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PART TWO: IMPOSITION OF TAX
CHAPTER ONE: SOURCE
Sources of income
2. Subject to the provisions of this Ordinance, income tax shall be payable for
each tax year, at the rates specified below, on the income of a person resident
in Israel, which was produced or which accrued in Israel or abroad and on the
income of a foreign resident which was produced or which accrued in Israel from
the following sources:
Business and vocation
(1) wages or profits from any business or vocation exercised for any length of
time, or from any incidental transaction or deal of a commercial character;
Employment
(2) (a) wages or profits from employment; any benefit or allowance given to an
employee by his employer; payments made to employees to cover their expenses,
including payments for maintaining a vehicle or telephone, travel abroad or the
acquisition of professional literature or of clothing, but exclusive of
aforesaid payments which for the employee are deductible as expenses; the value
of the use of a vehicle or of a mobile radio-telephone placed at an employee's
disposal; all whether paid in cash or in kind, whether given to the employee
directly or indirectly or given to another for his benefit;
(b) the Minister of Finance shall, with approval by the Knesset Finance
Committee, determine the value of the use of a vehicle or of a mobile
radio-telephone placed at the employee's disposal as aforesaid;
(3) Repealed
Dividends, interest and linkage differentials
(4) dividends, including dividends paid out of a company's capital gains, and
interest, linkage differentials or discounts;
Benefits
(5) pension, usufruct or annuity;
House property and land
(6) rents, royalties, keymoney, premiums and other profits derived from house
property, land or industrial buildings; if a person built a house property and
let it and received keymoney or a premium for the letting, and if after he let
it he sold that house property directly or indirectly to another, under an
agreement made when or before the property was let, then the purchaser shall be
deemed to have received keymoney or a premium of the same amount on the date of
the purchase; if the purchase is made within one year after the letting, that
shall be prima facie evidence that there was an aforesaid agreement;
Other assets
(7) gains or profits derived from any asset other than house property, land or
industrial buildings;
Agriculture
(8) gains or profits derived from agriculture, land cultivation, afforestation
or crops, including the value of any produce received in consideration of the
use of capital, assets, seed or domesticated animals, for purpose of the sources
of income said in this paragraph, and including a share of profits received in
respect of the aforesaid use;
Patent and copyright
(9) consideration received for the sale of a patent or design by the inventor,
or for the sale of a copyright by the author, if the invention was made or the
work produced not within the scope of the inventor's or author's ordinary
occupation;
Other sources
(10) gains and profits from any other source not included in paragraphs (1) to
(9), but not explicitly excluded from them and no exemption having been granted
on them in this Ordinance or in any other statute.
Gains or profit from gambling, lotteries or prizes
2A. (a) Gains or profits of an Israel resident person, produced or accrued in
Israel or abroad, as well as gains or profits of a foreign resident person,
produced or accrued in Israel, the source of which is gambling, lotteries or
prize winning activity, shall be taken into account in determining his profits
or income and for the purposes of this Ordinance they shall be deemed income,
except in respect of the set-off of losses.
(b) The provisions of subsection (a) shall not apply to each of the following:
(1) gains or profit, which under this Ordinance constitute income from some
other source;
(2) gains or profits from prizes given within a personal framework;
(3) gains or profits from lotteries or prizes designated by the Minister of
Finance with approval by the Knesset Finance Committee.
Other income
3. (a) An amount received by a person under insurance against loss of profits or
under insurance against the loss of working capacity shall be taken into account
in determining his profits or income; for this purpose:
"insurance against loss of working capacity" – insurance against injury to the
working capacity, against a loss of earnings or against a loss of profits due to
disease, invalidity or accident, all irrespective of whether the money under the
insurance was paid all at once or in periodic payments, whether it was paid by a
benefit fund or by somebody else.
(b) (1) If a debt or part of a debt was waived for a person in a certain tax
year, and if that debt arose out of an expenditure deductible in 7 determining
his chargeable income, then the debt shall be deemed part of his income in that
year.
(2) If a person received a loan and, had he been paid a grant instead, the grant
would have been income, and if the lender gave him a grant before the loan is
repaid or within one year after the day of its repayment, then the grant shall,
up to the amount of the loan, be deemed part of the recipient's income in the
tax year in which it was given; for this purpose, the remission of a loan shall
be treated like giving a grant.
