Tax Guide for US Expats Living and Working in Isreal
Who Is Liable For Income Taxes in Isreal
Resident individuals are subject to tax on their worldwide income and worldwide capital gains. Nonresident individuals are subject to tax on income from Israeli sources, which is income accrued or derived in Israel.
An Israeli resident is defined as an individual whose center of living is in Israel, taking into account the person’s family, economic and social links, including the following considerations:
- Permanent home
- Place of residence of the individual and his or her family
- Habitual place of business or permanent place of employment
- Place where assets and investments are located
- Place of membership in organizations, associations and institutions
Under the law, a rebuttable presumption of Israeli residency will apply in either of the following circumstances:
- The individual is present in Israel at least 183 days in a tax year ending 31 December.
- The individual is present in Israel at least 30 days in the current tax year and a cumulative total of 425 days in the current and two preceding tax years.
Effective from 1 January 2007, if an individual is not considered an Israeli resident for two consecutive years (Years 3 and 4), the individual is also not considered an Israeli resident retroactively as of the move date for the preceding two years (Years 1 and 2), provided that the individual spent less than 183 days in Israel during those preceding two years (Years 1 and 2). For example, if an individual is not considered an Israeli resident in 2012 and 2013 (because the individual’s center of living is outside Israel), the individual is not considered an Israeli resident retroactively for 2010 and 2011, provided that the individual spent less than 183 days in Israel in those years.
New immigrants (Oleah Hadash) or senior returning residents (who spent more than 10 years outside of Israel and were considered nonresident during that 10-year period) are generally classified as residents for Israeli tax purposes. However, they may enjoy certain income tax, capital gains tax and import tax benefits for specified periods. For new immigrants and senior returning residents, they may be considered a nonresident for tax purposes during the first twelve months as of the move to Israel if they submit a special notice within a limited time frame to the Israeli tax authority.
A distinctive regime is available for returning residents. The regime includes tax benefits for these individuals on their return to Israel.
Income subject to tax
Employment income. Taxable employment income broadly covers salary and virtually all cash and in-kind benefits and allowances provided directly or indirectly to employees or for their benefit. If benefits are provided on a net-of-tax basis, they must be grossed up for tax purposes.
Company vehicles at an employee’s disposal are taxable based on their prescribed usage value. The usage value for vehicles registered on or before 31 December 2009 depends on the price group of the model shown on the vehicle registration. The usage value for vehicles registered on or after 1 January 2010 equals a certain percentage of the vehicle’s cost as defined in detailed regulations. These values are set forth in tax tables published by the tax authorities.
The use of a cell phone provided by the employer is taxable (attribution of a specific amount).
Educational allowances provided by employers to their employees are taxable for income tax and national insurance purposes.
A portion of severance payments granted by employers to employees on termination of employment relationships is exempt from tax, regardless of whether the payments are required by law or are voluntary. The exempt portion is the lesser of one month’s salary or NIS 11,650 (as of 2011) per year of service.
Some Israeli employers provide a range of social benefits through externally approved provident funds. These funds are administered by Israeli insurance companies, private brokers or the Histradut labor movement.
Self-employment income. Residents and nonresidents generally are subject to Israeli income tax on income derived from a business conducted in Israel and on income from one-time commercial transactions. Residents are also subject to tax on overseas income.
Self-employed individuals are subject to tax on business profits at the rates.
Directors’ fees. Directors’ fees and related expenses for participating in board meetings are taxable as income from self-employment. A 16% value-added tax (VAT) liability also arises, but if the director derives primarily employment income, the payer company may account for the VAT under a reverse-charge mechanism. The company may recover the VAT as input VAT if it is a VAT dealer. Directors’ remuneration for other managerial duties is taxable as employment income.
For private, closely held companies (controlled by five or fewer individuals or their relatives), additional rules apply to the deductibility of payments to employee-shareholders who directly or indirectly control 10% or more of such companies.
Investment income. The following tax rates apply to investment income and gains derived by individuals.
Taxation of employee share option plans and share purchase plans. Detailed rules apply to employee share option plans and share purchase plans. Capital gains tax treatment is allowed for certain qualified plans called Section 102 plans, which are administered by a trustee, if, for options granted on or after 1 January 2006, at least two years have elapsed since the options were granted. Options granted according to the capital gains alternative (see below) before 1 January 2006 are subject to a minimum holding period of 24 months as of the end of the year in which the options were granted or 30 months from the grant date, depending on the election of the employee.
