Corporate Taxation

Foreign resident corporations may be exempt from corporation tax if their operations do not qualify as a permanent establishment under the appropriate double taxation treaty between Israel and the state of foreign residency.

The definition of PE under a relevant tax treaty is far clearer than whether a non-resident has a taxable presence under Israeli domestic tax law. A non-resident is normally subject to taxes on income earned or generated in Israel in the absence of tax treaty protection.

A minority corporation, according to Section 62A ITA, is owned or controlled by no more than five individuals (regarding certain relatives). This paragraph is designed particularly for situations in which a minority company employee ("Person") provides management or management-related services to another company. In such a circumstance, the revenue will not be taxable to the minority company but will be taxed to the individual as employment income, business income, or other income, depending on the circumstances.

The employment income classification applies if 70% or more of the minority company's total income or taxable income in the tax year is derived from services performed by the individual or the individual's relatives over four (4) years, or if the individual's services performed for the other company are of the type performed in an employer-employee relationship.

Since January 2018, the corporate income tax in Israel has been set at 23%. It is worth noting that Israel provides reduced company tax rates through taxation advantages. Special Priority Enterprises and Priority Enterprises, for example, are subject to a reduced corporate income tax ranging from 5% to 16% (depending on their location and description under the Israeli Law for the Encouragement of Capital Investment).

Companies: Dividends paid to a company (foreign or Israeli) by another Israeli company because of profits created or accumulated in Israel are tax-free. Dividends paid to Israeli companies from revenue generated or accumulated outside Israel, as well as dividends received from overseas, are taxed at a rate of 25%.
Shareholders: Dividends given to shareholders who own less than 10% of the company are subject to a 25% tax rate. Dividends paid to more substantial shareholders who own more than 10% of the company (or owned more than 10% of the company's shares in the previous year) are subject to a 30% tax rate.

Withholding taxes on income from Israeli sources are generally deducted at the corporate income tax rate on all transfers of income abroad under Israeli national tax laws unless an ITA tax certificate is available showing the withholding of exempt transfers or a reduced tax rate under an applicable tax treaty.