Filing Taxes in Israel

In some countries like the US and UK, citizens are required to file an annual tax return. But the law is more complex in Israel. Not everyone has to file for taxes. The law varies depending on the individual’s annual income,status etc. In principle, Israeli resident individuals over 18 are obligated by law to file a tax return unless they are eligible for a filing exemption.

The deadline for filing taxes in Israel is May 31 for online filers and for businesses required to keep double-entry books and April 30 for other individuals. Requests for time extensions for filing taxes can be granted by the ITA if you have a legitimate reason.  Alternatively, most accounting firms will allow their clients to spread out the filing of their tax returns over a longer period, without providing reasons, according to a special arrangement between the ITA and the Institute of Certified Public Accountants in Israel.

If you are a permanent resident in the US or hold US citizenship while living abroad, you are obligated to file US taxes with the IRS each year no matter which country you live in. Israel is no exception.  And in addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with form TD 90.22.1.

The US and Israel have a tax treaty in place which is helpful when determining which country should be paid specific taxes and at what point those taxes should be paid.  The US — Israel tax treaty is an expat’s guide to ensuring that taxes are paid to the right country.  If you are unsure of the language in the treaty or have any other questions, be sure to talk to a tax advisor to ensure the correct taxes are paid to the correct country.

Filing taxes online is required if you are required to file a tax return or if any of the following also apply in the year:

• If you have income from a business, employment, agriculture.
• If you sold a nonexempt Israeli real-estate interest and didn’t pay tax at the maximum rate.
• If you are a 10%-or-more shareholder in a controlled foreign company.
• If you carried out a reportable tax planning act. Or if the ITA requested it.

Even if you have already filed your taxes online, you are still required to file your taxes with an accountant on paper.  However, Israeli residents can be exempted from filing a tax return if all their income in the tax year was salary income or rental income, or foreign income, foreign pension income, interest income, securities income, or other income or a combination thereof — but only if a number of conditions are met:

• New and retuning senior residents are exempt from Israeli tax and reporting obligations regarding non-Israeli source income and gains for 10 years after acquiring Israeli citizenship.
• Since 2010, salary income that falls under NIS 613,000 for each spouse does not need to be filed for taxes.
• Rental income may receive a filing exemption if it was from renting out residential accommodation in Israel; if it did not exceed NIS 318,000 in 2010 (for each spouse),if 10% tax was paid thereon by January 30, 2011; and if no expenses, losses, exemption or credit was claimed.
• Foreign income may fall within the filing exemption if it was accrued or derived outside Israel or if it relates to foreign securities or Israeli company securities publicly traded on an exchange outside Israel.
• Securities income may fall within the filing exemption if it relates to the sale of securities traded on a stock exchange in Israel or abroad, or a sale of makam short-term bonds.
• Interest income may fall within the filing exemption if it relates to interest, discount income, inflation indexation or exchange gains that are not business related and accrued or derived in Israel from a savings plan.

 

Israeli resident individuals must file an annual personal tax return if they are:

• Holders of a 10% or more interest in a privately held entity, directly or indirectly. A married couple is not required to file separate taxes because their income is not from independent sources.
• If income includes severance pay upon leaving an employment or death, or a pension lump sum that the ITA allowed to be spread over more than one year.
• Athletes, entertainers or celebrities
• Holders of 10% or more of a passive controlled foreign corporation (CFC) or a foreign professional corporation (FPC), as defined in the tax law.
• Anyone else asked to file a tax return by an assessing officer.

As for foreign residents, if they derived taxable Israeli source income in the fiscal year, they must file an annual Israeli tax return. However, they may be EXEMPT from filing a tax return if the required tax was withheld and the income is one of the following: a business or profession conducted in Israel for no more than 180 days in the year: salary, pension, annuity, interest, dividend, rent, royalties.

Immigrants are not required pay taxes on foreign assets such as stocks or foreign land sold within seven years of immigrating. This exemption also includes salaries and passive income earned outside of Israel. The government levies no new taxes on pension payments received by immigrants. In other words, you only pay Israel the same amount of tax on your pension as you did in your former country. Immigrants are only eligible for this deduction if they received pension payments before coming to Israel.