Israel Finance Ministry, International Division

Excerpts from the
Annual State Revenue Report for 1997

THE ISRAELI TAX SYSTEM

ADMINISTRATIVE STRUCTURE OF THE TAX SYSTEM

	A. GOVERNMENT MINISTRIES
	B. NATIONAL INSURANCE
	C. MUNICIPAL AUTHORITIES

Several agencies impose and collect taxes and compulsory payments:

a. Government ministries;

b. The National Insurance Institute;

c. Municipal authorities.

A. GOVERNMENT MINISTRIES

1. Economic Research and State Revenue Administration

The main functions of the Administration are to analyze economic developments and elaborate macroeconomics forecasts; to advise the Minister of Finance and the Ministry administration in economic policy matters including taxes; to set guidelines for the tax divisions in preparing the annual state tax-revenue budget; and to initiate proposals for changes in the tax system and the organizational system of the tax units, as part of the government's economic policy. The Administration has over arching responsibility for legislation in tax affairs and in monitoring the implementation of tax policies. The Administration is also in charge of tax research and provides the public with information in tax matters. The Administration coordinates the work of inter ministerial committee that considers changes in government offices' fees.

2. Income Tax and Property Tax Division

The Division collects direct taxes, property taxes, and payroll tax from nonprofit organizations and financial institutions. Payroll tax is applied to the payroll of nonprofit organizations and on wages and profits of financial institutions.

The Income Tax Division has 3,500 employees. It is composed of staff departments headed by the Income Tax Commission, including Administration and Organization, Assessments and Economics, Investigations, Professional Division, Legal Division, Deductions System, Collections and Intelligence, Land Taxation, Internal Audit, Bookkeeping, and Bailiff's Service.

Assessments are made by the assessors' and land-taxation offices that implement the various tax laws (the Income Tax Ordinance and related statutes, the Land-Betterment Tax Law, and the Property Tax Law.)

3. Customs and Value Added Tax Division

The Customs and Value Added Tax Division collects indirect taxes on imported goods and domestic manufacture. The Division applies the Value Added Tax Law, the Customs Ordinance, the Purchase Tax on Goods and Services Law, and regulations based on them.

The Division has 2,000 employees. It is composed of an administration and the following field units: seven customs houses, seventeen VAT and purchase-tax units, and five units for investigations.

4. Computer Service System (Sha'am)

The Computer Service System is an auxiliary unit of the Finance Ministry that manages the computer information systems and provides the tax system with development and maintenance services. Information services for the tax divisions are also provided by additional government agencies such as Malam.

5. Other Government Ministries that Collect Taxes

Various government ministries apply and collect fees. Most fee collection is performed by the ministries of Transport, Justice, Finance, and the Interior. The main fees apply to driving and motor vehicles, the court system, and passports. All fees require the approval of the Minister of Finance before they go into effect or before the relevant Knesset committee adjusts their rate. The Minister of Finance approves changes in fees after they are discussed by an inter ministerial committee headed by the Director of the State Revenue Administration, who presents the minister with recommendations concerning them.

6. The National Insurance Institute

The National Insurance Institute collects compulsory payments under the National Insurance Law (Combined Version), 5755-1995, and the taxes set forth in the State Health Insurance Law, 5754-1994. The Institute is supervised by the Minister of Labor and Social Affairs, who implements the National Insurance Law and is authorized to introduce regulations based on it.

The minister heads the fifty-member National Insurance Council, in which labor organizations, management organizations, government ministries, and the public are represented. The Administration is the managing and executive authority of the National Insurance Institute. The Instate is geographically decentralized and has seventeen branches and fifty-five sub-branches countrywide. In all, it has 3,300 employees.

7. Municipal Authorities

Municipal authorities collect municipal property taxes, fees, and betterment charges for properties in their jurisdiction. Each authority has its own tax administration.

The law allows municipal authorities to award discounts at its discretion. An exception to this rule is the Senior Citizens Law, 5950-1989, which requires municipal authorities to give a 30 percent reduction on municipal property tax for men aged 65+ and women aged 60+, if they so request.

TAX BASES AND RATES

A. Income Tax and Property Tax Division

The main taxes collected by the Income Tax Division are income tax, capital-gains tax, land-betterment tax, property tax, and payroll tax.

(1) Income Tax

(a) Personal Income Tax

Tax base: Personal income tax is imposed on individuals' taxable income that was accrued in, derived from, or received in Israel from the following sources:

Work income, including income from labor, a business, a vocation, and various types of benefits derived from the taxpayer's labor in the past. Individuals who generated income overseas are not liable to personal income tax in Israel unless they practice the same vocation in Israel or were sent overseas by an Israeli employer.

Income not from work (passive income), including income from dividends, rental of an asset, interest, and so on. Several sources of income are tax-exempt: most transfer payments from the National Insurance Institute and the Ministry of Defense, most income from rental of a dwelling, and the income of blind and disabled persons who are eligible for the exemption (up to a ceiling). All individuals are assessed separately, as is a household on the condition that the sources of the spouses' earned income are not interdependent. When interdependence is present, or when the income is passive, the household is taxed in the name of one of the spouses, as the spouses choose.

