Israel Finance Ministry, International Division

Excerpts from the
Annual State Revenue Report for 1998

THE ISRAELI TAX SYSTEM
(continued)

ADMINISTRATIVE STRUCTURE OF THE TAX SYSTEM

(3) Property Tax

Tax Base

Undeveloped land other than farmland or land used for agriculrure. Valuation is performed by the tax authorities every few years and is adjusted once anually.

Tax Rate

1.2 percent per year on land that serves as business inventory for income-tax purposes.
2.5 percent per year on all other land.
By decision of the Knesset, property tax will bw abolished on January 1, 2000, and replaced by a 2.5 percent sales tax on land and business premises. Building contractors only will pay an 0.8 percent sales tax on new dwellings; this tax is recognized as an expense for income-tax purposes.

Exemptions and Reductions

	Governmental and public institutions, National Institutions, and United Nations agencies are exempt from property tax.
	A landowner who builds one dwelling unit on his/her land is exempt from property tax for 30 months from the beginning of construction.
	Land acquired before 1948 is qualified for a deduction of NIS 84,000 per dunam. The deduction is given for up to ten dunand only.
	Landowners whose holdings generate a total annual tax liability smaller than NIS 300 are exempt.
	Fruit orchards on non-agricultural qualify for a valuation deduction of NIS 70,000 per dunam for tax purposes.

Collection and Enforcement

(a) Personal Taxes

The tax year coincides with the calender year.Ninety percent of personal income tax is collected by withholding at source or by advance payments. Income tax on wage and on supplementary payments(dividents, interest, writers' fees, ect) is withheld at source by the employer of the party that paid income.
Self-employed taxpayers are liable to advance payments, usually as a percent of the previous month' turnover. The percentage is set as the ratio between the tax liability and the taxpayer's turnover as indicated in his/ her most recent known tax return. At the end of the tax year, when annual tax returns are filed, the income-tax authorities perform a final reckoning with these taxpayers.
When taxpayers have income from more than one source, tax is withheld at a 50 percent rate from the remaining sources unless they ask the tax assessor for a lower rate.
The law requires all payers of personal income tax to file returns, but most taxpayers are exempt from this requirement.
Taxpayers whose income is derived from abroad will be required to file returns starting with the 1999 tax year. Accordingly, those who geneerated some or all of their income abroad shall file returns in early 2000 0n their 1999 income.

The main exemptions from the general reporting requirement pertain to the following:

	Israel-resident individuals who derive all of their income from wage or rent, and/or other sources, provided that tax on their income was withheld at source and theit total income in these categories did not exceed the following levels in 1998: (a)... Wage or rent income: NIS 460,000 (b)... Additional income: NIS 240,000 or upto half of total personal income from wage and rent,whichever is lower.
	Resident individuals who derive all of their income from sources other than work, a business, or a vocation, provided that their total income does not exceed a sum three times that of the credit points for which they are eligible during that tax year.
	Nonresidents are exempt from filing if their income was derived or accured in Israel, on the condition that (a)tax was withheld at source and (b)their income originates in a business or vocation that was active in Israel for up to 180 days during the tax year and said income is classified as wage, interest, dividends, or royalties.

In any event, whenever a tax assessor orders individuals to declare their income in a tax return, they must do so.

(b) Corporations

Ordinarily, the corporate tax year coincides with the calendar year. Companies must file tax returns that are confirmed by a CPA and must present the tax authorities with a financial opinion within five months of the end of the tax year.Corporations must pay tax advances on account of the current tax year and must have tax withheld at source for work they perform for others.

Companies make advance payments on account of income tax in two ways:

1. ...as a percent of turnover, determined on the basis of the last year for which the company
...... filed a tax return, and additionaladvance payments for various non-deductible expenses;
2. ...as a defined amount. For example, banks make advance payments on the basis of their
...... most recent known tax return, adjusted by the Consumer Price Index.

(c) Land-Betterment and Capital-Gains Tax

A 50 percent advance payment is usually charged on account of land-betterment or capital-gains tax; this advance is paybale immideately after the sale of the asset. A final assessment is made after the taxpayer files his/her annual return, in which all income is reported.

