Worldwide Tax Summaries--ISRAEL(1999-2000)(part2)

Worldwide Tax Summaries--ISRAEL(1999-2000)(part2)

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As form January 1, 2000, sales tax at rates of up to of 2.5% will be generally applicable to the sale of most real estate rights.

Israeli-resident individuals are subject to taxation on Israeli-source income(i. e., income accrued in, derived from or received in Israel). The individual taxpayer is given relief for foreign taxes paid either in accordance with the relevant double taxation treaty or unilaterally. In addition, certain income, although from foreign sources,is deemed to be Israeli-source income in the hands of a resident,namely the following,
1. Income from a profession or vocation that an Israeli resident generally conducts in Israel. For these purposes, a change in the character of the income(e. g., business income vs. Employment income or vice versa) generated from the same vocation would not be considered a change in the vocation itself.

2. Income of an Israeli-resident employee from work performed outside of Israel for an Israeli resident employer within four years from the employee's from Israel. If the work is of the same nature as that in which the employee was engaged in Israel, the income is taxable even if the four years have elapsed. The four-year limit also does not apply if the employer is the state of Israel or a specified quasi-government body.

3. Profits from a business controlled and managed in Israel.

4. Capital gains that accrue to an Israeli resident outside of Israel(in respect of assets held outside Israel), even if the proceeds are not remitted to Israel.

Nonresident individuals are subject to income tax on Israeli-source-income and to capital gains tax on capital gains from assets situated in Israel, as well as the profits of a business controlled and managed in Israel. They are also subject to tax on income arising abroad and received in Israel, unless the income is received by a person who is in Israel for some temporary purpose only without any intention of establishing a permanent residence in Israel and who during the tax year has not actually resided there, whether continuously or with interruptions,  for a total of more than six months. A nonresident can be assessable and chargeable to tax in the name of a trustee, guardian, committee, attorney, factor, agent, receiver, branch, or manager, irrespective of whether such appointee is in receipt of the relevant income.

The Israel Income Tax Ordinance defines a "resident"as :"an individual who resides in Israel except for such temporary absences which to the assessing officer may seem reasonable and not inconsistent with the claim of such individual to be resident in Israel."In practice, all circumstances relating to the question of residence of the taxpayer should be examined, including such factors as birthplace, ownership of property in Israel, close family residing in Israel, the type of visa used for entry into Israel, the taxpayer's own representations, military service, the nature of the taxpayer's living quarters in Israel, and, above all,the length of time spent in Israel. If these and any other relevant factors show that home has been established in Israel, then the taxpayer will be considered resident for tax purposes.

Should an individual be deemed an Israeli resident at the same time resident of another country, the tie-breaker teats set out in the applicable treaty will determine in which country the employee will be viewed as resident. Generally, the treaties focus on factors relating to where the person's permanent home is maintained in which country the person's personal and economic relations are closest("center of vital interests"test) and in which country the person is a national.

For several years a "days-test"formula residency has been under consideration by the tax authorities, and this approach has now been formally proposed in draft legislation published on July 20,1998. The Israel Income Ordinance defines a nonresident taxpayer as being anyone other than a person resident in Israel. It elaborates on this definition by including inter alia, any person who is in Israel for some temporary purpose only, as described above.

Employee gross income/All remuneration derived from employment, including allowances paid to an employee for cars, clothes, transport, professional literature, and the like, are taxed as ordinary income. If the interest rate charged on loans to employees ins less than the rate of increase in the consumer price index(CPI)(with an addition of 2% annual interest), the resulting benefit for each month in which these loans are outstanding (i. e., the difference between actual interest charged and the increase in the CPI plus interest) is also taxed as ordinary employment income. The prescribed value of the regular use of a company car is considered to be income of the employee. Any benefit arising from exercising a right or option at a price below its market value is considered to be income of the employee. The only benefits that are exempt from tax are employers' contributions to further education and training schemes and their contributions to approved pension and benefit schemes (subject to certain requirements and maximum levels of contribution).

Foreign experts invited by a resident employer(and approved by the Minister of Labor and SoCIAl Welfare) or teaching institution (foreign experts) can deduct from their remuneration earned in Israel accommodation expenses and a daily allowance for meals for a period not exceeding 12 months. The daily meal deduction is restricted to the lower of (1) a prescribed amount, currently NIS240 per day or (2) 50% of gross employment income (according to the tax authorities guidelines). Otherwise, all earnings from employment performed in Israel are generally taxable as for other residents, except that personal tax credit points are not allowed to foreign residents.

"approved speCIAlists"(nonresidents approved by the director of the Investment Center at the Ministry of Industry and Trade), provided they are experts who possess skills not readily available locally, are taxed at a maximum rate of 25% on their earnings for a period of three years, with a possible extension of up to a further five years. They are also entitled to the benefits available to foreign experts in the first 12 months. Approval is normally given on income up to US$75,000 per annum.