Table VI-1
Income Tax Rates and Brackets-Monthly Income, 1998
(NIS and Percent)

Tax Bracket	Monthly income		Percent
	Minimum (NIS)	Maximum (NIS)
(1)	0	1,770	10
(2)	1,771	3,450	20
(3)	3,451	9,330	30
(4)	9,331	16,910	45
(5)	16,910+		50

Source: Income Tax Commission

These brackets and rates apply only to earned (labor) income. Income not from personal services (i.e., passive income, such as capital gains) are taxed at an initial rate of 30 percent and thence at the other brackets that apply to earned income (45 percent and 50 percent). Other kinds of non-employment or self-employed income are taxed at a limited and uniform rate. For example, dividend income and overseas income are taxed at 25 percent and interest on bonds and foreign securities at 35 percent.

Since the 1995 fiscal year, individuals who have reached the age of 60 have paid an initial tax rate of 10 percent on all types of income (work income and other). Their remaining income is taxed at the regular rates shown in Table VI-1.

Tax Credits

Most credits are given in the form of credit points subtracted from tax. Each point is worth NIS153. Since January 1, 1997, credit points have been adjusted once per year.

The credit points and the main credits are described below:

(a)

Every Israel-resident taxpayer is entitled to 2.25 credit points. Since fiscal year 1996, women have been entitled to a further half credit point. (In fiscal year 1995, married women only were given one supplementary credit point.)

(b)

Married persons with non-working spouses are entitled to an additional credit point.

(c)

Since January 1996, working women with children under 18 have been entitled to one additional credit point for each child. Previously, an additional credit point was given for each odd-numbered child in the family. Also since January 1996, working mothers have been entitled to only half a credit point per child during the year following the child's birth, and to half a credit point in the year in which the child reaches age 18.

(d)

Recent immigrants are entitled to three additional credit points in their first eighteen months in the country, two additional credit points in the following year, and one credit point in the next successive year.

(e)

Individuals with dependent children (divorcees, widows/widowers, and single-parent families) are entitled to one additional credit point on the grounds of being the heads of single-parent families.

(f)

Credits and/or deductions are awarded for contributions to benefit-type provident funds, life-insurance plans, and benefit programs other than comprehensive pension plans. For example, pension contributions toward which one's employer did not make a contribution to a provident fund are given a deduction of up to 5 percent, up to a wage ceiling of NIS8,500 per month, and a 25 percent credit up to 5 percent of eligible income that does not exceed NIS8,500 per month. The credit is given for that portion of the contribution for which the aforementioned deduction is not given.

(g)

Charitable donations are given a 35 percent credit up to 30 percent of taxable income or NIS438,000, whichever is lower. If the donor is eligible for a research and development deduction, the combined deduction and credit shall not exceed 50 percent of his/her taxable income.

(h)

A 15 percent tax credit is given for shift labor, up to a maximum credit of NIS645 per month. However, the credit is not awarded for the portion of the shift wage that, after added to the regular wage, results in a monthly income exceeding NIS7,360.

(i)

Residents of development areas are given tax credits as follows:

Table VI-2
Localities and Income-Tax Reductions

(NIS and Percent)

Locality:	Migdal ha-'Emeq	Various localities: Ofaqim, Safed, Tiberias, Karmiel, Sederot, 'Arad, etc.	Most localities over the Green Line	Yeroham, Mitspe Ramon, Eilat¹	Northern border localities (except Qiryat Shemona)	Qiryat Shemona
Rate of reduction (%)	3	5	7²	10	15	20
Dependency on place of income generation	None	None	None	None	None	None
Maximum qualifying income	NIS 6,435 per month	NIS 6,535 per month	NIS 9,330 per month	NIS165,720 per year, a 10% reduction is given in income exceeding this.	NIS165,720 per year, a 10% reduction is given in income exceeding this.	NIS165,720 per year³

Source: Income Tax Commission

Notes to the table:

1.	Residents of Mitspe Ramon are eligible for a 25 percent reduction as an alternative (instead of 10 percent) only for income generated in and near Mitspe Ramon. The maximum credit is NIS3,000 per year. Residents of Eilat also receive a credit for taxable income from a business or vocation on account of income generated in the Eylot area.
2.	In most localities where a 7 percent reduction is offered, it is also given to "teaching workers" and "medical workers" most of whose earned or vocational income is generated in these localities, even if they do not dwell there. People who work in Beit She'an or Qiryat Shemona are also entitled to the 7 percent reduction.
3.	A discount of only 10 percent is given for income exceeding this limit.

