Israel has a progressive tax system that includes both direct and indirect taxes. The Israeli taxation system is administered by the Israel Tax Authority.
Double Taxation Agreements
Israel has signed double taxation agreements with over 50 countries, including the United States, Canada, Australia, and most of the EU member states. These agreements aim to avoid double taxation on income earned in both Israel and the other country. They also provide relief from withholding taxes on dividends, interest, and royalties.
Main Taxes for Expats
Income Tax
Expats in Israel are subject to the same income tax rules as Israeli residents. Income tax is calculated based on the amount of taxable income earned during the tax year, which runs from January 1st to December 31st. The income tax rates for 2023 are as follows:
- Up to NIS 75,720 is taxed at 10%.
- The amount between NIS 75,720 and NIS 108,720 is taxed at 14%.
- The amount between NIS 108,720 and NIS 174,360 is taxed at 20%.
- The amount between NIS 174,360 and NIS 243,120 is taxed at 31%.
- The amount above NIS 243,120 is taxed at 35%.
Expats may also be entitled to claim certain tax credits and reliefs, such as the Foreign Tax Credit and the Child Tax Credit. These credits reduce the amount of income tax payable.
National Insurance
National Insurance is a social security tax that is paid by both employers and employees. The National Insurance rates for 2023 are as follows:
- Employees pay 3.9% of their gross income.
- Employers pay 7.5% of their employees’ gross income.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profits made from the sale of certain assets, such as property, shares, and investments. The CGT rate for 2023 is 25%. However, there are certain exemptions and reliefs available, such as the exemption for the sale of a principal private residence.
Value Added Tax
Value Added Tax (VAT) is a tax on the sale of goods and services in Israel. The standard rate of VAT is 17%. However, there are reduced rates of VAT for certain goods and services, such as food, medicines, and books.
Special Tax Breaks for Expats
Foreign Tax Credit
The Foreign Tax Credit (FTC) is a tax relief for Israeli residents who pay tax on foreign income in another country. The FTC allows individuals to claim a tax credit for foreign taxes paid, up to the amount of Israeli tax payable on the same income.
Capital Gains Exemption
Expats who are considered new immigrants or returning residents may be entitled to a capital gains exemption on the sale of certain assets. To be eligible for the exemption, they must meet certain conditions, such as having been a non-resident of Israel for at least ten years prior to their return.
Filing a Tax Return in Israel
Expats who are considered resident in Israel for tax purposes are required to file a tax return each year. The tax return must be filed by April 30th of the following year.
Expats can file their tax returns online using the Israeli Tax Authority’s website. To do so, they need to obtain a username and password, which can be obtained by visiting one of the tax authority offices in person.
When filing a tax return, expats need to provide details of their income, deductions, and tax credits for the relevant tax year. If they have any foreign income or assets, they may also need to declare them on their tax return. It’s important to note that Israel operates on a self-assessment system, which means that taxpayers are responsible for accurately reporting their income and paying the correct amount of tax.
Tax Exit Procedures
Expats who are leaving Israel to move abroad need to follow certain tax exit procedures. Firstly, they need to notify the Israeli Tax Authority of their departure and provide details of their new address abroad. They should also settle any outstanding tax liabilities before leaving Israel.
If an expat is considered non-resident for tax purposes, they are not liable for Israeli income tax on any future income that arises outside of Israel. However, they may still be liable for Israeli tax on any income or gains that arise from Israeli sources, such as rental income or capital gains from the sale of an Israeli property.
Expats who have paid tax in Israel may be entitled to claim a refund of some of the tax they have paid. To do so, they need to file a tax return for the relevant tax year and claim the refund through the normal tax refund process.
Overall, the taxation system in Israel is relatively complex, with a progressive income tax system and a range of direct and indirect taxes. Expats in Israel need to be aware of the main taxes that apply to them, such as income tax, National Insurance, and CGT, as well as any special tax breaks that may be available. They also need to ensure they file their tax returns on time and follow the tax exit procedures if they are leaving Israel to move abroad. By understanding the Israeli tax system, expats can ensure they are complying with their tax obligations and maximizing any tax benefits available to them.