(3) (a) If a person's debt or a part of his debt was remitted or written off in
a certain tax year, and if that debt stems from sums he received for the
production of his income from any business or vocation, or if he was given a
grant for the production of his income as aforesaid, and if that person is not
liable to tax on it under section 2 or under paragraphs (1) or (2) of this
subsection and if the provisions of sections 20A and 21(b) also do not apply to
it, then the debt shall be deemed income in the year in which it was remitted or
written off, and the grant as income in the year in which it was given, and on
them that person shall be liable to tax at a rate of not more than 50%.
(b) On application by a person who had income said in subparagraph (a), that
income shall – for purposes of section 28(b) – be deemed business income.
(c) Tax under subparagraph (a) shall, for purposes of section 92(a), be deemed
tax on a capital gain.
(4) The provisions of paragraphs (2) and (3) shall not apply to a waived or
written off grant or loan, which was given by the State, the Keren Kayemet
le-Israel, the Keren Hayessod – United Israel Appeal, the Jewish Agency for
Israel, the World Zionist Organization or the Rural and Suburban Settlement
Company Ltd. (RASSCO) to a cooperative society classified by the Registrar of
Cooperative Societies as an agricultural society or to a member of a said
society; however, if the society or the member suffered a loss as said in
section 28, then the amount of that loss shall be reduced by the amount of the
grant or of the loan that was waived or written off.
(5) For purposes of this subsection, a person whose debt has been waived
includes a person who treats a debt owed by him as if it had been waived or
written off.
(c) (1) If a person received amounts from the redemption of redeemable shares
issued by a company free of charge, or if a person received from the redemption
of redeemable shares amounts in excess of the amount he paid for them to the
company (in this section: the amount of income) – except for the redemption of
shares in a cooperative society upon the resignation or death of a member or
upon the winding up of the society and except for the amounts from the
redemption of shares that were allocated to an employee or to a service provider
within their meaning in section 3(i) – then he shall be liable to tax at the
rate of 35% on the part of the amount up to the determining date, even if he is
exempt of tax or if the tax rate to which he is liable is less than 35%, and on
the balance of the amount of income – at the rate of 20%, but if the individual
is a substantive shareholder, as defined in section 88 – 8 at the rate of 25%,
even if he is exempt of tax or if the tax rate to which he is liable is less
than the said rate; for the purposes of this section –
"the part of the amount of income up to the determining date" – the part of the
amount of income, the ratio of which to the total amount of income is as is the
ratio of the period from the date of issue of the share until the determining
date, to the period from the date of issue of the share until the day of its
redemption;
"balance of the amount of income" – the amount obtained by subtracting the part
of the amount of income until the determining date from the amount of income;
"determining date" – as defined in section 88;
(2) the paying company shall deduct the tax when it pays the amounts said in
paragraph (1) and pay it to the Assessing Officer within one week after the day
of payment, accompanied by a report;
(3) the amounts said in paragraph (1), which were paid by the company, shall not
be deductible under sections 17, 127 and 128;
(4) liability under paragraph (1) or (2) shall not apply to amounts a foreign
resident received in addition to the amounts paid by him to the company for
shares, in consequence of a change in the official exchange rate.
(d) (1) Amounts paid to an employer by a benefit fund, within its meaning in
section 47, including interest, linkage differentials and other profits that
stem from the employer's payments to the fund, shall be taken into account in
the determination of his income; for this purpose: "amounts paid to an employer"
include amounts which the employer treated as if they had been received from the
benefit fund and were redeposited in it, and he claimed their deduction under
section 17(5);
(2) the Minister of Finance may, with approval by the Knesset Finance Committee,
make rules on exemption from tax of amounts transferred from one benefit fund to
another, or of amounts the designation of which was changed within the same
benefit fund.
(e) Amounts paid by an employer for his employee to training funds within limits
prescribed in a collective agreement, within its meaning in the Collective
Agreements Law 5717-1957 (hereafter: collective agreement), and in respect of an
employee to whom no collective agreement applies – within limits set in a
collective agreement applicable to employees whose profession, seniority and
working conditions are similar, but no more than 8.4% of the determining salary
in respect of a teaching employee, and no more than 7.5% of the determining
salary in respect of any other employee, shall be deemed the employee's work
income when he receives them, but amounts paid by an employer above the
aforesaid limits shall be deemed the employee's work income when they are paid
to the fund; for this purpose:
"determining salary" – work income, exclusive of payments to the employee to
cover his expenses, overtime pay and payments for special efforts or for a
certain event – but not more than double the amount that is the ceiling for the
payment of the cost-of-living bonus, as determined from time to time by
agreement between the Coordinating Office of the Economic Organizations and the
General Federation of Labor in Israel;
(in tax years 1999 to 2004 the said double amount was NS 15,400; from March
2004: NS 15,712 – Tr.)