B. CUSTOMS AND VALUE ADDED TAX DIVISION

The Customs and VAT Division collects most indirect taxes- those that apply to manufactures in respect to the manufacture, sale, purchase, or use of goods and services. Manufacturers record these taxes as current production expenses. In most cases, these taxes apply to consumption by final consumers.

1. Taxes on Domestically Generated Goods and Services

This category includes four types of taxes: Value Added Tax, purchase tax, fuel excise, and stamp tax.

(a) Value Added Tax

(1) VAT on Private and Public Consumption

Tax Base

VAT is applied to the difference between businesses' total sales turnover (including random sales) and their purchases of inputs and capital goods. In practice, the tax applies to private and public consumption. The tax base excludes investments and exports but includes imports meant for consumption. Notwithstanding this, public-sector investments are VAT-liable.

Tax Rate

VAT is applied at a flat rate of 17 percent.
Exemptions and Reductions

1.	A zero rate of VAT (in which the business need not pay on transactions but is entitled to a refund of tax paid on inputs) applies to exports, incoming tourism, sales of fresh produce, international cargo forwarding, and sales of aircraft and marine vessels to businesses that engage in passenger and cargo transport by sea or by air.
2.	An exemption is given (without eligibility for refund of tax paid on inputs), for a term not exceeding twenty-five years, for leasing of dwellings and transfer of real estate for key money.
3.	The Eilat Law: most sales in Eilat are exempt from VAT (except for cigarettes and several consumer durables such as motor vehicles, TV and stereo sets, VCRs, and video cameras). Sales by vendors outside city limits to customer within city limits are also exempt from VAT if the vendors are active in Eilat. Tourism services are exempt from VAT in parts of the Eylot area.
4.	Newly arrived immigrants and returning Israelis are exempt from VAT, as explained in the section on important taxes (below).

(2) VAT on Nonprofit Organizations.

Tax Base

Wage payments by nonprofit organizations (including central government).

Rax Rate

A flat rate of 8.5 percent is charged.

(3) VAT on Financial Instructions

Tax Base

Wage payments are profits of financial instructions (banks, insurance companies, ect.).

Tax Rate

A flat rate of 17 percent is charged.

(4) Purchase Tax

Tax Base

Tax Base

Purchase tax applies to the wholesale price of final consumer goods and a small number of raw materials and intermediates.

Tax Rate

Between 5 percent and 95 percent, depending on the product.

Exemptions

Various products meant for education, health, industry, and agriculture are given a conditional exemption (based on use) from purchase tax.

Purchase Tax on Cigarettes

The purchase tax on cigarettes (both domestic and foreign manufacture) is 55 percent of consumer price, not including VAT, plus NIS 1.024 per pack.

(5) Fuel Excise

Tax Base

A flat-rate tax applies to all types of fuel.

Table VI-5
Fuel Excise Rates, Selected Types of Fuel

NIS per thousand liters, as of January 1, 1998)

Type of fuel	Tax rate
91-octane gasoline	2,019
96-octane gasoline	2,019
95-octane unleaded gasoline	2,019
Diesel fuel at filling station	107
Kerosene at filling station	70

Source: Customs and Purchase Tax Tarriff

(6) Stamp Tax

Tax Base

The tax applies to various documents such as contracts, official papers, notes, and bonds.

Tax Rate

0.4 percent to 3 percent.

Exemptions and Reductions

Various contracts pertaining to agreements with the government, and labor contracts, as listed in an appendix to the law.

2. Import Taxes

Three kinds of taxes are imposed on imports:

(a) Customs;

(b) Purchase tax;

(c) Value Added Tax.

(1) Customs

Tax Base

Customs are applied to the CIF value of imports (import value including shipping and insurance) of groups of products imported from "third countries," i.e., those with which Israel does not have Free Trade Area agreements. Israel has FTA agreements with Canada, the Czech Republic, E.F.T.A., the EU countries, Hungary, Poland, Slovakia, Slovenia, Turkey, and the United States.

Tax Rate

Customs tariffs range from 8 to 20 percent of CIF import value. In the program that liberalized imports from "third countries," declining tariffs were imposed on various product groups. (See Chapter XIV for details.

