The question of residency is important in determining a person’s status vis-a-vis their obligations to paying Israeli taxes.
The Tax Law states that every Israeli resident is required to file a tax return every year, and doing so late results in hefty penalties (in excess of NIS 1,000 for each month between the official deadline and the actual filing).
That being said, a supplementary ruling to the law grants exemptions from filing if you (and your spouse – assume this the whole way through this post) meet certain criteria.
The exemptions are in place in order to relieve the burden on the already-overstrechted tax authorities having to process tax returns for people who won’t have any supplementary tax to pay anyway.
There are though certain people whose circumstances dictate that they must file, regardless of their earnings. If you fall into at least one of the following categories, you must file a return:
(1) You are a controlling shareholder (10%+ ownership including holdings of close family) of a company or similar corporation. This applies to all Israeli corporations, and many overseas corporations.
(2) Income of husband and wife is assessed together, rather than seperate calculations.
(3) You received severance pay that was spread over a number of years – one of those years being 2012 (known as פריסת פיצויים).
(4) You were required to file a tax return for 2011, but not for one of these reasons.
(5) You own shares in a non-publically traded non-Israeli corporation.
(6) The value of your overseas assets at any point in 2012 exceeded NIS 1,839,000. This requirement is not relevant for those who fall into the “10-year exemption” for new olim.
So, assuming you do not meet any of the criteria above, you are exempt from filing a 2012 tax return if your income in 2012 was exclusively from the following list. If you had income from any other source, you are required to file:
(1) Salary (including pension and פיצויים) – if the gross amounts received were less than NIS 638,000 (per spouse) and tax was deducted at source.
(2) Rental income (above the exemption limit), provided that (a) the total gross rents were less than NIS 331,000 and (b) the 10% tax was paid by 30 January 2013.
(3) Foreign interest, dividends, capital gains etc, provided that (a) the total gross income was less than NIS 331,000 and (b) the tax (the rates depend on the exact nature of the income) was paid using the “short form” at the post office or online by 30 April 2013.
(4) Foreign pension, provided that (a) the total gross income was less than NIS 331,000 and (b) no tax is due in Israel under the provisions of section 9c of the tax law (beyond the scope of this post – perhaps I’ll address it some other time).
(5) Israeli-sourced interest and/or linkage income, provided that either (a) it is exempt from Israeli tax or (b) tax was deduced at source and the gross income was less than NIS 632,000.
(6) Capital gains made on the sale of publically listed shares provided that either (a) it is exempt from Israeli tax or (b) tax was deduced at source and the gross sales were less than NIS 1,823,000.
(7) Other types of income which are subject to tax and tax has been deducted at the maximum rate.
(8) Other income exempt from Israeli taxes.
If the total gross income of (7) and (8) combined is at least NIS 331,000, no exemption is granted.
Whilst this looks a little daunting, in many situations the requirement or exemption from filing is reasonably clear – but if in doubt, take professional advice.
מס הכנסה (Income Tax) is the primary tax authority in Israel, equivalent to HMRC in the UK and the IRS in the USA.
Before going into depth on any one subject, it is worthwhile to look at some of the basic concepts within the Income Tax Law.
- Israeli residents are subjected to Israeli taxation on their worldwide income. A credit is given for foreign tax paid.
- Non-Israeli residents are subject to Israeli taxation only on their Israeli-earned income.
- The tax year runs from 1st January through to 31st December.
- Tax files are joint between husband and wife. Whilst the tax calculations are generally seperate, both husband & wife are responsible for payment of the tax owed by the other.
- Income is classified as either earned (e.g. salary, self-employment) or passive – with differing tax rates applying. There is also a difference to the calculation of ביטוח לאומי depending on the defintion.
- Income considered joint (most types of passive income) is taxed as being earned by the higher earner of the couple.
- Tax is to be deducted at source by employers on salary income, and by banks on interest, dividends and capital gains earned through the bank.
- There is also a system in place for self-employed contractors and corporations to pay tax during the year, by a mixture of tax at source and payments on account.
- Tax owed should be paid by the end of the tax year, i.e. 31 December. Any tax owed but not paid by that date is subject to interest (4% per annum) and הצמדה (linkage to the retail price index).
All of the above is of course subject to the various exemptions and concessions granted in the law and Double Tax Treaties, and also the interplay with other taxes (e.g. מע”מ, מס שבח, ביטוח לאומי).