Doing business in Israel 2021 Keys to a secure financial future
Israel is emerging from the pandemic and getting back to business. Here’s an overview. You are probably doing taxable business in Israel if you conduct business activities physically in Israel or operate in Israel via an agent who can commit you. Israel’s tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.
Business tax rates
For 2021, the regular company tax rate is 23%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders and 25%-28% for other shareholders, resulting in a combined tax burden on distributed corporate profits of 42.25%48.41%, subject to any tax treaty.
Preferred income derived by preferred industrial and tech enterprises is liable to company tax of 7.5% in development area A and 16% elsewhere in Israel, without time limit. Dividends are generally taxed at 20%. The resulting combined tax burden on distributed profits is generally 26%-32.8% subject to any tax treaty. Lower rates are possible for certain large enterprises with annual revenues over NIS 10 billion. R&D grants, typically 50%, are also available.
Salaries and business profits of freelancers are subject to income tax at rates ranging up to 50%.
The VAT standard rate is 17%.
International agreements
Israel has income-tax treaties with 59 countries.
Israel is a party to a FATCA Intergovernmental Agreement with the USA and the OECD Common Reporting Standard. Remittances to and from Israel are subject to tax-compliance checks by the Israeli banks. Israel has free-trade agreements with Canada, Colombia, the European Union, the European Free Trade Association, Mercosur Mexico, Panama, Turkey, Ukraine, the United States and the UK.
National insurance (social security)
National insurance (bituah leumi) rates include:
• Resident employees: 3.5%-12%
• Employers of resident employees: 3.55%-7.6%
• Freelancers: 5.97%- 17.83% (52% is tax-deductible)
• Not working: 9.61%-12% (52% is tax-deductible)
• Payment if no income: NIS 177 per month
The above are subject to any applicable social security (“totalization”) treaty.
Immigrants
New residents and senior returning residents (lived abroad 10 years) are generally exempt from Israeli tax on non-Israeli sourced income for 10 years. The exemption does NOT apply to income for work done in Israel.
Immigrants also enjoy an exemption for five-20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank.
On Israeli-sourced income, new immigrants receive extra personal credits that reduce taxes by NIS 218-NIS654 per month for three-and-a-half years.
Foreign expatriates in Israel
Israel’s tax treaties sometimes grant an income-tax exemption for employees resident in those countries but working in Israel. Otherwise, non-residents working in Israel lawfully in their field of expertise for an employer as “foreign experts” who are paid at least NIS 13,300 per month can enjoy a deduction for accommodation expenses and daily living expenses of NIS 330 for up to 12 months, provided they are invited by an Israeli employer that is not an employment agency. But employers may be subject to a foreign workers’ payroll levy of 0% to 20%
Tax registrations
A business must register for Israeli tax purposes immediately once the business activity starts
Pay tax as you go
Every year, a business or investor will receive demands to pay VAT, payroll taxes, income tax, and tax installments on profits (mikdamot).Essential
There are strict bookkeeping and customer billing rules. Approved Israeli software or printed books must be used.
paperwork Employees and freelancers
Once employees have worked three to six months at a firm, they are entitled to mandatory pension and severance funding. The minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% toward pension funding and 6% toward severance funding. The employee pays 6% toward pension funding.
Real estate
Home rental income of up to NIS 5,070 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, flat-rate tax of 10%. Companies pay tax at regular rates.
Real estate acquisition tax rates range up to 10%. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,747,865 may be exempt from acquisition tax.
The gain from the sale of an only home in Israel by a resident individual may be exempt from tax provided its value does not exceed NIS 4,495,000. Otherwise, real-estate sales are generally taxed at 25%-50%.
Securities
Passive income derived by individuals from securities are taxed at rates of 25%-33%. Traders and companies pay tax at regular rates.
Estates, inheritances and gifts
There is no tax in Israel on estates or inheritances, nor on gifts to Israeli residents.
Happy Independence Day!
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com
“I remember when the candle shop burned down. Everyone stood around singing ‘Happy Birthday.’ ” –Steven Wright
Time flies. It seems like just yesterday our oldest was born, and now she is turning 20. She’s doing great work in sherut leumi (national service) doing Israel advocacy and earlier this week she got her driver’s license, a sure sign of growing up and maturity. No question we are really proud of her. On the other hand certain things haven’t changed in 20 years, like the fact that she still lives at home and is financially dependent on her parents! She hates when I say that. I hope she knows that I am joking when I speak about her moving out or paying us rent.
A few years ago I wrote, “While her birthday present will remain a surprise I must admit that I was contemplating doing what Mark Rioboli CFP at Independence Advisors, wrote about his birthday gift to his daughter. “I recently asked my daughter, “Guess what you’re getting for your birthday?” “A car? Jewelry? A new phone”, she guessed excitedly. “Nope”, I said, “estate planning documents.”
“Seriously Dad?” she said. “Seriously”, I said. “You can’t enter adulthood without the proper documents.” Such is the life of a wealth advisor’s child.” I may be cruel but I am not that cruel.”
While we all just finished celebrating Yom Haatzmaut, (Independence Day) her milestone birthday falls out this Shabbat, the 5th day of the Hebrew month Iyar, the real day of Yom Haatzmaut. Instead of a BBQ I plan on celebrating with a huge plate of Cholent! What could be a better birthday meal than that? Her milestone birthday, driver’s license and Yom Haatzmaut share the same theme; independence. I am going to give a few keys that will help put any young adult on the path to a secure financial future. The earlier you can start good money habits the better off you will be. It’s very hard changing bad financial practices when you’ve been doing them day in and day out for 20 or 30 years.
My first tip is to keep it real. Like many of you, I spent hours working the grill for a family BBQ on Yom Haatzmaut. We are now in the midst of smoke season. That’s the two weeks between the national barbeque on Independence Day through Lag Ba’omer- national bonfire day! I have met with too many people whose financial reality is based solely on smoke and mirrors.
Don’t believe their social media posts and pictures. They appear to be living the good life, but are really loaded up with debt and have no plan to pay it off, which means it keeps on getting worse and worse for them. The earlier in life that you can start budgeting and living within a budget, the easier it will be when you get older and your expenses ramp up.
There is a famous political saying in the US that a conservative is a liberal who got mugged the night before. Often ideological youth enter adulthood with a certain utopian economic worldview. Add that in Israel we have just finished up our fourth recent election season where we were exposed to numerous pledges on how the government will be there for us and take care of us.
Don’t believe it. It’s incumbent on each and every one of us to take care of our own future. No one else will do it for you. Parents never know if the way they try and educate their children actually sinks in or not. Well I can truly say that our birthday girl has a good head on her shoulders and has a great understanding of the benefits of freedom and the government staying out of our lives. For me, that is true nachas, pride.
How to take care of your financial future? Start saving. Get into the habit of putting something into savings from the money that you earn. As I have written numerous times, the earlier you start saving the more the wonder of compound interest will help you create a secure financial future.
In 2021, especially for a 20-year-old, everything is instant. Don’t like something - just swipe it away. Wifi a bit slow and your Google search takes four seconds, get angry that it’s sooo slow.
The key to growing wealth is patience. You’re not going to suddenly become a millionaire. You need to realize that good financial habits are the real keys to becoming financially secure. Live within your means, save and invest, and focus on a slow and steady approach to building wealth. That’s the ticket.
I want to wish you a very happy birthday and you should merit a year of health and happiness and may the Lord fulfill all your requests, for good.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
The writer is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.