Exemptions and Reductions

1. Imports from countries with which Israel has FTA agreements are exempt, as stated above.
2. Imports of ships, aircraft, diamonds, and many other products-foremost inputs and intermediates-are customs-exempt.
3. Newly arrived immigrants and returning Israelis are given an exemption from customs (and from purchase tax and VAT) for a list of products elaborated and set forth in the Purchase Tax (Exemption) Order, 5736-1975. The list is comprehensive for immigrants (including private motor vehicle) and less so for returning Israelis. The list is updated from time to time. Immigrants from "distress countries" (as shown on a list) receive a "tax-exemption grant" (NIS 11,472 per household, on average) and are fully tax-liable for all products (except for a VAT exemption on purchase of furniture).
4. Various products meant for education, health, industry, and agriculture are given a customs exemption conditional on use.

(2) Purchase Tax on Imports

Tax Base

The computed CIF value of imports, plus tariffs, plus the percent-quota supplement on certain products. Starting in January 1991, "arrangement importers" (importers who meet certain criteria and carry out a quantity of imports stipulated in the law) have been given the option of determining their tax base in view of their actual profit margin instead of a computed percent-quota supplement.

Tax Rate 5-95 percent, depending on the types of products.

Exemptions and Reductions

Newly arrived immigrants and returning Israelis are given exemptions and reductions, as explained above.

(3) Value Added Tax

Tax Base

Imported goods and services, on the basis of the CIF price, plus customs, plus purchase tax.

Tax Rate

uniform tax rate of 17 percent is applied.

Exemptions and Reductions

Identical to the VAT exemptions and reductions applying to domestic manufacture. Newly arrived immigrants and returning Israelis are exempt from VAT as explained above.

3. Collection and Reporting

VAT is paid on a monthly for large businesses, or bimonthly basis by those liable to it. Input tax is refunded on a current basis during the year. On domestic manufacture, the vendor is the party liable to purchase tax. On imports, the importer becomes liable at the point where the goods are released from inspection of the Customs Authority. Fuel excise is remitted directly by the Israel National Oil Refineries.

C.GOVERNMENT MINISTRIES' FEES

The Basis for Payment of Fees Various government ministries charge miscellaneous fees for licenses or services that they provide.

Level of Fee

Fees are compulsory payments, not taxes, for which the payer receives something in return-although not necessarily in direct proportion-for his/her money. Most fees are adjusted automatically once or twice a year, commensurate with increases in the Consumer Price Index.

Exemptions and Reductions

In limited cases, a reduction or exemption is awarded on the basis of ability to pay, type of payer (e.g., a reduced motor-vehicle license fee for ambulances), etc.

Collection and Enforcement

The revenue from most fees collected by government ministries is forwarded to the state exchequer. A small portion is earmarked to fund the revenue-dependent expenditure of the offices that collect them. Since 1992, the Economic Arrangements Law has prohibited the imposition of new earmarked fees.

D.NATIONAL INSURANCE

The National Insurance Institute collects National Insurance contributions and health tax.

1. National Insurance Contributions

Tax Base

Earned income of employees and the self-employed. Spouses are liable to National Insurance contributions in accordance with their own income. Insured persons who also have an income from unearned sources (passive income, such as that from rent or interest) are charged National Insurance contributions under certain conditions, up to an income ceiling.
The maximum taxable income for National Insurance remittances is four times the national average wage (NIS 23,924 per month). This ceiling is adjusted at the beginning of each year and whenever a Cost-of-Living Allowance is given.
Non-working adults are charged a reduced sum.

Tax Rate

National Insurance contributions for employees are remitted by employees and employers alike.

There are two brackets for National Insurance contributions:
1. A reduced rate up to half the national average wage (NIS 2,991 per month).
2. A regular rate, applying to income over half the national average wage up to the income ceiling for National Insurance contributions.

Table VI-6
National Insurance Contribution and Health Tax Brackets,
for Employees, Employers, and the Self-Employed

(Percent of Income as of January 1, 1999)

	Employees		Self-employed
	Regular	Reduced	Regular	Reduced
National Insurance Contributions
Employee	4.90	2.66	9.62	5.72
Employer	4.93	4.93	-	-
Health tax	4.8	3.1	4.8	3.1

1.	Imports of ships, aircraft, diamonds, and many other products-foremost inputs and intermediates-are customs-exempt.
2.	Recent immigrants and returning Israelis are given a customs exemption for a list of products elaborated and set forth in the Purchase Tax Order (Exemption), 5736-1975. The list is updated from time to time. (Immigrants who receive a "tax-exemption grant" are ineligible for the tax exemption on refrigerators, cooking ranges, and washing machines, because they are given a monetary grant in lieu of this tax relief. In January 1998, the level of the grant was NIS9,692.
3.	Under Israel's agreements with the European Common Market, the United States, and E.F.T.A., most products are customs-exempt.
4.	Various products meant for education, health, industry, and agriculture are given a conditional customs exemption.