The tax authorities must approve the trustee and receive notice concerning a Section 102 plan at least 30 days before the implementation of the plan. Individuals who move to another country to work or reside may request tax rulings from the tax authorities to mitigate uncertainty or address double taxation.
Employers may choose between alternative rules for dividing gains between salary income (the employer deducts an option expense and the employee is subject to income tax at rates of up to 45% plus national insurance contributions; see Section C) and capital gains (the employer receives no deduction and the employee is subject to capital gains tax at a rate of 25%). Restricted Stock Units (RSU) plans may be qualified in the same manner as Section 102 plans by filing an application for tax ruling with the Israeli tax authority and depositing the stock units in the hands of a qualified trustee for a period of at least two years.
Capital gains and losses. Residents and nonresidents are generally subject to Israeli tax on their capital gains relating directly or indirectly to assets in Israel, including Israeli securities, and to rights related to such assets. However, under a relevant tax treaty, a resident of the other tax treaty country may be exempt from Israeli tax on capital gains, except for gains derived from transfers of real estate interests or business assets in Israel and transfers by material shareholders. Special rules apply to publicly traded securities (see below). Resident individuals are also subject to capital gains tax on their capital gains derived abroad.
Exit tax. Persons who cease to be Israeli residents are generally liable to capital gains tax as if they sold all their assets one day before they ceased to be residents. The tax is payable on departure or on sale of the assets concerned (including shares and options) based on the linear portion of the gain.
Calculation of taxable amount. Capital gains are divided into real and inflationary components. In general, real gains derived before 31 December 2002 are taxed at the regular personal tax rates (30% to 45%). However, real gains derived from foreign publicly traded securities before 31 December 2004 are generally taxed at a rate of 35%. Any capital gains derived after these dates are taxed at a rate of 20% (or 25% if a 10%-or-greater shareholder [material shareholder]). The inflationary component is exempt from tax to the extent it accrued after 31 December 1993, and is taxable at the rate of 10% to the extent it accrued before that date.
Capital losses may be used to offset capital gains derived in the same tax year or in subsequent tax years.
Detailed rules relate to deferrals of capital gains tax in certain cases, including mergers, divisions and shares-for-assets exchanges.
Gains attributable to securities. Israeli residents are taxed at a rate of 20% on the real (inflation adjusted) gains derived from sales of traded securities in Israel and abroad, or 15% on the nominal gain on the sale of certain bonds not linked to the consumer price index or a foreign currency (see above). Regular tax rates up to 45% apply if any of the following conditions are satisfied:
- Interest expense is deducted.
- The interest income is business income.
- A special relationship exists (for example, customer-supplier, employer-employee or related parties).
Gains derived from sales of bonds issued by a foreign country or foreign mutual funds are subject to tax at the rate of 20% (or 25% if a material shareholder). Nonresidents are exempt from Israeli tax on capital gains derived on the Tel-Aviv stock exchange or on Israeli securities on an overseas exchange. However, if an Israeli resident owns at least 25% of a nonresident investor company, such exemption does not apply.
Gains attributable to real estate. Gains derived from sales of Israeli real estate or from sales of interests in real estate entities (entities whose primary assets relate to Israeli real estate) are subject to land appreciation tax at the regular rates of up to 45% for the portion of the gain that relates to the period before 7 November 2001. For the linear portion that relates to the period after that date, the applicable rate is 20% from 2007, with the exception of material shareholders who are taxed at a rate of 25%. Assets acquired in 2002 are eligible for a tax rebate of 20%.
Assets acquired in 2003 are eligible for a 10% rebate. Various exemptions apply to residential homes. A sales tax of 2.5% on certain real estate sales was repealed, effective from 1 August 2007. Also, see Real estate tax in Section B.
In addition, the purchaser of real estate must pay transfer fees (acquisition tax) at various rates ranging from 0% to 5%. For an interest acquired in a real estate entity, acquisition tax is imposed on the underlying real estate asset value without offsetting liabilities or borrowings.
Deductions
Deductible expenses. Business-related expenses incurred by employees are deductible only in limited circumstances. For example, expenses incurred to update existing professional know ledge are deductible. However, to claim these deductions, employees generally must file annual personal Israeli tax returns, even if they are otherwise exempt from filing.
