July 24, 2002 marked a major shift in Israeli Tax System as the Israeli Legislator adopted the personal criteria alongside the existing territorial criteria, with the necessary changes.

According to the new system tax obligation may derive from either of the following:
  1. Any legal entity which is considered to be an Israeli Resident for taxation purposes (Personal Linkage) regardless to the origin of it’s profits.
  2. Any entity, namely non-Israeli, which gained profits in Israel.

Determining the Personal Linkage
The Israeli Income Tax Ordinance sets out three test to classify an entity as Israeli Resident. The first two tests are of a formal nature, examining one’s effective presence in Israel. Should an individual spent at least (A) 183 days in the subject tax year in Israel; or (B) 30 days in the subject tax year and has also spent at least 425 days in the two years previous to the subject tax year in Israel – a general presumption this individual is to be considered as Israeli Resident for taxation purposes.

This presumption is refutable by means of the third test – the Essential Criteria. This is a general test, examining the essential ‘center of life’ of the individual. Indeed, one must bring evidence proving his/her ‘center of life’ is located outside of Israel. The center of life is defined by familial, economic and social linkage to Israel. For example, one may be considered as an Israeli Resident for taxation purposes if one physically attends social or familial events in Israel or by the court’s judgment of the subjective perception of the individual of himself as a resident of Israel as shown by his activities and lifestyle. Indeed, this test is very obscure and leaves much discretion to the courts.

Review of Main Tax Bases and Rates
The Israeli Tax Ordinance acknowledges three types of income:
A. Fruitful Assets and Income – on which the tax rates are progressive (e.g.
B. Capital Revenue – whereas Capital Revenues deriving from properties which accumulated up to January 1st, 2003 are subject to the above-mentioned progressive rates and revenues accumulated from January 1st 2003 a unitary tax rate of 20% is imposed. Please note that there are exceptions for this criterion. Please consult the undersigned for further information.
C. Dividends – Tax Rates vary in view of the shareholder’s extent of control in the firm. Please consult the undersigned for further information.

Naturally, exemptions are available for Israeli tax-payers and even more so for international companies and individuals since Israel is co-signed on Bilateral Double Taxation Agreement with some 44 countries from around the world, including (the US, Great Britain, Japan, China, France, Germany etc.).


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