Under the Israeli tax regime, Israeli residents are subject to tax in Israel on their worldwide income, while foreign residents are subject to tax in Israel only on their Israeli-sourced income.
An individual is considered an Israeli resident if his or her "center of life" is in Israel. The center-of-life test examines the connections that the taxpayer has to Israel as well as the taxpayer's subjective intention. A company is regarded as an Israeli resident if it was incorporated in Israel or is managed and controlled from Israel.
Individuals are not invariably required to file a tax return in Israel. Individuals who receive income which exceeds the amounts described in the tax regulations are required to submit an annual return. Other circumstances can subject an individual to filing requirements. Such instances include; holding 10% or more in a corporation, holding foreign bank accounts that exceed a certain balance, or holding foreign securities. Generally, individuals are required to file tax returns by April 30 although extensions are possible on a case specific basis.
In general, a corporation in Israel is subject to corporate tax on its taxable income, whereas partnerships are treated as "pass-through" entities and the partners are taxed on the partnership's income at the applicable rates. Israeli companies are subject to tax on all of their worldwide income, while dividends between Israeli companies are generally exempt. As a basic rule, corporations are required to file returns by May 31, however extensions are possible on a specific basis.
Tax rates and main exemptions at a glance (as of July 2019):
During the past year, there were no significant amendments to the Israeli tax legislation. However, a number of important circulars were published by the Israel Tax Authority (ITA) and important court decisions and new regulations took place. The main changes are:
The ITA published a comprehensive circular number 15/2018 (the Circular), addressing the Israeli income tax aspects of a business model restructuring by multinational groups. A change of a business model refers mainly to circumstances under which the functions, assets or risks (so called FAR) of an entity are transferred or terminated.
This matter is commonly raised in tax audits of Israeli companies that are acquired by multinational groups. Following the closing of the acquisition, the intellectual property of the Israeli acquired company is transferred, or deemed transferred, to a non-Israeli affiliate, or the entrepreneurial aspects of the acquired company (such as sales functions) are terminated.
The Circular addresses two major aspects of a business model change:
The Circular states that it follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of 2017 (OECD Guidelines). It also adopts certain determinations of a District Court's decision regarding Gteko vs. Tax Assessor of Kfar Sava (the Gteko Decision), published June, 2017, although some deviations from both of these authorities are apparent.
We should note that the Circular represents the ITA's interpretation of the law and, accordingly, its position on said matters. The Circular does not, however, have any legal binding status and therefore courts are not bound by it.
The ITA published two safe-harbour circulars for transfer pricing methodologies in certain types of activities performed by Israeli subsidiaries of multinational groups:
In accordance with the OCED rules, the circular adopts the 5% mark-up for low-value-added services. The general criteria for evaluating whether the services are considered low-value are prescribed in the circular.
For marketing services, the "plus" for the "cost plus" application should be set between 10-12%.
For a distributor, only the low-risk distributor model is mentioned, for which an operating margin of between 3-4% is expected.
Similar to other countries, these circulars do not rule out the option of the MNE proving that a lower benchmark should be applied, based on an applicable transfer pricing study and the presentation of relevant comparable or other relevant methods.
New Israeli Income Tax Regulations, which were officially published on February 6 2019 (the Regulations), implement the Common Standard on Reporting and Due Diligence for Financial Account Information (CRS), which was developed by the OECD.
Under the Regulations, Israeli financial institutions are required to report annually to the Israeli Tax Authority concerning international residents who own financial accounts in Israel. The definition of the term "Financial Institution" is very broad, and includes banks, investment funds, investment managers and brokers, entities that hold or manage financial assets on behalf of others, as well as certain insurance companies.
Israel will automatically, on an annual basis, exchange such information with more than 95 foreign countries in accordance with bilateral and multilateral agreements on the exchange of information. As part of the exchange of information, Israel will receive financial information concerning foreign accounts of Israeli residents (including information on financial income, as well as account balances).
It should be noted that the automatic exchange of information with certain countries, including Australia, Canada and the United Kingdom, will commence retroactively from 2017 onward (Israel will transfer and receive such information in July 2019), while the exchange of information with other countries such as Switzerland will commence only from 2019 (Israel will transfer and receive information in September 2019).
That said, the Regulations provide that certain charitable funds that provide interest-free deposit and credit services (Gemach), will be exempt from collecting account holder information, and from certain reporting obligations under the Regulations.
On September 13 2018, Israel informed the OECD that it had ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which was signed by the Minister of Finance on June 7 2017, and by that became the 11th country to ratify the MLI. The MLI came into force with respect to the relevant Israeli tax treaties on January 1 2019.
The changes to the double tax treaties provided for in the MLI will apply to the Israeli bilateral tax treaties currently in effect, but only with respect to the treaties with countries that have also ratified the MLI in their respective country, and furthermore only with respect to the provisions on which both countries have not submitted reservations to the OECD.
Thus, when checking the current version of a treaty in a country that has ratified the MLI, one would also need to check whether treaty provisions have changed due to the MLI.
Israel has chosen to implement the MLI on most of its existing treaties and has submitted some reservations to the MLI provisions.
In 2019, Israel has signed tax treaty agreements with the United Kingdom and Australia. However, those are yet to be brought into force. In addition, tax treaties with Austria, Armenia, Azerbaijan and Macedonia that were signed in previous years were brought into force during 2018 and 2019.
The District Court ruling published on May 19 2019, in the case of Noam Kopel v Rehovot tax assessment officer is the first case law in Israel regarding the taxation of gains from the sale of virtual currencies, and specifically Bitcoin.
The District Court accepted the position of the ITA in this case and ruled that Bitcoin should be considered as an "asset", and accordingly, gains from the sale of Bitcoins should be considered as capital gains. The District Court further ruled that at this time Bitcoin cannot be considered as a "currency". It seems from this ruling that the same principles should apply with respect to other virtual currencies.
This decision of the District Court is aligned with the ITA's position which was published in a circular from January 2018, stating that virtual currencies should be classified for tax purposes as assets and not as currencies.
It should be noted in this regard that recently the ITA increased the enforcement against individuals and corporations who trade in virtual currencies. In addition, the ITA imposed a special reporting obligation on individuals who trade in such virtual currencies, affective from the 2018 reports.