"teaching employee" – a member of one of the following training funds: 9
(a) Keren Hishtalmut Lemorim Vegananot Ltd.;
(b) Keren Hishtalmut Lemorim Alyessodiim, Morei Seminarim Umefakchim Ltd.
(c) Keren Hishtalmut Lemorim Alyessodiim Ltd.
(e1) Repealed**
(e2) Amounts received by an individual from a training fund for the self
employed, as defined in section 17(5a), including interest, linkage
differentials and other profits, and exclusive of amounts which he deposited and
which were not deductible under section 17(5a), shall be deemed that
individual's income or profit from business or occupation when he received them;
however, the amounts of interest, linkage differentials and other profits
received from the training fund on the dates designated in section 9(16b) shall
be deemed income from interest, as said in section 2(4).
(e3) (1) Amounts which all employers of an employee paid for him to savings
benefit funds and to pension benefit funds on account of the employer's benefit
component and which exceed the rate for deposit, multiplied by the employee's
salary or by the ceiling amount, whichever is less, shall be deemed work income
of the employee when they were paid to the benefit funds; amounts paid as
aforesaid to benefit funds, which do not exceed the rate for deposit, multiplied
as aforesaid, shall be deemed the employee's work income when he receives them;
(2) in this subsection –
"average wage in the economy" – the average wage calculated for the purpose of
benefits and insurance contributions under section 2(b) of the National
Insurance Law [Consolidated Version] 5755-1995, as the National Insurance
Institute publishes them;
"the rate for deposit" – the rate set under section 22 of the Control of Benefit
Funds Law for deposit on account of the employer's benefit component, or the
percentage of the employee's salary which the employer deposited in a benefit
fund on account of the employer's benefit component, whichever is less;
"employer's benefit component" – within its meaning in section 21 of the Control
of Benefit Funds Law;
"salary" – within its meaning under section 22 of the Control of Benefit Funds
Law, in respect of which the employer paid to a benefit fund;
"ceiling amount" – one of the following, as the case may be:
(1) if amounts for the employee were paid only to pension benefit funds – an
amount equal to four times the average wage in the economy per month;
(2) if amounts for the employee were paid only to savings benefit funds – one
twelfth of the ceiling of entitling income;
(3) if amounts for the employee were paid to pension benefit funds and also to
savings benefit funds –
(a) in respect of the amounts paid to pension benefit funds – the amount said in
paragraph (1);
(b) in respect of the amounts paid to savings benefit funds – the amount said in
paragraph (1), less the salary in respect of which the amounts were paid to
pension benefit funds, on condition that it does not exceed the amount said in
paragraph (2); 10
"ceiling of entitling income" – the amount stated in paragraph (1) of the
definition of "entitling income" in section 47, as the case may be.
(e4) (1) Profits an individual received from a benefit fund, which he was
entitled to receive under the provisions of section 23 of the Control of Benefit
Funds Law, and also interest and other profits which he received from a training
fund at the times designated in section 9(16a) or (16b), as the case may be,
shall be deemed interest income; however, profits he received as aforesaid as an
amount of linkage differentials calculated on payments paid to the benefit fund
or to the training fund shall be deemed income from linkage differentials.
(2) repealed
(e5) Profits received by an individual from the savings program in a life
insurance policy shall be deemed income from interest; but aforesaid profits
received as an amount of linkage differentials calculated on the payments paid
to the savings program shall be deemed income from linkage differentials.
(e6) Income from partial linkage differentials shall be deemed interest income;
in this subsection, "partial linkage differentials" – as defined in section
9(13)(1), but for this purpose the index shall be the Consumer Price Index, a
foreign currency exchange rate, including exchange rate differentials, or any
other index ;
(f) If the occupation of a person ceased in a particular tax year and his income
is determined by assessment on a cash basis, then all the amounts which, due to
the determination of income on a cash basis, were not charged with tax in the
hands of that person before the cessation, shall be deemed income of the person
entitled to them at the time of their receipt; for this purpose: "cessation of
occupation" includes a change of occupation or death; however, aforesaid amounts
which are included in the estate of that person shall, for purposes of estate
duty under the Estate Duty Law 5709-1949, be reduced by the amount of tax due on
them under section 125A.
