exemption for rental income from apartments in Israel up to 4,910 NIS (2012).
• The income tax liability on apartments rental fees is calculated on the basis of one of the following alternatives:
– Rental income is calculated after deduction of expenses and taxed as business income with the usual (progressive) tax rates - over 30% rate.
– Tax is payable at the rate of 10% of gross rental income (without deducting expenses).
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Overseas Rental income
• The tax liability of an Israeli resident individual
with respect to rental income from real property
located outside of Israel, is determined on the basis
of one of the following:
– progressive tax rates applied to net rental income
(deduction of permissible expenses). FTC is allowed.
– flat rate of 15% on rental fees after deduction of only
depreciation expenses. other expenses incurred in
generating the rental income are not deductible. FTC is
denied.
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International Taxations
rules
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Controlled Foreign
Corporation (CFC)
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Controlled Foreign Corporation (CFC)
General • Designed to prevent the deferment or
avoidance of taxes through the use of foreign corporations, with respect to passive income.
• An Israeli resident who has control (10% or more of any of the means of control) over a controlled-foreign-corporation, is subject to tax on his pro-rata portion of that corporation’s “undistributed profits” as though they were actually distributed to him as dividends at the end of tax year - Deemed dividend.
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Controlled Foreign Corporation (CFC)
Definition • A “controlled foreign corporation” is a Foreign
resident body-of-persons that meets the following:
– Its shares or other interests are not traded on a stock
exchange.
– Most of its income or profits during the tax year are
passive. In this regard, a specific rule is set for a
corporation held by a business company.
– The tax applied to its passive income overseas does not
exceed 20%.
– More than 50% of any of the corporate’s “means of
control” are held, directly or indirectly, by Israeli
residents.
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Controlled Foreign Corporation (CFC)
Passive Income
• “Passive Income” - an income being one of the
following, except if it is of a business nature:
– Interest or linkage differences.
– Dividends.
– Royalties.
– Rental income.
– Consideration for the sale of an asset which was
not used as part as the corporation’s business.
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Controlled Foreign Corporation (CFC)
“Undistributed Profits”
• Profits originating in passive income of the company, except for profits originating from dividends received from another foreign corporation whose income was taxed at a rate that exceeds 20%, that were not paid to shareholders during the tax year
• The profits are calculated according to domestic tax laws of the foreign company’s state of residence, except if it is not a “treaty country“, in which case the profits will be calculated according to accounting principles accepted in Israel (IFRS).
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Controlled Foreign Corporation (CFC)
Holding structure - example
CY
B
65%
50% 50%
35%
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Controlled Foreign Corporation (CFC)
Holding structure - example
BV
countryB
100%
100%
CY
100%
15%
Domestic Tax laws applicables
Israeli (int'l) accounting principles applicables
Benefits regarding Cyprus internal laws, treaties and EU directives
Deemed tax credit while applying CFC rules: “screen saver”
0%
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Foreign Vocation
Company (FVC)
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Foreign Vocation Company (FVC)
General
• A foreign body-of-persons that meets all the following:
– If it is a company, not more than 5 individuals control the company.
– 75% or more of any “means of control” are held, directly or indirectly, by Israeli resident individuals.
– Most of the controlling members or their relatives, carry on “a special vocation” on behalf of the corporation.
– Most of its income or profits derive from “a special vocation”.
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Foreign Vocation Company (FVC)
Foreign Vocation income
• Income generated by FVC from activities
preformed by a controlling members
(through his relative or a company under his
control) shall be taxed in Israel as income
generated in Israel.
• The FVC is considered an Israeli resident for
domestic tax purposes.
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Foreign Vocation Company (FVC)
Holding structure - example
High-tax jurisdiction
CY
Management\ consulting fees
CY FVC
Alert
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Indirect (underlying) tax credit for an
Israeli company • Credit for the tax paid on income in which a dividend
was shared, under certain conditions:
– Corporate Tax debit on the “included dividend”.
– Chaining maintenance up to a level of a
subsubsidiary company subjugated to the
minimum maintenance rate: 25% in the subsidiary
company and 50% in the subsubsidiary company
(by the subsidiary company).
• Deemed underlying foreign tax credit is granted for
CFC purposes.
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Israeli withholding tax
rates to foreign
residents
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Israeli withholding tax rates to foreign
residents
• General rule: 25% withholding tax on any taxable income paid to non-residents.
• Dividends:
– General rule: 25%.
– Controlling member (10% of the means of control): 30%;
• Interest:
– General rule: 25%.
– Controlling member (10% of the means of control): the usual (progressive) tax rates - over 30% rate
• Lower withholding tax rates according to tax treaties.
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IL
No branch tax in Israel
CY
Activity in Israel
Israeli CIT
25%
25%
0%
Israeli WTT on dividends
CY
Activity in Israel (PE)
Israeli CIT
0%
25%
0%
NO WTT
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Tax benefits for foreign
residents
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Categories of exemptions &
benefits • Exemption from tax on capital gains;
• Exemption from tax on investment income;
• Law for Encouragement of Capital
Investment from 1959;
• Participation Exemption.
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Law for Encouragement of Capital Investment
general overview
• Israel encourages investments from both Israeli and
foreign residents, by offering a wide range of
incentives and benefits through a number of laws and
regulations.
• In order to promote weak economic regions within
Israel, greater benefits in “priority regions”. However,
enterprises throughout the country may be eligible
for benefits if they comply with the relevant criteria.
• Significant amendments have recently been enacted
into the law (amendment no. 68).
