IsraelTax Obligations Detailed

In Israel, employers have various tax obligations for their employees, encompassing payroll withholding, social security contributions, and corporate income tax.

Income Tax

• Tax Brackets and Rates (2025): Israel's income tax system uses progressive brackets. As of 2025 the tax rates are:

  • 10% for income up to 7,010 ILS.
  • 14% for income between 7,011 and 10,060 ILS.
  • 20% for income between 10,061 and 16,150 ILS.
  • 31% for income between 16,151 and 22,870 ILS.
  • 35% for income between 22,871 and 54,300 ILS.
  • 47% for income between 54,301 and 75,480 ILS.
  • 50% for income above 75,481 ILS.

• Foreign Expert Minimum Salary: Foreign experts working in Israel must earn at least twice the average monthly wage. For 2025, with the average wage set at 13,316 ILS, the minimum salary for foreign experts is 26,632 ILS per month.

Social Security (National Insurance)

• Employer Contributions (2025):

  • 4.51% on monthly income up to 7,522 ILS.
  • 7.6% on income between 7,522 ILS and 50,695 ILS (the maximum contribution ceiling).

• Employee Contributions: Employees also contribute to National Insurance, which covers healthcare, pensions, and other social benefits.

• Non-Resident Employees: Lower rates apply for non-resident employees.

Corporate Income Tax (CIT)

• Standard Rate (2025): The corporate income tax rate is 23%.

• Reduced Rates: Businesses meeting specific criteria under the Encouragement of Capital Investments Law can qualify for reduced CIT rates.

• Tax Returns: The corporate tax return is generally due five months after the end of the tax year (May 31 for calendar-year taxpayers). However, extensions are possible.

Value Added Tax (VAT)

• Deadlines: Filing and payment deadlines for VAT typically fall on the 15th of each month for periodic returns, the 16th for income tax deductions, and the 23rd for the detailed VAT report. However, the Israeli tax agency publishes specific deadlines for each month, which can vary.

Employee Stock Option Plans (ESOPs)

• Taxation: ESOPs are governed by Section 102 of the Israeli Tax Ordinance. Employers can choose to tax options as regular employment income or as capital gains. Capital gains taxation allows for a reduced flat rate.

Other Employer Obligations

• Payroll: Employers must withhold income tax and social security contributions from employee salaries.

• Benefits: Employers must provide certain statutory benefits, including health insurance and pension contributions.

• Compliance: Employment contracts must comply with Israeli labor laws.

This information is valid as of February 5, 2025, and may be subject to change due to legislative updates or further announcements from the Israeli tax authorities. Always consult updated official resources and/or legal counsel for the latest information.

In Israel, employee tax deductions encompass various areas, including income tax, National Insurance, and health tax, impacting net pay. Let's explore the key aspects of these deductions.

Income Tax

Income tax in Israel operates on a progressive system, meaning higher earners face higher tax rates. As of 2025, the tax brackets and rates are as follows:

• Up to 7,010 ILS: 10%
• 7,011 - 10,060 ILS: 14%
• 10,061 - 16,150 ILS: 20%
• 16,151 - 22,870 ILS: 31%
• 22,871 - 54,300 ILS: 35%
• 54,301 - 75,480 ILS: 47%
• Above 75,481 ILS: 50%

For example, an employee earning 20,000 ILS per month would fall into the 31% bracket. Their income tax calculation would involve paying different rates for each portion of their income, falling within various brackets, making it progressively higher.

National Insurance

National Insurance contributions fund social security benefits like healthcare, pensions, and unemployment support. Both employers and employees contribute.

• Up to 7,522 ILS (60% of average wage): Employee contributes 4.27%, employer contributes 4.51%.
• Above 7,522 ILS (up to 50,695 ILS): Employee contributes 12.16%, employer contributes 7.6%.

Income above 50,695 ILS is not subject to National Insurance contributions.

Health Tax

Health tax supports the national healthcare system and is deducted solely from the employee's salary.

• Up to 7,522 ILS: 3.23%
• Above 7,522 ILS: 5.17%

There is no employer contribution for health tax.

Other Deductions and Considerations

• Pension Funds: Employers typically contribute to employee pension funds. The exact amounts vary but can significantly reduce taxable income.

• Education Funds: Employees can contribute up to 15,712 ILS monthly to education funds, which offer tax advantages for professional development and educational pursuits.

• Foreign Workers: Deductions for foreign workers follow specific regulations, particularly concerning health insurance and housing costs, sometimes capped as a percentage of their salary.

• Travel and Subsistence: Employees can deduct work-related travel and subsistence expenses incurred outside their usual work location, adhering to specific guidelines.

It is important to note that these rates and regulations can change. Consulting with a tax professional or using updated payroll software ensures accurate and compliant deductions.

In Israel, the standard VAT rate is 18% as of January 1, 2025, impacting businesses and individuals.

VAT Registration

Businesses with an annual turnover exceeding 120,000 ILS (approximately 32,846 USD as of January 24, 2025) must register for VAT. Businesses operating below this threshold can register voluntarily to reclaim input VAT. There are different VAT registration classes: "Authorized Dealer" (Osek Morshe) for standard businesses, "Exempt Dealer" (Osek Patur) for small businesses under the threshold, and a separate category for non-profit organizations. Foreign businesses may require a fiscal representative unless specific exemptions apply.