(g) If, during the tax year, a body of persons was a public institution, within
its meaning in section 9(2), or if it did not operate for profit or all its
income was exempt of tax, or if in its respect legislation determined that – for
the purpose of tax payment – it be treated like the State, then it shall be
liable to tax at the rate of 90% on the amounts specified below, without any
right to exemption, deduction or set off whatsoever:
(1) amounts expended for purposes specified in regulations under section 31,
which under those regulations are not deductible, or which exceed the deductible
amounts;
(2) amounts it expended, which are not deductible under section 32(11);
(3) amounts it paid to a severance pay benefit fund in excess of the amounts
that would have been deductible, had it not been exempt of tax.
(h) If a person received amounts as interest on debentures, and in the case of
debentures that do not relate to a preferred loan, if he received interest –
including linkage differentials – in respect of a period when the debenture was
owned by another (hereafter: accrued interest), then the following provisions
shall apply:
(1) if for its recipient the accrued interest does not constitute income under
section 2(1), then the accrued interest shall be deemed income in respect of
which there is no right to any exemption – other than the exemption granted on
the interest itself – credit, deduction or set off; this provision shall not
apply to that part of accrued interest received by a certain benefit fund that
accrued in other benefit funds, as long as continuity is maintained by sale from
one benefit fund to another; for this purpose: "benefit fund" – a benefit fund
exempt of tax under section 9(2);
(2) if the accrued interest constitutes income for its recipient under section
2(1), and in respect of a linked debenture – if the following two conditions
hold:
(a) the interest accrued in respect of a period of more than one year;
(b) the debenture was acquired within a year and a half before its redemption or
before the date of the interest payment; and in respect of an unlinked debenture
– if the following two conditions hold:
(a) the interest accrued in respect of a period of more than three months;
(b) the debenture was acquired within three years before its redemption or
before the date of the interest payment, then, for purposes of calculating the
profit or loss of the recipient of the interest from the sale or redemption of
the debenture, no account shall be taken of that part of the amount he expended
on the debenture's acquisition which equals the accrued interest, less the tax
due thereon. The provisions of this subsection on interest shall apply, mutatis
mutandis as the case may be, also to discounts as defined in section 9(13b),
which are not tax exempt under the said section.
(h1) The Minister of Finance may, with approval by the Knesset Finance
Committee, determine that the provisions of subsection (h) shall not apply to
certain categories of investments or to certain categories of assessees, all on
conditions and with adjustments that he shall prescribe.
(i) (1) If a person realized a right received in the past to acquire an asset or
service, and if at the time of the realization there was a difference between
the price normally payable for that asset or service and the price that person
paid, or if a person received a loan, whether given directly or indirectly to
him or to another for his benefit, and if that loan was free of interest or bore
a lower rate of interest than the Minister of Finance set for this purpose with
approval by the Knesset Finance Committee – either in general or for particular
categories of loans or for loans for specific purposes – then the difference
shall be deemed –
(a) if the right or loan was given in connection with an employee / employer
relationship – work income;
(b) if the right or loan was received from someone to whom its recipient
provides services – income within the meaning of section 2(1), unless he proves
that it was not given in connection with the services he provides;
(c) if a right or loan to which subparagraphs (a) or (b) do not apply was
received by a controlling member or by his relative from a company under his
control – income under section 2(4); for this purpose: "relative" – as defined
in section 76(d)(1);
"controlling member" – a person who holds or is entitled to acquire, directly or
indirectly, alone or together with his relative, one of these:
(1) at least 5% of the issued share capital;
(2) at least 5% of the voting power in the company;
(3) the right to receive at least 5% of the company's profits or of its assets
upon winding up;
(4) the right to appoint a director. For purposes of this subsection – "loan"
includes any debt; "interest" includes linkage differentials.
(2) The tax on the differential in realizing an aforesaid right shall, on the
assessee's application, be calculated as if that differential were income
received in a number of equal annual instalments, as is the number of years from
the day when the right was conferred until it was realized, but not more than
six years that end with the year of the realization.