To complement the tax deductions available to employees for training, only self-employed individuals may deduct payments made to approved training funds that are used for training in Israel (or for any purpose after six years).
Personal deductions. In general, tax relief for individuals is in the form of tax credits rather than tax deductions. Consequently, relatively few items are deductible for tax purposes.
As a result of major amendments to the law, the calculation of personal deductions has become complicated. Readers should seek professional advice before making decisions.
Business deductions. Expenses are generally deductible if they are incurred wholly and exclusively in the production of taxable income. Additional rules apply to certain items, including car expenses, travel, entertainment, and research and development. The cash basis is acceptable for certain small businesses, and special inflation-adjustment rules are prescribed for businesses. These adjustments include inflation relief relating to inventories and depreciation for certain small businesses.
Special rules for expatriates. If no treaty exemption applies, expatriate nonresidents working in Israel lawfully for an employer may enjoy certain benefits. For the first 12 months in Israel, a foreign expert is entitled to a deduction for accommodation expenses incurred and a living expense deduction of up to NIS 310 per day if the employment income exceeds NIS 12,600 per month.
Foreign journalists who are members of the Foreign Press Association in Israel and foreign athletes are entitled to a tax rate of 25% and the above-mentioned expatriate deductions for the first 36 months of work in Israel for foreign journalists and the first 48 months of work for foreign athletes.
A levy at the rate of 20% is imposed on foreign employees’ employment income unless the employees are journalists or athletes or if the employment income exceeds NIS 16,614 per month. The levy must be paid by the employer and is not deducted from the employment income.
Rates. The Israeli tax year is the calendar year. In principle, Israeli personal tax liability is computed annually, although tax is typically withheld from salaries and reported each month. Monthly tax brackets used during a year for payroll and other purposes are updated annually for inflation and are totaled to produce the annual tax brackets.
Credits. Israeli resident individuals are entitled to personal tax credits, which are known as credit points. These credit points are deducted from the computed income tax liability of individuals. Each credit point is currently worth NIS 209 per month.
The number of credit points granted to an individual reflects family circumstances. For example, an unmarried male resident generally receives 2.25 credit points, and an unmarried female resident generally receives 2.75 credit points. If both spouses work and opt for separate tax computations, the husband receives 2.25 credit points and the wife receives 2.75 points; the wife also generally receives one credit point for each child under 18 years of age and one-half of a credit point for a child born or reaching 18 in the tax year.
The following are other significant tax credits granted to individuals:
- Credits with respect to savings fund contributions (see Income subject to tax).
- Tax credit for 35% of charitable contributions to recognized institutions if a taxpayer’s annual contributions exceed NIS 310. However, no credit is given for annual contributions exceeding 30% of taxable income or NIS 7,636,000, whichever is lower.
- Additional credits in various other cases, including new immigrants, returning residents, one-parent families, divorcées, graduates of a higher education institute in 2005 and subsequent years and residents living and working in various priority areas.
Relief for losses. In general, business losses may be offset against income from any source derived in the same tax year, including salary income. Unrelieved business losses may be carried forward for an unlimited number of years to offset business income or capital gains derived from business activities (see Capital gains and losses).
B. Other taxes
Net worth tax. Net worth tax is not levied in Israel.
Estate and gift taxes. Israel does not impose taxes on inheritances or bona fide gifts. For transfers by inheritance or by gift of assets that would normally be subject to capital gains tax or land appreciation tax, the recipient’s tax cost base and date of purchase are generally deemed to be the same as those for the transferor of the property.
Real estate tax. In general, sellers of real estate assets are subject to land appreciation tax on capital gains at rates of up to 45% on any appreciation before 7 November 2001, and at a rate of 20% on any appreciation after that date, with certain exceptions, including exemption provisions for homes owned by an individual. Purchasers of real estate interests in Israel pay an acquisition tax at rates ranging from 0% to 5%.
C. Social security
Contributions. National insurance contributions are generally payable on taxable income as calculated for income tax purposes.
Totalization agreements. Israel has entered into social security totalization agreements with the following countries.
Austria
Finland
Poland
Belgium
France
Sweden
Bulgaria
Germany
Switzerland
Canada
Italy
United Kingdom
Czech Republic
Netherlands
Uruguay
Denmark
Norway
To learn more about the history, culture, economy and other information about Isreal
We have been preparing US income tax returns for US Citizens and permanent residents living in Isreal for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Isreal and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Isreal.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email