Income taxes in Israel are a fundamental aspect of financial planning for both residents and non-residents alike.
Understanding the intricacies of the Israeli taxation system is crucial to ensuring you meet your legal obligations and optimize your financial resources.
This blog aims to demystify and provide essential insight into the Israeli income tax system, enabling you to make informed financial decisions.
If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).
This article isn’t formal tax or legal advice, and the facts might have changed since we wrote it.
Table of Contents
What is the general structure of income taxes in Israel?
Israel operates under a progressive income taxes structure, much like many other countries worldwide.
The term “progressive” refers to the fact that the tax rate increases as the taxable income increases. There are six tax brackets, ranging from 10% to 50%.
Income taxes in Israel is levied on an individual’s worldwide income, meaning Israeli residents are taxed on their income from both local and foreign sources.
Non-residents, on the other hand, are taxed only on their Israeli-sourced income. It’s essential to understand that an individual’s residency for tax purposes is determined based on the center of life test, which considers factors such as the individual’s family, economic, and social ties.
Are there any specific tax laws that apply to expats living in Israel?
Israel has specific tax laws that apply to expats. One such regulation is the “10-year exemption” rule for new immigrants and returning residents.
As per this rule, new immigrants and long-absent returning residents are exempt from paying Israeli tax on income earned abroad or generated from assets located outside Israel for a period of ten years. This rule also exempts these individuals from reporting foreign income and assets during this period.
Furthermore, returning residents who have lived abroad for at least ten consecutive years may be eligible for a five-year tax exemption on foreign income under certain conditions.
What are the rates of income taxes in Israel for expats?
As for the rates of income taxes in Israel for expats, it generally mirrors the tax rates for Israeli residents, except for the exemptions mentioned earlier.
The tax rate is progressive, starting at 10% for an annual income of up to ILS 75,720 and reaching up to 50% for income exceeding ILS 651,600.
However, expats can be subject to different tax regulations depending on their status and the existence of any tax treaties between Israel and their home country. Such treaties could potentially alleviate double taxation and reduce the tax burden.
It’s crucial for expats to consult with a tax professional familiar with Israeli tax law and the specific provisions that apply to foreigners. This consultation can ensure compliance with all tax obligations and help identify any opportunities for tax savings.
Israel has specific tax laws that apply to expats. One such regulation is the “10-year exemption” rule for new immigrants and returning residents.
Do I have to pay taxes in Israel if I’m also paying taxes in my home country?
As an expat, you might wonder if you have to pay taxes in Israel if you’re also paying taxes in your home country.
The answer is potentially yes, but it depends on your residency status and the tax treaty, if any, between Israel and your home country.
If you are deemed a resident of Israel for tax purposes, you are liable to pay taxes on your worldwide income in Israel.
However, Israel has tax treaties with many countries to avoid double taxation. These treaties typically provide credits for taxes paid abroad, effectively reducing your tax liability in Israel.
When is the tax year in Israel and when are tax returns due?
In Israel, the tax year runs from January 1st to December 31st, identical to the calendar year.
As for tax returns, the due date for individuals is generally by April 30th of the year following the tax year.
However, tax return filing is not required for everyone; many salaried employees without additional income sources are exempt.
It’s essential to verify whether you are required to file a return based on your specific circumstances.
What are the penalties for late filing or non-filing of income taxes in Israel?
Regarding penalties, late filing or non-filing of income tax returns in Israel can result in fines and interest charges.
The exact amount can vary depending on how late the tax return is and the amount of tax due.
Furthermore, severe cases of non-compliance can lead to criminal charges. Therefore, it’s crucial to comply with tax filing requirements and deadlines or consult with a tax professional if you need more time to prepare your return.
What deductions and credits are available to reduce my tax liability in Israel?
Israel offers various deductions and credits that can reduce your tax liability.
Credit Points
In Israel, tax credits are awarded in the form of “credit points,” which reduce the amount of tax you owe. Every resident taxpayer is entitled to a certain number of credit points.
Additional points may be awarded based on certain criteria, such as for being a parent, a working mother, a new immigrant, or a returning resident. Each credit point reduces the tax payable by a fixed amount, which is adjusted annually.
Pension Contributions
Contributions to an approved pension fund are tax-deductible up to certain limits. This deduction can provide significant tax savings, particularly for self-employed individuals or those earning higher incomes.
Education and Training Expenses
Certain education and training expenses related to your profession may be deductible. However, these must meet specific requirements, and there may be limits on the amounts that can be deducted.
Home Office Expenses
If you work from home, you may be able to deduct a portion of your home expenses as a business expense. This can include a proportion of your rent or mortgage, utility bills, and internet costs. However, strict criteria must be met to claim this deduction.
Donation
Donations to approved charities are also tax-deductible up to a certain limit.
Moving Expenses for New Immigrants
If you’re a new immigrant, you can claim a one-time deduction for the cost of moving to Israel. This can include costs such as shipping of household goods.
Business Expenses
If you’re self-employed or own a business, you can deduct a wide range of business expenses. These can include costs such as office rent, supplies, advertising, travel, and more.
Foreign Tax Credit
If you’re a resident of Israel and pay tax on foreign income in another country, you may be eligible for a foreign tax credit. This credit prevents double taxation and can significantly reduce your Israeli tax liability.