(3) The Minister of Finance may prescribe the way of calculating the
differential said in paragraphs (1) and (2), and the way of calculating every
datum necessary for that purpose.
(4) repealed
(j) (1) If a person extended a loan which is entered in account books kept in
respect of income for which books must be kept by the double entry method, or if
a body of persons gave a loan and that loan carries no interest or interest at a
rate lower than the rate set for this purpose by the Minister of Finance with
approval by the Knesset Finance Committee, then the interest differential shall
be deemed interest under section 2(4) fir whoever gave the loan; for purposes of
this subsection –
"interest" includes linkage differentials;
"loan" includes any debt that is not one of the following:
(1) a debt of customers or of suppliers in respect of goods or services;
(2) a tax debt;
(3) a loan to a certain person or to a certain category of persons or for a
certain purpose, extended directly or indirectly against made by the State or by
the Jewish Agency for Israel and in accordance with the depositor's
instructions.
(4) a loan to which subsection (i) applies;
(5) a fixed term deposit or the balance of a current account with a banking
corporation that is a bank or a foreign bank licensed under the Banking
(Licensing) Law 5741-1981;
(6) a deposit deposited with the State, a local authority, a Government company
or a Government subsidiary and a loan extended to them;
(7) a loan extended by a financial institution in the ordinary course of
business, except for a loan extended to a company under its control or to a
sister company; for this purpose –
"financial institution" –
(a) within its meaning in the Value Added Tax Law;
(b) an institution for which interest income is income under section 2(1) and
said income is its main income;
"sister company" – a company that is controlled by some third company, which
also controls the financial institution that extends the loan;
(8) a loan extended by a public institution, as defined in section 9(2) of the
Ordinance, for a public purpose;
(9) a loan that is an international transaction, within its meaning in section
85A;
(10) a loan that is not linked to any index and does not bear any interest or
any yield, extended by a body of persons under its control against a capital
note that was issued for a period of at least five years, provided the loan
cannot be repaid before the end of the said period, is of lower rank then other
obligations and precedes only the distribution of surplus property at
liquidation;
(11) capital notes and debentures issued by another body of persons, on
conditions prescribed in paragraph (5) of the definition of "fixed assets" in
Schedule Two of the Inflationary Adjustments Law, which on December 31, 2007,
were a fixed asset for whoever extended the loan;
"control" – at least 25% of the voting power or of the right to profits, whether
direct or indirect, on at least one day during the tax year.
(2) The Minister of Finance may prescribe the manner in which the interest
differential is to be calculated, as well as the manner of calculating every
datum necessary for that purpose.
Income from an area
3A. (a) For purposes of this section – "Israel citizen" – each of the following:
(1) an Israel citizen, within its meaning in the Citizenship Law 5712-1952;
(2) an Israel resident;
(3) a person entitled to enter Israel under the Law of Return 5710-1950, who is
a resident of an area;
(4) a body of persons, in which an Israel citizen, within its meaning in
paragraphs (1) to (3), is a controlling member; for this matter – "controlling
member" – as defined in section 32(9);
"area" – each of these: Judea and Samaria and the Gaza District, including the
areas included within the territorial jurisdiction of the Palestinian Authority
in accordance with the Agreement about the Gaza District and the Jericho Area
between Israel and the Palestine Liberation Organization, which was signed in
Cairo on May 4, 1994;
"resident of an area" – like the definition of "Israel resident" or "resident"
in section 1, except that, instead of "in Israel", everywhere there read "in an
area";
"profits" – within their meaning for purposes of tax in the tax law applicable
in the area.
(b) The income of an Israel citizen, which accrued or was generated in an area,
shall be treated like income that accrued or was generated in Israel.
(b1) The income of an Israel citizen resident of an area, which accrued or was
generated outside Israel and outside an area, shall be treated like the income
of an Israel resident that accrued or was generated outside Israel. 14
(c) (1) If an Israel citizen belongs to a body of persons resident in an area,
then part of that body's profits, proportional to that citizen's share in the
rights to the body's profits, is deemed his income;
(2) for the purposes of paragraph (1), if the income of a body of persons was
produced in Israel or in an area, then the income of the Israel citizen shall be
treated as if it had been produced in Israel; if the income of the body was
produced outside Israel and outside an area, then the income of the Israel
citizen shall be treated as if it were the income of an Israel resident that was
produced outside Israel;
(3) dividends received by an Israel citizen out of profits on which he paid tax
under this subsection are exempt of tax.
