On December 29, 2008, Israel's Knesset (Parliament) passed a tax amendment (income tax ordinance amendment 169) which aims to expend the credit supply amid the international financial crises. Following is a detailed outline of the new amendment:
1. Exemption from interest, discount premiums and foreign currency adjustment rates on bonds traded on Tel Aviv Stock Exchange.
According to the Israeli income ordinance, foreign residents are taxed in Israel on a territorial basis - on income sourced in Israel. The source of income from Interest, discount premiums and foreign currency adjustment rates is determined by the place of the payor. Hence, income from interest, discount premiums and foreign currency adjustment rates on bonds traded on Tel Aviv Stock Exchange which were issued by Israeli residents companies are taxed in Israel.
However, the new amendment provides that foreign residents will be exempt from interest, discount premiums and foreign currency adjustment rates on bonds traded on Tel Aviv stock exchange, provided that the income is not from a permanent establishment in Israel.
Further to that, the exemption will not apply if the recipient is: (1) a holder of at least 10% of the shares of the bond issuer company; (2) a related company (25% parent or subsidiary of the bond issuer); (3) employee, service provider, product supplier and other parties having a special relationship with the bond issue, unless the assessor officer is satisfied that the rate of interest was fixed in good faith.
2. Exemption from taxes on capital gains from the sale of securities in an Israeli resident company.
Foreign resident who has purchased securities in an Israeli resident company before 1.1.09 is tax exempt on capital gain from the sale of such securities in certain conditions specified in the tax ordinance, including that of being a resident of a country that has a tax treaty with Israel.
The amendment expends the current exemption and provides that foreign resident is exempt from taxes on capital gains from the sale of securities (purchased after 1.1.09) in an Israeli resident company even if he / she is not a resident of a country that has a treaty with Israel.
The exemption would not apply to capital gains from securities in companies whose main assets are Israeli real estate and to gains attributable to an Israeli "permanent establishment".
3. 5% rate of company tax (instead of 25%) for dividends from a foreign source which is "used in Israel".
Further to provisional tax treatment of foreign source dividends income by Israeli company (tax rate of 25% and credit of the foreign withholding tax or company tax rate and credit of the underlying foreign tax) the amendment further provides that Israeli resident company may elect to be taxed at a 5% rate for dividends from a foreign source provided that they are "used in Israel" (as specified in the ordinance) in 2009 or within one year after actual receipt of the dividend, whichever is later.
1. Exemption from interest, discount premiums and foreign currency adjustment rates on bonds traded on Tel Aviv Stock Exchange.
According to the Israeli income ordinance, foreign residents are taxed in Israel on a territorial basis - on income sourced in Israel. The source of income from Interest, discount premiums and foreign currency adjustment rates is determined by the place of the payor. Hence, income from interest, discount premiums and foreign currency adjustment rates on bonds traded on Tel Aviv Stock Exchange which were issued by Israeli residents companies are taxed in Israel.
However, the new amendment provides that foreign residents will be exempt from interest, discount premiums and foreign currency adjustment rates on bonds traded on Tel Aviv stock exchange, provided that the income is not from a permanent establishment in Israel.
Further to that, the exemption will not apply if the recipient is: (1) a holder of at least 10% of the shares of the bond issuer company; (2) a related company (25% parent or subsidiary of the bond issuer); (3) employee, service provider, product supplier and other parties having a special relationship with the bond issue, unless the assessor officer is satisfied that the rate of interest was fixed in good faith.
2. Exemption from taxes on capital gains from the sale of securities in an Israeli resident company.
Foreign resident who has purchased securities in an Israeli resident company before 1.1.09 is tax exempt on capital gain from the sale of such securities in certain conditions specified in the tax ordinance, including that of being a resident of a country that has a tax treaty with Israel.
The amendment expends the current exemption and provides that foreign resident is exempt from taxes on capital gains from the sale of securities (purchased after 1.1.09) in an Israeli resident company even if he / she is not a resident of a country that has a treaty with Israel.
The exemption would not apply to capital gains from securities in companies whose main assets are Israeli real estate and to gains attributable to an Israeli "permanent establishment".
3. 5% rate of company tax (instead of 25%) for dividends from a foreign source which is "used in Israel".
Further to provisional tax treatment of foreign source dividends income by Israeli company (tax rate of 25% and credit of the foreign withholding tax or company tax rate and credit of the underlying foreign tax) the amendment further provides that Israeli resident company may elect to be taxed at a 5% rate for dividends from a foreign source provided that they are "used in Israel" (as specified in the ordinance) in 2009 or within one year after actual receipt of the dividend, whichever is later.
