Questions and Answers

  1. Returning residents and newcomers
  2. Income Tax and National Insurance
  3. VAT

Returning residents and newcomers

In today’s global world, the movement of citizens between countries is common, whether it is for the purpose of studies, work, exposure to a new culture, economic reasons, etc. The State of Israel decided to encourage Israelis who left abroad to return to Israel by providing various benefits. In 2008, a comprehensive reform was enacted to provide tax benefits to returning residents and new immigrants.

Three types of returning residents were defined:

  1. Returning resident without rights – a person who has cut off residency and has stayed in Israel for more than three years and less than six.
  2. Returning resident with rights – a person who has cut off residency and stayed in Israel for more than six years and less than ten.
  3. A long-time returning resident – someone who cut off residency and stayed in Israel for over ten years.

The tax benefits provided as part of the reform include, among other things, an exemption from capital gains tax, an exemption from passive income for a period of five and ten years, respectively, for a returning resident with rights, up to an exemption from reporting and a ten-year tax exemption from all income from sand for a long-term returning resident.

תושב חוזר הוא תושב ישראלי ששהה מחוץ לגבולות המדינה מעל לשנתיים וחוזר להתגורר בישראל……

Income Tax and National Insurance

Tax rates in Israel are divided into several types of income:

  • Income from salary, business and personal income for individuals – progressive tax rates depending on the amount of income. As income increases, so do tax rates. The tax rates are between 10% and 47% excluding additional tax.
  • Yishaf tax (wealth tax) is at the rate of an additional 3% on taxable income of individuals (not on companies) of any type above an annual income of NIS 698,280
  • Income for corporations – the tax rate in Israel for corporations (companies) is 23% and is called corporate tax.
  • Dividend income – taxation on dividend income is 30% for those who have substantial control and 25% for those who do not have substantial control.
  • Capital gains – taxation on capital gains is fixed at 25%.

The decision depends on several variables.

Scope of activity and profitability of the business

Does the family unit consume all the profits of the activity

Is there legal exposure

Company operating costs are significantly higher than operating an independent portfolio.

You can start operating as a freelancer and later, after the activity is established, transfer it to a company.

VAT

An exempt trader is an independent business owner whose annual turnover does not exceed NIS 107,692 in 2023 and the type of business is not part of a list of occupations that cannot be registered as exempt traders, for example, accountants, lawyers, doctors, various consultants, etc.

An exempt dealer does not need to report or pay regularly to the VAT authorities, but only once a year reports all of his income in the previous tax year and assuming that he did not exceed the income ceiling of an exempt dealer, he will not be liable to pay VAT.

An exempt dealer is exempt only from VAT and not exempt from periodic and annual reporting to the Income Tax and National Insurance.

There are several factors that should influence the decision

  1. If the main business activity is with private individuals, then activity as an exempt dealer will make it possible to reduce the price of the service by the amount of VAT.
  2. Operating costs as an exempt dealer are lower than a licensed dealer.
  3. On the other hand, an exempt dealer is considered a small business owner, so this may have a negative marketing effect.