Exempt Income (Generally Subject to a Ceiling)

1. Income of the blind and the disabled-a full tax exemption up to NIS35,200 per month.

2. Benefits from the Ministry of Defense and the National Insurance Institute.

3. Workers' compensation benefits.

4. Interest on savings plans.

5. Gains from sale of securities-if they are not considered a business income.

6. Employers' contributions to wage-earners' advanced-training funds are tax-exempt if kept with the fund for six years without interruption or, under certain conditions, for a shorter period.

Deductions from Income

1. Personal health-insurance premiums (not including dental insurance).

2. 52 percent of expenses on National Insurance payments for the self-employed.

3. In 1996, contributions of the self-employed to advanced-training funds (up to 4.5 percent of income, with a ceiling) became self-deductible.

Limited Tax Rates

The types of income listed below are taxable at limited final rates irrespective of the tax brackets that apply to the taxpayer's other income:

1.	Income from dividends of publicly-owned corporations-25 percent.
2.	Income from dividends of Approved Enterprises under the Encouragement of Capital Investments Law-15 percent.
3.	Income up to NIS6,350 per month from rental of dwellings to individuals is tax-exempt. Income exceeding this sum is subtracted from the sum of the exemption by the same amount by which it exceeds the exemption sum. In other words, the tax exemption falls in linear fashion to zero at an income level double that of the exemption ceiling of NIS6,350 per month. Accordingly, a monthly income from residential rental that exceeds NIS12,700 per month is taxable at the regular income-tax rates, with an initial tax bracket of 30 percent.
4.	If a residential unit is rented to a corporation, the aforementioned exemption is not given without approval of the Income Tax Commissioner. If the dwelling is put to residential use, the rental income is liable to tax at a rate of 10 percent. The income ceiling that creates an entitlement to the reduced tax rate of 10 percent is NIS6,300 per month. When the rental income exceeds this sum, the entire rental income is taxed at the regular income-tax rates, with a beginning rate of 30 percent.

Under certain conditions, key-money income of individuals and corporations is taxed at a limited rate of 35 percent.

B. Corporate Income Tax

The Income Tax Ordinance defines the taxable income of corporations and allows them to deduct various expenses used to generate income, e.g., depreciation, payroll, and research and development.

Tax Base

The tax base is the same as that of personal-income tax. Taxable income is adjusted to the rate of increase of the Consumer Price Index as set forth in the Income Tax Law (Inflationary Adjustments), which stipulates the method of adjustment. The decline in inflation in the past few years has made this adjustment less important.

Tax Rate

To determine tax liability, corporations are divided into four groups:

(1)	Ordinary corporations are taxed at 36 percent.
(2)	Corporations with foreign investment are taxed at 10-25 percent, commensurate with their proportion of foreign investment. When all investment in a company is from foreign sources, the company is taxed at only 10 percent. When 50 percent of the total investment is of foreign origin, the company is taxed at 17.5 percent. (A weighting formula of foreign and ordinary investment proportions is used throughout.)
(3)	Approved Enterprises under the Encouragement of Capital Investments Law (ECIL) pay corporate tax at a rate of 25 percent, as set forth in the ECIL.
(4)	The alternative track for Approved Enterprises gives such enterprises a tax exemption for two years, six years, or ten years, depending on their location (investment area). The alternative track is available to Approved Enterprises (as defined in the ECIL) that forgo an investment grant.

Exemptions and Reductions

	All research and development expenses are recognized as expenses for the year in which they are made.
	Approved Enterprises are allowed an accelerated rate of depreciation.
	Ordinary firms are exempt from tax on dividend earnings paid out of ordinary income on which corporate tax has already been paid. Approved Enterprises are liable to a 15 percent tax on dividends that they distribute to individuals or corporations.

B. Capital-Gains Tax

Tax Base

Capital gains from the sale of business assets and securities.

Securities traded on the stock exchange are exempt from capital-gains tax, except for (a)securities that are part of the books of account of a business and (b)securities held by individuals who are deemed by the tax assessor to be a part of the business.

Tax Rate

The tax rates are identical to the ordinary income-tax and corporate-tax rates (after subtraction of "inflationary gain" during the term in which such a gain existed). Inflationary gains generated since fiscal 1994 have not been taxed.

Exemptions and Reductions

Income of individuals and mutual funds from the sale of foreign securities that are not traded on the Tel Aviv Stock Exchange is taxed at 35 percent only.

3. Payroll Taxes

There are three types of taxes on wage:

(a) Employers' tax;

(b) Value Added Tax on nonprofit organizations;

(c) Value Added Tax on financial institutions.

(a) Employers' Tax

Tax Base

Employers' total payroll is taxed at 4 percent. The tax applies only to public institutions, nonprofit organizations, and corporations whose entire income is exempt from income tax.

Exemptions and Reductions

Most sectors of the economy are exempt from this tax.

(b) Value Added Tax on Nonprofit Organizations

Tax Base

This tax, at 8.5 percent, is imposed on the payroll of NPOs (including the government).

(c) Value Added Tax on Financial Institutions

Tax Base

This tax, set at 17 percent, applies to payroll and profits in the financial sector.