(d) Repealed
(e) If an Israel citizen paid tax to area authorities on income said in
subsection (b) or in subsection (b1), then he shall receive an Israel tax credit
in the amount of the tax he paid in the area; in respect of income said in
subsection (c), an Israel citizen shall receive credit for part of the tax paid
by the body of persons on its profits, proportional to his share in the rights
to the body's profits; tax paid as said in this section shall not be considered
foreign taxes, as defined in section 199.
(f) The provisions of this Ordinance shall apply – mutatis mutandis as the case
may be and subject to the provisions of this section – to an Israel citizen who
resides or works in an area, as if he were an Israel resident.
CHAPTER TWO: LOCATION
Location of income from sale abroad
4. If a person carries on an agricultural, manufacturing or any other productive
enterprise in Israel, then the following provisions shall apply to him:
(1) if that person wholesaled any product of his enterprise abroad or for
delivery abroad, whether the contract was concluded in Israel or abroad, then
all the profit derived from that sale shall be deemed that person's income
accrued or derived in Israel, except that, if it is proven to the Assessing
Officer's satisfaction that the profit was increased by anything done to that
product abroad – other than handling, grading, fattening, sorting, packaging or
converting – then that enhancement of profit shall not be deemed income accrued
or derived in Israel;
(2) if a person otherwise converted, used or dealt abroad with any product of
his enterprise, then the profit he might have obtained if he had wholesaled the
product abroad under optimal conditions shall be deemed his income accrued or
derived in Israel.
Place where income is produced
4A. (a) The place where income or profit accrued or was produced from any of the
sources specified below shall be –
(1) in respect of business income – the place where the income yielding business
activity takes place;
(2) in respect of income from business or from incidental business of a
commercial character – the place where the transaction or the business takes
place;
(3) in respect of income from an occupation – where the service is performed; 15
(4) in respect of work income – where the work is performed;
(5) in respect of interest, discount and linkage differentials – the payer's
place of residence;
(6) in respect of rent or fees for the use of an asset – where the asset is
used;
(7) in respect of gain or profit, including royalties, that stem from an
intangible asset – the payer's place of residence;
(8) in respect of a pension, usufruct or annuity – the payer's place of
residence;
(9) in respect of income from agriculture – the place of the asset that yields
the income;
(10) in respect of dividends – the seat of the body of persons that pays the
dividend.
(11) in respect of gains or profit from gambling, lotteries or prize winning
activity, as said in section 2A – the place of residence of the person who pays
the said gains or profits.
(b) (1) Notwithstanding the provisions of paragraphs (4) and (8) of subsection
(a), Israel will be deemed the place where income under the said paragraphs was
produced, if the employer is one of the bodies specified in paragraph (a)(4) of
the definition of "Israel resident" or "resident" in section 1, on condition
that the work relationship with the said employer began when the employee was an
Israel resident.
(2) Notwithstanding the provisions of paragraphs (5), (7) and (8) of subsection
(a), the following will be deemed the place where the income was produced:
(a) in Israel, also when the payer is a foreign resident – if the payment
constitutes an expense of the foreign resident's permanent enterprise in Israel;
(b) abroad, also when the payer is an Israel resident – if the payment
constitutes an expense of the Israel resident's permanent enterprise abroad.
(c) The Minister of Finance may prescribe, with approval by the Knesset Finance
Committee –
(1) in respect of income produced in more than one place and for which there is
no other provision – rules to relate production of the income to different
places;
(2) the place where income was produced in certain instances, for which no other
provision has been prescribed.