What kind of income is considered taxable in Israel?
The income taxes in Israel operates based on a comprehensive taxation principle, which means that all types of income are subject to tax unless a specific exemption applies.
The different types of taxable income are categorized into different income sources or “baskets”. Here’s a more detailed look at the types of income considered taxable:
Income from Personal Effort
This category includes income from employment or self-employment. It covers salaries, wages, bonuses, benefits in kind, and any other income derived from your personal efforts or work.
Business Income
This refers to income generated from a business or profession. It can include profits from selling goods or services, less allowable deductions such as business expenses, depreciation, and certain allowances.
Income from Interest and Dividends
Interest income from bank deposits, bonds, or other loans is taxable, as are dividends received from shares of stock. The tax rates can vary depending on the nature of the interest or dividends and the recipient’s status.
Rental Income
If you own property in Israel and lease it out, the rental income you receive is taxable. However, certain expenses related to the property (like maintenance and repairs, municipal taxes, insurance, and interest on loans taken to purchase the property) can usually be deducted.
Pensions
Generally, pensions are subject to income taxes in Israel. This includes both local and foreign pensions. However, the tax treatment can vary depending on the type of pension and the recipient’s circumstances.
Capital Gains
Capital gains, which are the profits from selling assets such as real estate or shares, are also subject to tax in Israel. The rate of tax can vary depending on factors like the type of asset, the length of ownership, and the seller’s circumstances.
Royalties
Income received from royalties for the use of intellectual property rights like patents, trademarks, and copyrights is considered taxable income.
Prizes and Winnings
Prizes and winnings, such as lottery or gambling winnings, are generally subject to tax in Israel.
It’s crucial to note that tax residents of Israel are taxed on their worldwide income from all these sources. In contrast, non-residents are taxed only on their Israel-sourced income. Certain exemptions and deductions may apply, depending on the specific circumstances and nature of the income. Therefore, it’s always advisable to seek professional tax advice.
Donations to approved charities are also tax-deductible up to a certain limit.
What is the process for filing an income tax return in Israel as an expat?
The process for filing an income tax return in Israel as an expat involves several steps.
First, you need to determine your tax residency status and the types of income you need to report. Then, you need to gather all necessary documentation, such as wage slips, bank statements, and receipts for deductible expenses.
The tax return itself can be completed online using the Israeli Tax Authority‘s “My Taxes” system. This platform provides a personalized interface where you can fill in your details, report your income, claim deductions and credits, and submit your return.
Remember that not all individuals are required to file a tax return in Israel. Many salaried employees without additional income sources are exempt from filing.
However, if you have multiple income sources or your situation is complex, it would be wise to consult with a tax professional.
How does Israel’s tax system differ from the US and the UK?
Israel’s tax system differs from those in the US and the UK in several ways.
One of the main differences is the way residency is determined. In Israel, tax residency is based on a “center of life” test, which considers various factors.
In contrast, the US uses a citizenship-based taxation system, meaning US citizens and residents are taxed on their worldwide income regardless of where they live. The UK uses a statutory residence test that considers day count and other ties to the UK.
Another significant difference lies in the tax rates. Israel’s highest income tax rate is 50%, while the US federal tax rate goes up to 37%, and the UK’s highest rate is 45%.
However, when comparing tax rates, one must also consider state or local taxes in the US and National Insurance contributions in the UK.
Lastly, while Israel offers a 10-year tax exemption on foreign-sourced income for new immigrants and certain returning residents, no such provisions exist in the US or the UK tax systems.
Consulting with a tax professional who understands both Israeli tax law and the tax rules in your home country can provide invaluable guidance.
What are some tips for navigating income taxes in Israel as an expat?
Navigating income taxes in Israel as an expat can be challenging. Here are six tips to help you manage your tax obligations effectively:
Understand Your Tax Residency Status
The first step in navigating income taxes in Israel is to understand your tax residency status. This will determine whether you are taxed on your worldwide income (if you are a resident) or just your Israeli-sourced income (if you are a non-resident). Residency is determined based on the “center of life” test, considering factors such as your family, economic, and social ties.
Leverage Tax Exemptions
If you are a new immigrant or a long-absent returning resident, you might be eligible for a 10-year tax exemption on foreign-sourced income. Make sure to understand the rules around this exemption to leverage its benefits fully.
Be Aware of Double Taxation Treaties
Israel has double taxation treaties with many countries. These treaties can prevent you from being taxed twice on the same income and can often reduce your tax liability in Israel.
Keep Comprehensive Records
Good record-keeping is vital for accurate tax filing. Keep track of your income and expenses, and retain any documentation that may be needed for your tax return. This includes payslips, bank statements, and receipts for deductible expenses.
Understand Deductions and Credits
Israel offers various deductions and credits that can reduce your tax liability. Ensure you understand what’s available to you and how to claim these benefits on your tax return.
Consult a Tax Professional
The Israeli tax system can be complex, and as an expat, you might face additional challenges and considerations.
Consulting with a tax professional who understands both Israeli tax law and the tax rules in your home country can provide invaluable guidance. They can help you comply with all your tax obligations and optimize your tax position.
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