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14 April 2013

Some basics of Income Tax

מס הכנסה (Income Tax) is the primary tax authority in Israel, equivalent to HMRC in the UK and the IRS in the USA.

Before going into depth on any one subject, it is worthwhile to look at some of the basic concepts within the Income Tax Law.

  • Israeli residents are subjected to Israeli taxation on their worldwide income. A credit is given for foreign tax paid.
  • Non-Israeli residents are subject to Israeli taxation only on their Israeli-earned income.
  • The tax year runs from 1st January through to 31st December.
  • Tax files are joint between husband and wife. Whilst the tax calculations are generally seperate, both husband & wife are responsible for payment of the tax owed by the other.
  • Income is classified as either earned (e.g. salary, self-employment) or passive - with differing tax rates applying. There is also a difference to the calculation of ביטוח לאומי depending on the defintion.
  • Income considered joint (most types of passive income) is taxed as being earned by the higher earner of the couple.
  • Tax is to be deducted at source by employers on salary income, and by banks on interest, dividends and capital gains earned through the bank.
  • There is also a system in place for self-employed contractors and corporations to pay tax during the year, by a mixture of tax at source and payments on account.
  • Tax owed should be paid by the end of the tax year, i.e. 31 December. Any tax owed but not paid by that date is subject to interest (4% per annum) and הצמדה (linkage to the retail price index).
All of the above is of course subject to the various exemptions and concessions granted in the law and Double Tax Treaties, and also the interplay with other taxes (e.g. מע"מ, מס שבח, ביטוח לאומי).

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