Special provisions on the location of income
5. Notwithstanding the provisions of any statute on the location of income, the
following shall be deemed income produced in Israel:
(1) repealed
(2) repealed
(3) repealed
(4) (a) repealed
(b) the Minister of Finance may, with approval by the Knesset Finance Committee
and on conditions to be prescribed by him, exempt of the tax, in whole or in
part, rent paid for chartering an aircraft or vessel that operates on
international routes, as well as interest and linkage differentials on loans for
the acquisition thereof; this exemption may be general or for particular
categories of charters or loans; 16
(5) (a) income produced by a foreign occupational company, which stems from
activity in a special occupation – in the amount of the income of the Israel
resident shareholders;
(b) in respect of income under this paragraph and dividends distributed out of
it to shareholders said in subparagraph (a), the foreign occupational company
shall be treated as if its business were controlled and managed in Israel;
(c) the income, chargeable income and profits of a foreign occupational company
said in subparagraph (a) shall be calculated according to the applicable tax
laws; for this purpose: "applicable tax laws" – one of the following, as the
case may be:
(1) in respect of a foreign occupational company resident in a reciprocating
state within its meaning in section 196 (in this section: reciprocating state),
which files a return of its income or is assessed in the said state – the tax
laws in that state;
(2) in respect of a foreign occupational company to which the provisions of
subparagraph (1) do not apply – bookkeeping principles accepted in Israel, other
than bookkeeping principles on equity gains or equity losses, and on changes in
the value of securities;
(d) notwithstanding the provisions of Part Ten, Chapter Three, Article Two on
credit for foreign taxes, the taxes paid by a foreign occupational company to
tax authorities of a country abroad on its income said in subparagraph (a) in
respect of income which under section 4A was produced abroad shall be treated
like foreign taxes, as defined in section 199, and the said income shall be
treated like foreign income, as defined in the same section;
(e) for the purposes of this paragraph – "foreign occupational company" – a
foreign resident body of persons, for which all the following hold true:
(1) if it is a company, then it is a small company, within its meaning in
section 76(a);
(2) 75% or more of one or more of the means of control in it are directly or
indirectly held by individual Israel residents or by Israel citizen residents of
an area, as defined in section 3A; for this purpose, the proportion of
indirectly held means of control shall be calculated in accordance with the
provisions of section 75B(a)(1)(d)(2); and for this purpose the direct or
indirect rights of individuals who became Israel residents for the first time or
of veteran returning residents, as said in section 14(a), shall not be taken
into account before ten years have passed since they became Israel residents as
aforesaid;
(3) the controlling members or their relatives, who jointly or severally,
directly or indirectly hold 50% or more of one or more of the means of control,
work for the company in a special occupation, either directly or through a
company in which they directly or indirectly hold means of control to the extent
of at least 50%;
(4) most of the income or of the profits of the company during the tax year,
other than equity profits and losses and changes in the value of securities,
stem from the special 17 occupation;
"special occupation" – an occupation or profession designated by the Minister of
Finance with approval by the Knesset Finance Committee;
"income of the Israel resident shareholders" – the chargeable income of a
foreign occupational company derived from activity in a special occupation,
multiplied by the proportion of the direct or indirect entitlement of
shareholders who are Israel residents or Israel citizen residents of an area, as
defined in section 3A, to the company's profits; and for this purpose the share
in the direct or indirect rights of individuals who became Israel residents for
the first time or of veteran returning residents, as said in section 14(a),
shall
not be taken into account before ten years have passed since they became Israel
residents as aforesaid;
"means of control", "controlling member" and "relative" – as defined in section
75B.
CHAPTER THREE: ASSESSMENT PERIOD
Tax Year
6. Tax for each tax year shall be charged on a person's chargeable income in
that year.
Special assessment period
7. (a) Notwithstanding the provision of section 6, the Director may – on
application by the assessees specified below – prescribe that the tax for each
tax year be imposed on their income during a period of twelve consecutive months
that begins on a date other than January 1 (hereafter: special assessment
period):
(1) a joint investment trust, within its meaning in the Joint Investment Trusts
Law 5721-1961;
(2) a Government company, within its meaning in the Government Companies Law
5735-1975;
(3) a company, the shares of which are listed for trading on a Stock Exchange
recognized for purposes of the Joint Investment Trusts Law 5721-1961;
(4) a company, at least 51% of whose share capital and voting power are held by
a foreign resident company, the shares of which are traded on a Stock Exchange
abroad, or by a company in which the rights to at least 51% of the profits are
held by an aforesaid foreign resident company.
(b) In addition to the provisions of subsection (a), the Director may set a
special assessment period also for an assessee who has a special relationship,
direct or indirect, with a company for which a special assessment period was set
under subsection (a)(2) to (4), but he shall do so only if the assessee agreed.
(c) When the Director has set a special assessment period for an assessee under
subsections (a) or (b), then tax shall be imposed for each said period subject
to all the adjustments that the Director deems just and reasonable.
(d) The Director may make the setting of a special assessment period under 18
this section conditional, and he may refrain from setting a special assessment
period for a company said in subsection (a)(2) to (4), if no special assessment
period was set under subsection (b) for the assessee with whom it has, directly
or indirectly, a special relationship.
