Are Israeli tax rates higher than Canadian tax rates? Does Israel tax on worldwide income similar to Canada?
Before 2003, Israel taxed its residents on a territorial basis. That is, an Israeli resident was taxed only on income earned in Israel. For olim, that meant they could continue to earn income outside of Israel without being subject to Israeli taxes. That included both active and passive income.
However, as of Jan. 1, 2003, Israel began taxing its residents on a worldwide basis – much like how Canada taxes its residents. That is, regardless of where the income is earned, the Israeli resident is required to report and pay taxes on all the income (subject to treaty relief). Many economists claim that this adjustment was necessary if Israel was to survive the fiscal challenges faced by a developing democracy.
The new regulation had a major impact on olim who had come before that date. Israel introduced many interim rules to give olim a period to adjust, but after the adjustment period, olim, like all Israelis, became subject to worldwide taxation rules.
The 10-year tax exemption given to qualified olim who arrived after Dec. 31, 2006 taxed them using the old territorial approach. That is, they are taxed only on income earned while in Israel.
Most new olim will be looking for a job in Israel once they arrive. Some will continue to work abroad but many will find Israeli sourced income. So what are local Israeli tax rates like? Many of us were under the impression that Israeli tax rates were higher than Canadian tax rates. In some cases that is true, but in many, it is not. In fact, overall, tax rates are similar.
• Regular company tax rate: 25 per cent
• Regular dividend tax rate: 30-32 per cent for 10 per-cent-or-more shareholders, 25-27 per cent for other shareholders
• Personal income tax rates: 10-50 per cent: individuals taxed on a graduated basis
• Personal national insurance tax rates: up to 16.23 per cent on 42,435 shekels per month; none on dividends or capital gains
• VAT (HST equivalent) standard rate 17 per cent
• Real estate acquisition tax rates now range up to 7 per cent generally (but olim do get a discount on their first purchase)
• Deadline for 2013 income tax returns: companies – May 31, 2013; most other taxpayers – April 30, 2013
One difference is that in addition to income taxes (which are not dissimilar to Canadian tax rates), an Israeli resident has to pay National Insurance taxes. The combination of the two taxes can, for certain income levels, make the Israeli tax regime more “taxing.”
Another interesting difference relates to the reporting requirements of employees.
If you are an employee of an Israeli company, you are not required to file a tax return if your only income is from employment income. That is, every Canadian employee must file a Canadian tax return where he/she reconciles the income earned with the taxes withheld at source. In Israel, the employer is responsible for withholding the correct amount of income taxes and dues for national insurance (and pension fund payments as applicable). That takes the individual off the hook and he/she is not required to file a tax return. However, one is required to file a tax return and/or Declaration of Assets form for various reasons including earning self-employment income and/or income levels above 630,000 shekels per year.
Needless to say, making Aliyah with the possibility of earning income abroad, invites opportunities for significant tax savings and simpler reporting requirements.
Chaim Wigoda made Aliyah from Canada in 2002. He is the managing director of HCC International Services Ltd. – an Israeli company that specializes in tax and financial planning for olim. He can be reached at (416) 512-9707 or at firstname.lastname@example.org. Chaim will be speaking about Aliyah Tax Planning at Aliyah fairs hosted by Nefesh b’Nefesh/The Jewish Agency on March 3 in Toronto (Novotel North York, 3 Park Home Ave., North York, ON, M2N 6L3) and March 4 in Montreal (Hôtel Ruby Foo’s, 7655 Decarie Boulevard Montreal, QC, H4P 2H2).