VAT Rates and Exemptions

• Standard Rate: 18% (increased from 17% on January 1, 2025). This applies to most goods and services.
• Zero Rate (0%): Applies to exports, certain tourism services, and specific goods like fruits and vegetables.
• Exempt: Financial services, certain real estate transactions, diamonds, precious metals, and non-profit organizations are VAT-exempt but may be subject to other taxes, such as payroll tax.

Invoicing Requirements

• As of 2025, VAT-registered buyers must request invoices for business-related purchases exceeding 350 ILS (approximately 96 USD).
• Additional VAT collection, payment, and invoicing obligations are triggered for purchases surpassing 28,115 ILS.
• The Israel invoice model is being implemented gradually. As of May 5, 2024, tax invoices exceeding 25,000 ILS require an allocation number issued by the tax authorities for input tax deduction. This measure is intended to combat fraudulent invoicing.

Filing and Reporting

• Returns: Authorized Dealers file monthly or bi-monthly returns, depending on turnover. The filing frequency is monthly for turnovers exceeding 1,490,000 ILS. Businesses below this threshold can usually file on a bi-monthly basis.
• Deadline: VAT returns are due by the 15th of the following month after the reporting period.
• Payment: VAT payments must be remitted by the same deadline and paid to approved Israeli banks.
• Additional Reporting: Businesses exceeding a specific annual turnover must file electronic transaction reports.
• Input Tax Surplus: Businesses must report specified input tax surplus amounts exceeding 20,974 ILS (approximately 5,741 USD).

Penalties

• Late Filing: Penalties apply for overdue VAT returns, with amounts adjusted periodically. As of July 1, 2024, the penalty is 239 ILS (approximately 65 USD) for each two-week delay.
• Inadequate Recordkeeping: Penalties for insufficient VAT records are calculated as 1% of the tax liability, with a minimum of 359 ILS (approximately 98 USD) as of July 1, 2024.

Specific Taxes for Certain Sectors

• Financial Institutions: Pay a VAT-equivalent tax of 18% based on total payroll and profits.
• Non-profit Organizations: Subject to a VAT-equivalent payroll tax of 7.5%.

This information is current as of February 5, 2025, and may be subject to change. Always consult with a tax professional for the most up-to-date information and personalized advice.

Israel offers a range of tax incentives for both individuals and corporations.

Personal Income Tax Incentives

• Personal Tax Credits: Tax credits are available for residents based on their status, such as having dependent children, being a new immigrant, or being a single parent. Each credit point reduces tax liability. As of 2024, each point was worth ILS 242 monthly, with a minimum of 2.25 points for residents. Note: Credit point value is subject to annual adjustment and may differ for 2025. Foreign residents are not eligible.
• Charitable Contributions: Donations to recognized public institutions qualify for a 35% tax credit. For 2024, the minimum aggregate donation is ILS 207, up to a maximum of 30% of taxable income or ILS 10,354,816, whichever is lower. Unused amounts may be carried forward for three years under specific conditions.
• New Immigrant and Returning Resident Benefits: These benefits apply for ten years upon becoming an Israeli tax resident:
  • Exemption from Israeli tax on passive income (dividends, interest, rent, royalties, pensions) from outside Israel.
  • Exemption from Israeli tax on business, vocation, or salary income sourced outside Israel (with some limitations).
  • Exemption from capital gains tax on the sale of assets located outside of Israel.
• Periphery Tax Break: Residents of specific towns, cities, and settlements may qualify for a tax break. Eligibility depends on location (distance from the country's center, proximity to borders), socio-economic level, and population size.

Corporate Tax Incentives

• Preferred Enterprise: Qualified corporations may benefit from reduced corporate tax rates on "Preferred Income." The rate for 2024 was 16%, or 7.5% for enterprises in peripheral zones. Dividends from Preferred Income are taxed at 20% for Israeli residents. Non-resident shareholders may qualify for reduced rates according to applicable tax treaties with pre-approval from the Israeli Tax Authority (ITA).
• Special Preferred Enterprise: This category, generally a Preferred Enterprise with Preferred Income exceeding ILS 1 billion and consolidated revenues over ILS 10 billion, receives further tax reductions. Tax rates can be as low as 8%, or 5% if in a peripheral zone, for a benefit period of 10 years.
• Preferred Technological Enterprise: A specific incentive program exists for these enterprises, offering a reduced corporate tax rate of 12% (or 7.5% in preferential zones) on income linked to intellectual property. Dividends distributed to Israeli resident shareholders from the preferred income would be subject to 20% tax.
• High-Tech Incentives: Recent legislation provides tax benefits to encourage investment in the high-tech sector, including:
  • Withholding tax exemption on interest payments to foreign financial institutions.
  • Five-year tax amortization of acquisition costs.
  • Tax credits for individual investors.
• R&D Incentives: Various tax incentives exist for Research and Development (R&D) activities, including:
  • Grants and tax breaks for companies engaging in approved R&D projects. Specific programs and benefits depend on various factors. For instance, "Angel's Law" offers tax benefits to individuals investing in qualified Israeli R&D companies.
• Approved Enterprises: These may qualify for fixed asset grants between 10% and 32%, and reduced company tax rates between 10% and 25% for periods of seven to fifteen years. These benefits typically apply to enterprises operating in development or priority areas.

Important Considerations: This information is for general guidance only and is current as of February 5, 2025. Always consult with a qualified tax advisor for personalized advice on your specific circumstances. Tax laws and regulations can change frequently, so it is crucial to verify the latest updates before making decisions. You should consult the Israeli Tax Authority for specific details and official information.