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Law for Encouragement of Capital Investment
Benefits and conditions
• Lower tax rates compared to the ITO:
• Lower tax rate on dividends distributions (15% instead of
25%-30%);
• Accelerated depreciation expenses;
• Possibility of entitlement for both grants and tax benefits;
• The law applies also to indirect exporters;
• Conditions: industrial activity, export requirement (25% of
the revenues), and more.
Other Periphery Year
15% 10% 2011- 2012
12.5% 7% 2013- 2014
12% 6% from 2015
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Exemption for capital gains
• Gain derived from the sale of securities traded in Israeli stock exchange, provided the gain was not derived within a permanent establishment of the seller located in Israel (doesn’t apply to short-term bonds issued by the Israeli Government).
• Gain derived from the sale of Israeli resident company’s securities traded in a foreign stock exchange, provided the gain was not derived within a permanent establishment of the seller located in Israel, the security was purchased after registration for trade and other conditions.
• Gain derived from the sale of shares in an Israeli resident company who - at the time of issuance of such shares - was approved as an “R & D Company”.
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Special exemption to boost
investments - Art. 97(B3)
• Special exemption from Capital Gain in relation to investments in Israeli non-traded resident companies (or foreign companies whose main assets are interests in Israeli assets). The exemption is excluded for:
– Gain derived within a PE of the seller in Israel.
– Gain derived from the sale of a Real Estate company*
* any security of a company which - at the acquisition date of that
security and two years preceding its sale - the major value of its assets comprised of interests in real estate located in Israel or in an Israeli real estate company.
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Special exemption to boost
investments • Conditions - Acquisition between 1.1.05 - 31.12.08.
– The seller reported the sale to the tax authorities of country of which he is a resident.
– The seller was a resident of a treaty country (both at the purchase and sell date), as follows: • An individual purchaser - was a resident of a treaty country for at
least 10 years prior to acquisition;
• A foreign entity purchaser - at least 75% of “controlling interests” over such entity were held, directly or indirectly, by individuals who were residents of a treaty country for at least 10 years prior to acquisition.
• Conditions - Acquisition after 1.1.2009:
– The purchaser was a foreign resident (including any non-treaty country).
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Exemption for interest paid to foreign
residents • interest, discount fees and currency differences
income, which are generated by a foreign resident from Israeli traded bonds and debentures may be tax exempt
– subject to certain conditions, including the requirement that the foreign resident would not hold a "substantial shareholding" (10% or more);
– doesn’t apply to short-term bonds issued by the Israeli Government.
• Interest paid to a foreign resident for a foreign currency deposit in an Israeli bank is exempt
– provided certain conditions are met.
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Dividends paid to foreign
residents • Dividends from traded and non-traded
Israeli securities - It should be emphasized
that generally, dividend income of a foreign
resident from Israeli securities is taxable in
Israel at a rate of 25% or 30%, depending on
the rate of participation.
– Lower withholding tax rate may apply according to
tax treaties.
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Article 16A of ITO
• The Minister of Finance is authorized to return income
tax, fully or partly, to a foreign resident if the tax
payable in Israel is not granted to his as a credit
against the tax due in his state of residence.
• Application to foreign investors in investment funds
operating and investing in Israel:
– VC Funds- Full exemption on all kind of income (Capital
Gain, dividends, interest);
– Private Equity Funds- Exemption on Capital Gain
(exemption on dividends and interest only to income
attributed to “Exempt Foreign Investor”).
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Anti abuse section – 68A
• special anti abuse
section to prevent
“Israelis” from abusing
such benefits:
• If the foreign resident
company is owned,
directly or indirectly, by
Israeli residents, the
foreign resident is not
entitled to benefits. IL
CY
No exemption granted
25% or more
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Israeli Participation
Exemption regime
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Participation Exemption
• A participation exemption regime for Israeli
holding companies, under specific conditions.
• An Israeli holding company is exempt from tax
on the following:
– dividends received from foreign “active”
subsidiaries;
– capital gains tax upon sale of such subsidiaries;
– interest on bank deposits in Israel and on income
(interest, dividends, and capital gains) from
securities traded in Israeli stock exchange.
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Participation Exemption - benefits for
foreign investors
• Foreign shareholders benefit from a reduced
withholding rate on dividends distributed by
the Israeli holding company – only 5%.
• Foreign shareholders may apply for tax
exemption on capital gain upon the sale of the
Israeli holding company’s share under Art.
97(B3) - special exemption.
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Participation Exemption
Participation exemption company
Foreign “active” subsidiaries
More than 10%
5% 25-30%
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Participation exemption
• Definitions: “Israeli holding company”
– Registered in Israel, Managed and control from Israel.
– Privately owned and not tax transparent.
– Not a financial institution.
– Its total investment in foreign subsidiaries, throughout at
least 300 days of the tax year, amounts to at least 50 million
NIS.
– 75% or more of its assets constitute the subsidiaries.
– The company formally requests to be recognized as a
holding company.
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Participation exemption
• “Subsidiary” for participation exemption:
– Resident of a treaty country.
– Resident in non treaty country - provided that the corporate
tax rate on business income in that country is 15% or more
(at time the shares are purchased).
– The Israeli holding company holds at least 10% of profit
rights in the subsidiary for 12 consecutive months.
– At least 75% of the subsidiary’s income from sources outside
Israel is business income.
– Israeli assets or Israeli income of the subsidiary may not
comprise more than 20% of the subsidiary’s total
assets/income, respectively.
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