According to the OECD, Israeli tax revenues amounted to 29.8% of GDP in 2023, which was better than the OECD average of 33.9%. The October 7 war has affected the Israeli economy due to IDF reserve duty, frontline evacuations and higher taxes needed.
You are probably doing taxable business in Israel if you conduct business activities in Israel or operate in Israel via an agent who can commit you. Israel's tax treaties and the OECD Multilateral Instrument refine these criteria for foreign companies.
Business Tax Rates:
For 2025, the regular company tax rate is 25%. The regular dividend tax rate is 30%-33% for 10%-or-more shareholders, 25%-28% for other shareholders, so total tax on distributed corporate profits is 42.25%-48.41%, subject to any tax treaty.
However, income from labor-intensive activities of closely held companies with 5 or fewer shareholders may be taxed at up to 52%. Retained past profits may be subject to a 2% surtax. At the international level, specialist advice is vital.
Preferred income derived by preferred industrial or tech enterprises is liable to company tax of 7.5% in development area A, 16% elsewhere in Israel. Dividends are generally taxed at 20%. Lower rates are possible for certain large enterprises. R&D grants, typically 50%, are also available.
The VAT standard rate is 18%.
International Agreements:
Israel has income tax treaties with 60 countries.
Israel is a party to US FATCA and OECD CRS information exchange arrangements.
Israel has free trade agreements with: the USA, EU, EFTA, UK, Canada and UAE among others.
National Insurance (Social Security):
National Insurance rates include:
Resident employees: 4.27%-12.17%;
Employers of resident employees: 4.51%-7.6%;
Freelancers: 7.7%- 18%% (52% is tax deductible);
Not working: 12.09%-12.17% (52% is tax deductible);
Monthly payment if no income: NIS 250;
The above is subject to any applicable social security (“totalization”) treaty.
Olim
New residents and senior returning residents (lived abroad 10 years) are generally exempt from Israeli tax on non-Israeli source income for 10 years. The exemption does NOT apply to income for work done in Israel.
Olim also enjoy an exemption for 5 – 20 years regarding interest on Patach foreign-currency time deposits of three months or more at an Israeli bank.
On Israeli source income, new immigrants receive extra personal credits which reduce taxes by NIS 242 – 726 per month for 4.5 years.
Foreign Expatriates in Israel
Israel's tax treaties sometimes grant a tax exemption for employees resident in those countries but working in Israel.
Otherwise, non-residents employees in Israel lawfully in their field of expertise as “foreign experts” who are paid at least NIS 14,800 per month, may enjoy deductions for accommodation expenses and daily living expenses of NIS 360 for up to 12 months, provided they are invited by an Israeli employer that is not an employment agency.
Tax Registrations:
A business must register for Israeli tax purposes immediately the business activity starts.
Pay Tax As You Go:
Every year, a business or investor will receive demands to pay VAT, payroll taxes, income tax, and tax instalments on profits (Mikdamot).
Essential Paperwork:
There are strict bookkeeping and customer billing rules – approved Israeli software or printed books must be used. A 30% flat expense deduction is possible for freelancers with annual revenue below NIS 120,000.
Employees and Freelancers:
Salaries and freelancers pay taxes at rates ranging up to 50%-52%.
Once employees have worked 3 – 6 months at a firm, they are entitled to mandatory pension and severance funding. The minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% towards pension funding and 6% towards severance funding. The employee pays 6% towards pension funding. Separate pension rules apply to freelancers.
Under approved ESOP plans, employees pay only 25%-30% tax if various conditions are met.
Real Estate:
Home rental income of up to NIS 5,654 per month is exempt for individuals. Thereafter, several possibilities exist – regular tax on net income, 10% flat tax, etc. Companies pay tax at regular rates.
Real estate purchase tax rates range up to 10%. For an Israeli resident purchaser with no other home in Israel, the first NIS 1,978,745 may be exempt from purchase tax.
The gain from the sale of an only home in Israel by a resident individual may be exempt from tax provided its value does not exceed NIS 5,008,000. Otherwise, real estate sales are generally taxed at 25%-52%.
Securities:
Passive income derived by individuals from securities are taxed at rates of 25%-35%. Traders and companies pay tax at regular rates.
Estates, Inheritances and Gifts:
There is no tax in Israel on estate or inheritances, only on gifts to foreign residents.
Always consult experienced advisors in each country at an early stage in specific cases.
The writer is an accountant and tax specialist at Harris Consulting & Tax Ltd.
