PalestineTax Obligations Detailed

In Palestine, employers face various tax obligations related to employee payroll, value-added tax (VAT), and property tax.

Employer Tax Obligations in Palestine for 2025

As of February 5, 2025, the following employer tax obligations are in effect in Palestine:

Value Added Tax (VAT)

• The standard VAT rate is 16% on applicable goods and services.
• Input VAT on purchases (including fixed assets) is refundable, regardless of whether the purchases relate to local sales or exports.
• Imported goods are subject to 16% VAT. This input VAT is deductible from output VAT or claimable from VAT authorities.

Customs Duties

• Customs duties and purchase taxes are levied on imported goods based on the product type and country of origin.
• Rates vary depending on trade agreements. For example, many imports from the European Union and Turkey have zero customs duties due to trade agreements, but purchase tax may still apply.

Property Tax

• A 17% property tax is levied on rental income from buildings.
• Taxpayers can deduct 40% of the property tax paid as expenses and claim a credit for the remaining 60% against their tax liability. The credit cannot surpass the tax paid on rental income for the tax period.

Payroll Tax

• Employee income is taxed via withholding at the following rates based on annual Israeli Shekel (ILS) earnings:

  • ILS 1 to ILS 75,000: 5%
  • ILS 75,001 to ILS 150,000: 10%
  • ILS 150,001 and above: 15%

Corporate Income Tax

• Palestinian companies generally face a 15% corporate income tax rate.
• Telecommunication companies and those considered pure monopolies in the Palestinian market are subject to a 20% rate.

Additional Considerations:

• Palestine has no social security contributions, excise taxes, transfer taxes, or stamp taxes.
• The tax year aligns with the calendar year (January 1st to December 31st).
• Annual tax returns are due by April 30th of the following year.
• Employers must withhold payroll taxes and remit them monthly.
• Israeli authorities retain a percentage of income tax collected from Palestinians working in Israel, with the balance remitted to the Palestinian Authority (PA).

Please note that this information is current as of today, February 5, 2025, and might be subject to change. Consulting with a tax professional or the Palestinian tax authorities is recommended for the most up-to-date information and specific guidance.

Employee tax deductions in Palestine are complex, influenced by Israeli control over tax revenues and varying based on employment location.

Income Tax

• Employees within Palestine: Subject to income tax according to the following annual brackets:

  • ILS 1 - 75,000: 5%
  • ILS 75,001 - 150,000: 10%
  • ILS 150,001 and above: 15%

• Employees in Israel or Israeli Settlements: Israel deducts income tax, a portion of which is transferred to the Palestinian Authority. The exact percentage transferred varies based on employment location (Israel vs. settlements) as defined by agreements and Israeli law. Additional deductions are imposed by Israel, ostensibly to offset various costs and as punitive measures. These deductions are a significant point of contention and impact the Palestinian Authority's budget.

Withholding Tax (WHT)

• Residents: WHT applies to payments exceeding ILS 2,500. The rate depends on the WHT certificate issued by the Tax Department, or defaults to 10% if no certificate is provided.

• Non-Residents: A 10% WHT is applied to payments made to non-residents.

Social Security and Other Deductions

For Palestinian workers employed in Israel, deductions are made for social security, health insurance, and other benefits by the Israeli authorities. These deductions are estimated to be about 23% of the worker's wages. However, the precise amount varies based on the employee's sector of employment.

Value Added Tax (VAT)

While not a direct employee deduction, the current VAT rate of 17% in Israel (potentially rising to 18% in 2025) affects the cost of goods and services and therefore indirectly impacts employees' real income.

Challenges and Current Situation

The Palestinian Authority faces significant challenges due to Israeli deductions from clearance revenues, a vital source of funding for its budget. These deductions impact the government's ability to meet financial obligations, including public sector salaries. Local revenues are also under pressure due to economic hardships in Gaza. The Palestinian Authority is taking steps to address these fiscal challenges, including seeking the release of withheld funds and optimizing resource allocation.

It's important to note that the tax situation in Palestine is dynamic and subject to change due to the ongoing political and economic circumstances. As of February 5, 2025, this information reflects the latest available data, but ongoing developments may affect these figures.

In Palestine, the Value Added Tax (VAT) is levied at a standard rate of 16% on most goods and services.