(b) Purchase Tax on Imports

Tax Base

The CIF value of imports, plus tariffs, plus the percent-quota supplement as computed to reflect the importer's profit spread.

Starting January 1991, "arrangement importers" (importers who meet certain criteria and carry out a quantity of imports stipulated in the law) have been given the option of determining their tax base in view of their actual profit margin instead of a computed percent-quota supplement. The percent-quota supplement was also abolished on several products not manufactured in Israel, and the purchase rate applying to these products was raised concurrently.

Tax Rate

5-95 percent.

Exemptions and Reductions

Exemptions and reductions are given to students, returning Israelis, and recent immigrants. For recent immigrants, see further details in Section (a), "Customs," above.

(c) Value Added Tax

Tax Base

Imported goods and services, on the basis of the CIF price, plus customs, plus purchase tax. A uniform tax rate of 17 percent is applied.

Exemptions and Reductions

See schedule of exemptions under "Value Added Tax on Domestic Manufacture."

VAT and Customs Division Administration

Value Added Tax, which generates most of the Division's revenues, is paid on a monthly or bimonthly basis by those liable. VAT refunds for deduction of VAT paid on inputs are given on a current basis throughout the year.

Purchase taxes on products are built into the price of the products.

On domestic manufacture, the vendor is the party liable to purchase tax. On imports, the importer becomes liable at the point where the goods are released from inspection of the customs authority.

Fuel excise is remitted directly by the refineries.

C. OTHER GOVERNMENT MINISTRIES-CHARGING AND COLLECTION OF FEES

Other government ministries collect miscellaneous fees applying to licenses (motor vehicles, firearms, banks, insurance companies, physicians, engineers, insurance agents, and others) or special services provided by government agencies (passports, drivers' licenses, inoculations, etc.) and are set by law.

The Basis for Payment of Fees

Fees are usually based on the cost of the service tendered.

Most fees are adjusted automatically several times a year. The adjustment of each fee is set forth in a special regulation based on the law of relevance to it. Several fees are set forth at fixed rates in the law; they are adjusted only when the law that stipulates their rate is amended.

Exemptions and Reductions

In most cases, the state is exempt from fees. However, there are exemptions. For example, even government ministries pay motor-vehicle licensing fees.

The law allows the minister in charge to award an exemption (in full or in part) and to anchor it in regulations. For example, technical institutes and associations for relief and charity are charged a minimal motor-vehicle licensing fee. The institutions that benefit from this tax relief are listed in the regulations.

Collection and Enforcement

Fees are collected by fourteen government ministries. A few of them are earmarked for funding of operations of the ministry that collects them (court fees, several Ministry of Agriculture fees, etc.) but the revenue from most fees collected by government ministries is forwarded to the state exchequer.

B. NATIONAL INSURANCE

This section is divided into two parts:

(a) National Insurance contributions from employers and employees;

(b) Employee remittances for health insurance.

(a) National Insurance Contributions

Tax Base

Earned income of wage-earners and the self-employed. Spouses are liable to National Insurance contributions in accordance with their own income. Insured persons who also have an income from unearned sources (passive income, such as that from rent or interest) are exempt from National Insurance contributions if such income accounts for less than 50 percent of their total income; when passive income surpasses this proportion, it, too, becomes liable to National Insurance contributions.

The maximum taxable income for National Insurance remittances is four times the national average wage. This ceiling is adjusted whenever a cost-of-living allowance is given and at the beginning of each year. The National Insurance ceiling as of January 1998 was NIS22,420.

National Insurance contributions for wage-earners are remitted by employees and employers alike. The government makes a payment to the National Insurance Institute in order to reduce their labor costs of employers, who in the past had paid this portion.

The self-employed remit National Insurance contributions for themselves (as employees and as employers). Citizens who do not have National Insurance contributions deducted from their wages are also liable to payment, as are persons who do not work, Israelis residing overseas, and so on.

