On July 25, in second and third readings, the Knesset plenary approved Amendment Number 147 to the Income Tax Ordinance, thus enacting a multi-year tax plan that will outline Israel’s tax policy for the coming five years. In the context of this plan, the Knesset has allocated NIS 11 billion (by the end of the process), expanded the tax basis and strengthened enforcement. According to Eitan Rob, Director of the Israel Tax Authority, the approved plan creates certainty for the business sector, improves the competitive ability of Israeli companies and increases the number of jobs that will be available in the economy. In addition, the plan includes a commitment to a significant tax reduction for all the citizens of the State of Israel, while emphasizing and creating a relative preference for lower and middle-income earners.

The main changes that the plan will carry out are:

1. A reduction of tax rates for individuals and companies, through a gradual process which will continue through the year 2010. In this context, all workers, including those earning less than the threshold for paying taxes, will enjoy an increase in disposable income, due to a reduction in National Insurance payments.
2. Tax exemptions have also been significantly increased for income from interest earned in the capital market by low-income earners, pensioners and the disabled (increases of from 50% to 85%).
3. A reduction in the rate of VAT, down to 16.5%. The reduction of VAT will benefit, in the main, lower and middle-income groups, as most of these groups’ disposable income is used in the consumption of commodities which are subject to VAT.
4. An improvement in Israel’s competitive ability – through the encouragement of investments and increasing growth and employment:
* Exemption from real estate purchase tax on the purchase of individual residential units up to a value of NIS 550,000 (a benefit worth up to approximately NIS 6000).
* Accelerated depreciation for machines and equipment for industry, agriculture, construction, and tourist accommodations – leading to increased employment.
* A tax exemption for foreign investors earning capital gains - leading to increased investments in Israel which will in turn lead to increased employment.
* A participation exemption – which will encourage of the establishment of management centers by multinational corporations in Israel and lead to increased employment through the export of services.
* Real estate investment trusts – the adoption of a tax mechanism which allows households to invest in real estate companies whose shares are traded on the stock exchange, and allows them to be taxed as if they had invested directly in the real estate. (This allows ordinary taxpayers in every city to enjoy the benefits of investing in large real estate properties).
5. Increasing efficiency, simplification and neutrality within the tax system, through the simplification of capital gains taxation and the establishment of uniform capital gains tax rates. This is done through the establishment of a 20% rate for all income from bank and non-bank interest and from dividends and for capital gains earned from the realization of investments in both exchange-traded and non-exchange traded shares. The result is the creation of tax neutrality for an investor who will not be required to seek out complex tax advice in order to achieve the same goal.
6. Tax easements created by the granting of a one half tax credit point (worth approximately NIS 1,100 per year) for taxpayers with bachelor’s or master’s degrees. Such credits would be available from the end of their studies, and continue for as many years as those that had been spent studying.
7. Easements for workers who have been issued options – accomplished through the shortening of the holding period for such options that is required in order for the worker to benefit from a reduced tax rate.
8. The anchoring in legislation of the ability of all citizens to determine their status at the Tax Authority with regard to the tax outcome of a particular transaction before it is executed (with respect to all tax aspects, as a result of the unification of all the tax divisions – income tax, VAT and real property taxation).
9. The expansion of the tax base and the strengthening of enforcement, with an emphasis on the top one-hundredth of the tax paying population:
* Taxation of trusts – closing the cracks in the tax system regarding Israeli residents’ passive income from abroad.
* Prevention of aggressive tax planning – the imposition of a reporting requirement regarding any tax planning that leads to a significant tax reduction.


Last Updated: 28-07-2005