January 20, 2023
Reduction on Withholding Tax in Israel
When a foreign resident generates income in Israel, the payor of the income will in principle have to charge tax at source of 25%. In the strict maintenance of the imposition of withholding tax on outgoing payments Israel holds a somewhat unique position, as the enforcement largely rest on the banks in Israel transferring money out.
Depending on a Convention for Prevention of Double Taxation, the Israel tax officer may issue – upon request and Forms filed – a certificate for reduction of that withholding tax, or an exemption, under Regulation 2 of the Income Tax Regulations (“deduction from payments to foreign residents”). Although these regulations specifically only refer to payments of income which qualify as “taxable” under sections 170 and 171 of the Israel Income Tax Ordinance, Israeli banks will insist, for most money transfers, the tax assessor’s approval for an exemption or reduction of withholding tax.
Automatic Exemption from Withholding Tax on Certain Payments – Executive Order 34/93
The Israel Ministry of Finance, with the understanding that the process for having to obtain withholding tax permits is burdensome and sometimes counter-productive for Israel’s trade relations, included in its executive order of 1993 (34/93) a listing of specific transfers to recipients abroad which do not require withholding tax and which do not require a withholding tax certificate from the tax assessor.
These payments can be made based only on the tax payer’s declaration in a form and includes all details required in the said form and it will be noted on it, or on a copy of it, as a ‘statement for tax purposes’. The list of payments of which the transfer to a foreign resident is permitted without the charge of any tax at source is:
- Purchase of tangible goods (with the exception of computer software which often may contain a royalty element in relation to a “right of use”, which is subject to withholding tax)
- In that case the import list will suffice, without the need for the payer’s state- ment. Also the documents required by the supervisor of foreign currency as proof of import for making payments on account, without the payer’s state- ment, provided that the import list is attached to the last payment.
- It may also suffice to deposit payer’s statement as a reference, without the need for a list of import, regarding the import of goods of which total value does not exceed 500 dollars, provided that the payer has declared that this import is not in the scope of his business or responsibilities.
- Correspondent fees for banks abroad, without a statement by the payer’s.
- Land, sea and air transport services, carried out in their entirety abroad
- Port services, unloading, loading and storage abroad, including payments to customs agents abroad.
- Services provided to Israeli shipping and aviation companies, operating on international routes, with the exception of payments for services in Israel
- International shipping or aviation services, performed by a resident of one of the countries with which Israel has a valid (tax) agreement on this matter,
- Tourism services performed entirely abroad.
- Insurance abroad to cover risks abroad.
- Services provided and performed in full abroad by foreign service providers, including agents, on condition that the payer declared that no one was in Israel to perform the services, and on the condition that the total payment for these kinds of services in the tax year, by that specific payer, does not exceed $250,000
- Refund of an advance to a foreign customer, provided it does not include interest and does not exceed the amount of the advance
- Fees for patent registration, standards inspections, company registration, etc., to authorized authorities abroad
- Obligatory payments to governmental authorities abroad upon demand
- Subscription fees for journals published abroad
- Membership fees for an international organization abroad.
- Entrance or participation fees for a foreign seminar, conference or exhibition
- Foreign advertising expenses.
- Fees for a booth at a (foreign) exhibition.
- Fees for participation in a foreign tender abroad.
- Tuition, registration fees, exam fees, etc., paid to educational institutions abroad
- Proceeds of a real estate sale, provided a certificate from the Real Estate Tax office was received
- Acquisition of provident/pension rights from a foreign country or institution
- Certain allowances to foreign residents under various social laws and regulations
- Allowances – according to a document on behalf of the payer (including a credit notice), detailing the nature of the credit as a pension or as an annuity and/or the pension slip, within the limit of the amount specified in the document
- Bequests – based on an inheritance order and/or court approval regarding the estate, within the limit of the amounts attributed to the heirs abroad
- Alimony paid according to law.
- Certain gifts and supports for relatives
- Allowance for medical travel and expenses for medical treatment abroad
- Redemption of State of Israel bonds (bonds).
- Proceeds from sale or redemption securities Tel Aviv Stock Exchange.
- Consideration for the purchase of a foreign security.
- Proceeds for a single sale of a privately owned vehicle
- Transfers to the recipient who is an individual in an amount not exceeding $500 per year for the payer.
- Transfers from a non-resident deposit account to a non-resident deposit account
The formalities and requirements surrounding withholding tax in Israel may cause complications in commercial transactions and cross-border monetary traffic. For solutions feel free to contact us here