Much has already been written about the law for economic efficiency for the years 2009 and 2010 (alias the budget), which was passed by the Knesset on July 14 after a marathon debate and published in the Book of Laws Number 2203.
The law is quite ambitious; it‘s mission (section 1) is to enable the Israeli economy to cope with the effects of the global economic crisis and lay the basis to bring back growth after the crisis while reducing socioeconomic differences, as well as reducing the government deficit by making it more efficient and developing the peripheral regions.
Here are brief highlights of the main tax measures enacted.
Income-tax rates are to be gradually reduced for individuals over the years 2010-2016. The top income-tax rate will decrease from 46 percent in 2009 for income over NIS 454,681 per year (index linked) to 45% in 2010-2011, 44% in 2012, 43% in 2013, 42% in 2014, 41% in 2015 and 39% in 2016. The minimum income-tax rate will remain 10% for earned income and any income of people aged 60 or more.
The intermediate rates will also decrease by 2016, but only for those earning over NIS 97,921 per year (NIS 8,100 per month approximately) – a bonus for the middle- and upper-socioeconomic groups only?
For investment income the minimum rate will decrease from 30% in 2009-2011 to 24% by 2016.
The standard rate of company tax will decrease from 26% in 2009 to 25% in 2010, 24% in 2011, 23% in 2012, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016. It seems Israel is trying to compete with the low corporate-tax rates in Eastern Europe, even though many of those countries have suffered particularly badly from revenue shortfalls in the economic crisis.
With regard to new residents and certain returning residents, the finance minister is authorized to extend the 10-year tax holiday for foreign source income and gains to 20 years if they make a substantial investment in Israel on terms yet to be decided. Watch this space and don‘t hold your breath.
Tax breaks for ‘‘privileged enterprises‘‘ are to be extended to renewable-energy operations and ‘‘tourist lodging installations‘‘ with at least 11 rooms, not just hotels, as well as other recreational, cultural or pastime tourist attractions.
The tax rate for certain dividends will decrease from 20% or 25% to 12% for a one-year window of opportunity commencing this October 1 if the shares on which the dividend was paid were acquired before 2003 and the profits accrued in the years 1996-2002.
In addition, annual payments of salary, management fees, interest, indexation and other payments to the dividend recipient in the years 2009-2012 must not be less than the annual average in 2007-2008.
With all those conditions, will anyone actually qualify for the 12% dividend-tax rate? If so, wait until October before distributing the dividend.
Also check if any tax breaks (privileged enterprise, approved enterprise) or tax treaty apply to the dividends.
The standard rate of VAT was increased from 15.5% to 16.5% for the 18-month period from this July 1 to December 31, 2010, under separate regulations.
Under the Economic Efficiency Law, all businesses will have to report monthly for VAT purposes, but those with revenues under NIS 835,000 will pay VAT once every two months.
The revenue threshold for so-called exempt dealers will be increased to NIS 100,000 to reduce bureaucracy – but starting January 1, 2012!
Online detailed reporting of purchase and sales invoices will be required to help combat VAT fraud by means of fictitious invoices. This will be introduced in phases, depending mainly on the amount of revenue, over the years 2010-2012.
As for sales invoices, invoice numbers will be allocated to every business, and they must be used. If these invoice numbers are not used, business customers won‘t be able to recover the VAT on the transaction as input VAT. This procedure begins on January 1, 2011.
National Insurance Institute
The upper income limit on which National Insurance Institute payments must be paid has been doubled from NIS 38,415 to NIS 76, 830 per month, for the period August 1, 2009, to December 31, 2010.
What happens if a company employs someone with a gross pay of, say, NIS 80,000? The employee will pay extra NII of NIS 4,610 per month (12% of NIS 76,839 minus NIS 38,415) and the employer will pay an extra NIS 2,086 per month (5.43% of NIS 76,839 minus NIS 38,415). But the income-tax reductions starting in 2010 will mitigate some of the damage from swings and roundabouts.
The above is very brief and general.
As always, consult experienced tax advisers in each country at an early stage in specific cases.