The rules are complex. In principle, Israeli resident individuals over 18 must file a tax return unless they are eligible for a filing exemption.
In some countries, including the US and the UK, virtually everyone has to file an annual tax return. Here in Israel, to make things easier for some, not everybody has to do so. Here is an overview of the requirements for the 2010 tax year, namely the year ended December 31, 2010.
When is the filing deadline?
The filing deadline is May 31 for online filers and for businesses required to keep double-entry books and April 30 for other individuals.
Time extensions for filing can be requested from the ITA if you have a good reason.
Alternatively, most accounting firms are allowed to spread out the filing of their clients‘ 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.
Who must file online?
Online filings are required from you if are required to file a tax return (see below) if any of the following also apply in the year: if you have income from a business, employment, agriculture; if you sold a non-exempt 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 (see below); if you carried out a reportable tax planning act (see below); or if the Tax Authority requested it. Even if you are required to file online, you must still file the return online as well as the old-fashioned way (on paper).
Notwithstanding the above, no online filing is needed in the following cases:
(1) if your income from a business, employment and agriculture didn‘t exceed NIS 76,710 nor did your spouse‘s income exceed that amount, nor did your joint income NIS 153,420; or
(2) if you and your spouse have reached retirement age (generally 67 for men, 64 for women), or
(3) you are a 10%-or-more shareholder in an Israeli company, or
(4) you claimed ‘‘negative income tax‘‘ benefit.
Who has to file a tax return?
The rules are complex. In principle, Israeli resident individuals over 18 must file a tax return unless they are eligible for a filing exemption. These rules apply even if you don‘t need to file online.
Who is exempt from filing?
Residents will be EXEMPT 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, as summarized below. (Certain people must always file an annual tax return as described in the next paragraph).
New and senior returning residents are exempt from Israeli tax and reporting obligations regarding non-Israeli source income and gains for 10 years after becoming Israeli resident. (Senior returning residents are individuals who lived abroad at least five years and returned to reside Israel in 2007-09, or lived abroad 10 years if they returned to Israel after 2009.)
Salary income may fall within the filing exemption if it did not exceed NIS 613,000 in 2010 (for each spouse) and the required tax was withheld at source. In addition, such ‘‘salary income‘‘ should be one of the following: employment income; pension paid by an employer or a provident fund; severance pay paid upon death or leaving an employer; a lump sum paid instead of a pension; income realized by an employee from shares or share options, pursuant to a plan approved under Section 102 of the Income Tax Ordinance (regardless of which alternative was adopted: capital gain or salary income). If you had more than one employer in the year, the tax withholding needs to be according to instructions obtained from the local tax office.
Rental income may fall within the filing exemption if it was from renting out residential accommodation in Israel; the required tax was paid; it did not exceed NIS 318,000 in 2010 (for each spouse); 10 percent tax was paid thereon by January 30, 2011; and it and 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; it did not exceed NIS 318,000 in 2010 (for each spouse); and tax was paid on account unless an exemption applies. For example, new and senior returning residents (who lived abroad five or 10 years, depending on the date they returned) enjoy a 10-year tax and reporting exemption for foreign income and gains.
Foreign pension income may fall within the filing exemption if any tax due has been paid and it did not exceed NIS 318,000 in 2010 (for each spouse). New and senior returning residents (who lived abroad five or 10 years) enjoy a 10-year tax and reporting exemption for foreign-source income, including foreign pensions.
Interest income may fall within the filing exemption if it relates to interest, discount income, inflation indexation or exchange gains that are non-business in nature and accrued or derived in Israel from a savings plan, deposit, provident fund, publicly traded bond, State of Israel bond or makam short-term bond). The filing exemption only applies if the income is exempt or any tax due was withheld; the income must not exceed in total NIS 613,000 in 2010 if it was taxable. Where tax applies, it is due at rates of 15% (instruments unlinked to the rate of inflation or an exchange rate) or 20% (linked instruments) or up to 45% (in 2010, if interest expenses are claimed; or the lender holds 10% or more of any means of control of the borrower, an employee or service provider, or is related to the borrower).