Tax Rate

National Insurance contributions are applied in two brackets:

(1) A reduced tax bracket for income up to half of the average wage per employee post (NIS2,803 per month).

(b) A regular tax bracket for income exceeding half of the average wage per employee post.

Table VI-5
National Insurance Contribution and Health Tax Brackets,
for Wage-Earners and the Self-Employed

(Percent of Income)

	Wage-earner		Self-employed
	Regular	Reduced	Regular	Reduced
Employee	4.90	2.66
Employer	4.93	4.93	9.62	5.72
Health tax	4.8	3.1	4.8	3.1

Source: National Insurance Institute

Exemptions and Reductions

1. Various population groups are exempt from National Insurance contributions for different types of coverage. For examples, career soldiers are exempt from maternity insurance and foreign workers (from abroad and from the territories) are absolved from National Insurance contributions except for workers' injury, maternity, and bankruptcy.
2. Men over age 65 and women over age 60 who receive old-age pensions are exempt from National Insurance contributions, but men aged 65-70 and women aged 60-65 who continue to work and earn wages-who are ineligible for old-age pensions (if their monthly income exceeds NIS 3,409 per month for individuals and NIS 4,546 for couples)-are liable to contributions.
3. Married homemakers who do not work outside their homes are exempt from National Insurance contributions but are eligible for old-age pensions upon reaching age 65.
4. Non-work income is exempt from National Insurance contributions if it accounts for less than 50 percent of the insured's income. Otherwise, it is fully liable to National Insurance contributions.

2. Health Tax

Tax Base

The base of health tax is identical to that of National Insurance contributions.

Tax Rate

See Table VI-6 above.

3. Collection and Reporting

Employees-It is the employer's duty to report and forward payments on account of National Insurance contributions and health tax. Employees who work for more than one employer must also report to the National Insurance Institute.
Self-employed-The self-employed make quarterly advance payments on account of National Insurance contributions on the basis of their last known income. The payments are adjusted in view of changes in the national average wage. After the income-tax authorities make the final tax assessment, a final reckoning is done.

E. MUNICIPAL AUTHORITIES

1. Municipal Property Tax

Tax Base

Municipal property taxes are applied to all types of real estate-dwellings, business premises, industrial buildings, and so on-except for undeveloped land. To determine the tax base, different municipal authorities give different consideration to the size and economic value of the property, the taxpayer's socioeconomic condition, and other variables. For example, one authority uses net area (not including interior walls) as the basis for taxation of dwellings, and another uses gross area including areas jointly held with neighbors.

Tax Rates

Tax rates vary among different municipal authorities and types of properties. Each authority has maximum and minimum rates.

Exemptions and Reductions

The law allows municipal authorities to award exemptions and reductions as they see fit, usually in view of socioeconomic situations. Authorities must give an exemption or a reduction in certain cases, e.g., government offices and senior citizens receive a reduction.

2. Fees

Municipal authorities charge fees for various services that they provide, foremost in construction, development, sewage, and business licensing.

3. Property Betterment Charge

Betterment is the increase in the value of a property due to rezoning; this increase is charged at a 50 percent rate.

Tax Base

The increase in the value of a property due to rezoning by the municipal authority.

Appendix

DOUBLE-TAXATION TREATIES

The Economic Research and State Revenue Administration is entrusted with treatment of double-taxation treaties.
Double-taxation treaties create rules that are supplementary to each country's internal tax laws; they constitute a separate and additional layer of law. The combination of the two layers often results in arrangements different from those set forth in the internal law. For the most part, the changes are reflected a tax reduction or exemption in one or both of the countries, in order to prevent double taxation of an income or asset in both countries.
Israel has double-taxation treaties with the following countries:
Austria, Belgium, Canada, China, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, India, Ireland, Italy, Jamaica, Japan, the Netherlands, Norway, Poland, Romania, Singapore, Slovakia, South Africa, Sweden, Thailand, Turkey, the United Kingdom, and the United States.
The treaties with Finland, Greece, Italy, Romania, and Turkey, went into force on January 1, 1999. A double-taxation treaty with Uzbekistan was ratified in early 1999 and will go into effect on January 1, 2000. A double-taxation treaty with Russia was signed in 1994 but has not yet been ratified by the Russian Government.