Capital gains and investment income/Capital gains tax is payable on capital gains(with some exceptions) by residents of Israel on the sale of assets(irrespective of the location of the assets) and by nonresidents on the sale of assets located in Israel or of the direct or indirect right to an asset located in Israel.

For the purposes of assessing tax, the capital gain is generally calculated in local currency terms, and provisions exist for segregating the taxable gain into its real and inflationary components. The inflationary amount is the total of two components(i)net cost indexation difference and (ii)share of retained prosfits (in the event of a disposal of shares).

The net cost indexation difference is equal to the original cost of the asset less deqreCIAtion(where applicable) multiplied by the percentage increase in the Israeli consumer price index from the date of acquisition of the asset to the date of its sale. This component of the inflationary amount is exempt to the extent it accrued after January 1,1994 and is generally subject to tax at the rate of 10% if it accrued before then.

A nonresident who invests in taxable assets with foreign currency may elect to calculate the inflationary amount in terms of the foreign currency originally invested. Under this option, in the event of sale of shares in an Israeli resident company, the inflationary amount attributable to exchange differences on the investment is exempt from Israeli tax.

In the case of a disposal of shares, the share of retained profits is the amount of gain equal to the proportional part of the retained profits of the company that the seller of the shares would have rights to by virtue of those shares. Profits for this purpose are generally defined as finanCIAl statement profits available for distribution which accumulated over the period from the end of the tax year prior to the year of acquisition of the shares to the end of the tax year prior to the year of sale, but no more than seven years prior to the year of sale.The amount of the profits is not to exceed the amount of income taxed in the above-mentioned period, less the taxes thereon and any dividend distributed therefrom, with the addition of tax-exempt income.A nonresident is not exempt from tax on this type of inflationary amount.

The remaining"real gain,"if any, is taxable at the regular tax rates(30% to 50%).

SpeCIAl tax rates apply to assets purchased prior to April 1, 1961.

Profits on the sale of securities traded on the Tel Aviv Stock Exchange and certain Israeli securities traded overseas are exempt from tax, unless the profits are determined to be from trading in securities. SpeCIAl provisions of the law apply to the sale of securities that were acquired prior to their listing on such an exchange.

Israeli resident individuals who dispose of foreign securities that are listed for trading on overseas exchanges are generally liable to Israeli tax of 35% of the capital gain arising thereon, calculated in terms of the foreign currency invested.

Capital gains realized by a nonresident from the sale of assets that are not attributable to an Israeli permanent establishment or are not real estate rights may qualify for treaty exemption, depending upon the particular circumstances.

Dividends from resident companies are generally subject to 25% withholding tax (15% for approved enterprises), which represents the final tax to the individual. Dividends received from foreign companies are liable to a maximum tax of 25%(35% in the case of traded securities)on receipt in Israel. Nonresidents who are in Israel for some temporary purpose for less than six months in the tax year will not be liable to tax in Israel on such dividends from foreign companies.

Business deductions/Business expenses deductible from business-source income must be incurred wholly and exclusively during the tax year for the purposes of producing this income. Employees are entitled to relatively few deductions, which include subsistence expenses if required to travel out of town and subsistence expenses abroad.

Self-employed individuals are subject to special rules for determining the deductibility of expenditure on the maintenance of private vehicles and small commerCIAl vehicles, as well as other expenditures, such as telephone costs, when the business is conducted from the axpayer's house.

Nonbusiness expenses/Residents are entitled to personal tax credits against their tax liabilities according to their status. At January 1999 each point is worth NIS165 per month, resident individuals being entitled to a minimum of 2.25 points. Additional points are granted for, among others, dependent children, new immigrants and single-parent families.

Tax credits and deductions are granted for certain payments for life insurance premiums and payments to provident and pension funds.

Foreign residents are not entitled to personal tax credits or unilateral tax relief on foreign income. However, in circumstances where is can be shown that the amount of tax payable in Israel exceeds the amount of tax credit available in the home country on specific Israeli-source income, the Minister of Finance is permitted to order a total or partial tax refund.

Donations to recognized public institutions entitle the taxpayer to a tax credit of 35% from donations that in aggregate are not less than NIS320, provided the donations do not exceed 30% of annual taxable income or NIS451,000, whichever is less.

Personal tax credits are available; see"Personal allowances"above.

Social security taxes/National Insurance contributions are funded by the employee at 2.66% on the first NIS2,991 of income per month and 4.9% on additional income up to a maximum of four times the average national wage(currently, NIS23,924 per month). Employers' contribution is 4.93%, according to the same limits. Contributions for nonresidents are funded by the employee at 0.33% and 0.6% in accordance with the above limits and by the employer at a single rate of 0.7% up to the upper limit. SpeCIAl detailed rules and rates apply to the self-employed and to other sources of income generated by an Israeli resident(i. e., rent, interest,dividends, pension, etc.). Capital gains are not subject to National Insurance contributions.

Local taxes on income/There are no local taxes on income.

National Health Insurance premiums/Health Insurance premiums are levied at 3.10% on the first NIS2,991 of income per month and 4.8% 

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