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; it is exempt or any tax due was withheld; and it must not exceed in total NIS 1,752,000 in 2010 if it was taxable.
Other income may fall within the filing exemption if it did not exceed NIS 318,000 in 2010 and was any of the following: income from which 46% tax was withheld even if you are eligible for a lower rate, or at least 30% tax was withheld if so approved by the ITA (to get any lower rate, you must file a tax return); income that is exempt from tax, provided it is not business, professional or salary income.
Who must always file?
Notwithstanding the above, Israeli resident individuals must generally file an annual personal tax return if they fall into any of the following categories:
1) Holders of a 10% or more interest in a privately held entity, directly or indirectly. This does not apply to new and senior returning residents for 10 years, as outlined above.
2) A married couple not entitled to claim separate tax calculations; for example, because their income is not from independent sources.
3) 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.
4) Sports persons.
5) An individual who was required to file a tax return in the previous year, unless this was because he or she was a residential property landlord.
6) If the individual, or the individual‘s spouse or child under 18, held at any time in the year any of the following: any right in a foreign-resident entity that is not publicly traded on a stock exchange; or other foreign assets if their value on any day in the year was NIS 1,768,000 or more; an account at one or more foreign banking institutions if the total balance in all foreign banking institutions on any day in the year was NIS 1,768,000 or more. This does not apply to new and senior returning residents for 10 years.
7) If the individual conducted a taxable real-estate transaction (directly or via a real-estate entity) in the year unless tax was paid at the maximum rate, or if the tax was spread over more than one year.
8) With regard to trusts, annual tax returns are required from: the trustee of an Israeli Residents‘ Trust or an Israeli Residents‘ Testamentary Trust (the latter having at least one Israeli resident beneficiary) (on Form 1327); but if a settlor or beneficiary are elected to be ‘‘assessable or chargeable,‘‘ or a ‘‘representative settlor/beneficiary,‘‘ they file the return instead of the trustee (on Form 1301); the trustee of a trust that has income or an asset in Israel (Form 1327). The finance minister is empowered to exempt trustees from filing annual tax returns if all their income is exempt from Israeli tax. In various other cases it may be enough to file a trust notice form instead of a tax return. Trusts are complex and specific advice is strongly recommended in each case.
9) Holders of 10% or more of a passive controlled foreign corporation (CFC) or a foreign professional corporation (FPC), as defined in the tax law. This reporting requirement shall not apply to new and senior returning residents for 10 years, as outlined above.
10) Anyone else asked to file a tax return by an assessing officer.
Taxpayers who are not in employment or business, who do not fall within the two reporting requirements listed in No. 6 above and had annual income below NIS 16,605 in 2010 will not be subject to file an annual tax return. This will benefit a number of low-income earners.
Additional reporting requirements apply to anyone who conducts a prescribed reportable tax-planning act (also known as aggressive tax planning).
Do children have to file an Israeli tax return?
Israeli resident children who were under 18 at the beginning of 2010 must file an annual tax return if they had taxable income of NIS 73,460 or more in the year.
When do foreign residents have to file an Israeli tax return?
In principle, foreign resident individuals who derived taxable Israeli source income in the year 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. In practice, Israeli banks are required to withhold tax from most payments – typically 25%. It is necessary to apply upfront to the Israeli payor‘s tax office to apply any more beneficial provisions in a bilateral tax treaty or the domestic Israel law. No tax is withheld on patach foreign-currency bank deposits for 5 – 20 years at Israeli banks if the appropriate bank forms are filled out when remitting funds to Israel.
Which companies have to file?
Briefly, any entity that has income that is taxable in Israel must file an annual Israeli tax return, accompanied by audited financial statements.
As always, consult experienced tax advisors in each country at an early stage in specific cases.