VAT Registration

Businesses operating in Palestine are generally required to register for VAT, regardless of their size or turnover. This registration simultaneously covers both income tax and VAT. The registration process involves submitting an application along with required documentation to the Ministry of Finance office within the relevant governorate.

VAT Filing and Payment

Businesses registered for VAT are required to file periodic VAT returns and remit the collected tax to the Palestinian Authority. The specific deadlines for filing and payment are determined by the tax authorities, and penalties may apply for late submissions or payments. Even if no sales transactions occur during a given month, businesses may still be required to submit a VAT return indicating zero sales.

VAT Refunds and Exemptions

Businesses can claim refunds for VAT paid on purchases related to their business activities. Refunds can typically be received either as a cash payment or as a credit against future VAT liabilities.

Certain goods and services are exempt from VAT. These typically include exports, essential goods like basic foodstuffs, and services related to specific sectors such as education or healthcare. Additionally, projects supported by the Palestinian Authority, such as investments in infrastructure or food processing, may also be eligible for VAT exemptions. It's important to consult the latest regulations to determine the specific goods and services that qualify for exemptions.

Other Taxes Relevant to Employers of Record

• Purchase Tax: This tax is levied on specific consumer products at rates ranging from 5% to 95% depending on the product type. Products manufactured for export are typically exempt.
• Income Tax: Employees working in Palestine are subject to income tax, deducted at source based on progressive tax brackets.
• Property Tax: Property tax is levied at a rate of 17% of the rental income received from buildings.

It is important to note that the tax regulations and rates in Palestine can be subject to change. Therefore, staying informed about the latest updates from the Ministry of Finance and seeking professional tax advice are crucial for accurate compliance. As of today, February 5, 2025, this information reflects the current state of VAT regulations in Palestine.

Palestine offers various tax incentives to attract investment and stimulate economic growth.

Investment Incentives

• Customs Duty Exemptions: Fixed assets and spare parts (up to 15% of fixed asset value) are exempt from customs duties.
• Free Transfer of Funds: Investors can transfer financial resources out of Palestine using applicable market exchange rates in convertible currency.
• Income Tax Benefits:
  • Agriculture, industrial, and tourism projects: 0% income tax for up to five years, followed by 10% for three years. A grace period of up to four years or until profitability is reached may precede these periods.
  • Export-Oriented Investments: Incentives are available for investments increasing production exports by over 40%.
  • Local Content Utilization: Incentives are available for investments using at least 70% local content.
  • Job Creation: Investments creating at least 25 new jobs during the benefit period receive incentives.
• Equal Treatment: No distinction exists between foreign and domestic investors regarding incentive eligibility.

Individual Income Tax

• Tax Brackets (as of 2011):
  • ILS 1 to 75,000: 5%
  • ILS 75,001 to 150,000: 10%
  • ILS 150,001 and above: 15%
• Deductions: Specific deductions exist for residents, transportation costs (or 10% of annual salary), university studies (up to a yearly cap, excluding scholarship recipients), and home construction/purchase (one-time deduction or yearly interest deduction up to a limit for a maximum of 10 years).
• Exemptions: Exemptions apply to gains from property sales and capital gains from securities sales. As of January 22, 2025, no other significant individual tax credits or incentives exist under Palestine Tax Law.

Corporate Income Tax

• General Rate: 15% on income.
• Exceptions: Telecommunication and monopolistic companies may be subject to a 20% rate.
• Investment Promotion Law Incentives: Qualified projects approved by the Palestinian Investment Promotion Agency (PIPA) may benefit from reduced income tax rates (5% for five years, followed by 10% for three years). Exact details on the latest incentives and application process should be confirmed with PIPA.

Tax Laws and Regulations

The primary legal frameworks governing these incentives include the Law on the Encouragement of Investment in Palestine No. (1) of 1998, subsequent amendments, the Palestinian Income Tax Law number (8) of 2011 (amended by Decree number (5) for 2015), and other relevant regulations.

Further Information

For the most up-to-date and official details on these incentives, eligibility, application procedures, and other specific requirements, it's recommended to consult the Palestinian Investment Promotion Agency (PIPA), Ministry of National Economy, or a qualified tax advisor in Palestine.