(e) When the Director has set a special assessment period, he may cancel his
decision, whether or not on the assessee's application, if he finds reasonable
cause for doing so, and – for purposes of that cancellation – he may prescribe
any adjustment he deems just and reasonable; such a cancellation, made not on
the assessee's application, shall go into effect at the end of the special
assessment period during which it was made.
Apportionment of income over more than one year
8. (a) The Director may permit keymoney or a premium under section 2(6), which
is a participation in the cost of construction, or a similar payment to be
apportioned as income over the entire period of the rental contract or over any
other period which the Director may designate.
(b) The Director may permit income from the sale of a patent or design by the
inventor, or from the sale of a copyright by the author, to be apportioned as
income over a period to be prescribed by the Director; this provision shall not
apply to income under section 2(9).
(c) On application by an assessee or his heirs, the following types of income
shall be deemed, for purposes of tax computation, to have been received as said
here:
(1) wage differentials – in the years to which they refer, but not during more
than six tax years up to the year in which they were received;
(2) pay in lieu of vacation received by an employee – in equal annual
installments over a period of not more than six tax years that ends in the year
in which they were received, but not more than the number of years of his
employment;
(3) income from personal exertion, as said in paragraphs (5) or (6) of the
definition of that term in section 1 – in equal annual installments in the work
years for which the grant is paid or in the period in which the right to the
pension was created, as the case may be, but over no more than six tax years up
to the tax year in which the grant was received or the pension capitalized;
however, the Director may, if requested, permit such apportionment over a
different period, including years to come, under conditions which he may
determine, including the payment of an advance.
(d) If the Director permitted income to be apportioned under this section or
under section 9A(d) and the assessee dies, or the assessed company begins to be
wound up before the end of the period set by the Director, then any income which
under the apportionment belongs to years subsequent to that tax year shall be
added to the assessee's income in the tax year in which he died, or to the
income of the company in the tax year in which it began to be wound up; however,
on application by the assessee's heirs, the administrator of his estate or the
executor of his will, the whole income shall be reapportioned over a period of
years ending with the tax year in which the assessee died, or, on application by
the assessee's heirs, all the income which under the apportionment relates to
years subsequent to that tax year, shall be deemed the heirs' income in those
years, in proportion to their respective shares in the assessee's estate, and
that after they have provided collateral to the Director's satisfaction for
payment of the tax which will be due from them under this calculation; but if
the assessee paid the advance under 19 subsection (c)(3) or section 9A(d), or if
tax was withheld at the source under section 164 – then the said advance paid or
the said tax withheld at the source in respect of years after the death shall be
deemed the amount of tax due.
Division of income from work, the performance of which takes longer
than one year
8A. (a) In this section –
"extended work" – work, the performance of which takes longer than one year,
including construction work on a building by a person who performs the work at
the order of another, and exclusive of the construction of a building by its
owner;
"income from extended work" – income from extended work which is income under
section 2(1), either from performance or from sale.
(b) If an assessee engages in extended work, he shall report his income from it
in the following manner:
(1) in the tax year in which he completed at least 25% of the monetary volume of
the work, as calculated for that year, or of the quantitative volume of the
work, whichever he chooses, he shall report on the estimated income earned by
him from the part of the work he has performed, and in every tax year thereafter
he shall report on the estimated income earned by him in accordance with the
part of the work he performed in that year, calculated on the basis which he
chose when he first calculated the volume of work completed; in the tax year in
which he completed the work he shall report on the business results in their
entirety, deducting income which he reported in previous years;
(2) a loss from extended work shall be taken into account for purposes of
determining chargeable income during the tax years before the tax year in which
the work was completed, only after the assessee completed at least 50% of the
monetary volume of the work, as calculated for the year in which he claimed the
set-off of the loss, or at least 50% of the quantitative volume of the work;
(3) if subparagraphs (1) or (2) apply to an assessee, then he shall append to
his return under section 131 a return, certified by an auditor, as defined in
the Auditors' Law 5715-1955, specifying the manner of determining the income or
the loss, as the case may be, and the manner in which the volume of accomplished
work was calculated.
(c) (1) In this subsection –
"building" – a building built by its owner, the construction of which takes
longer than one year;
"building fit for use" – a building or part thereof, which has been connected to
the electricity grid, or a building in respect of which the conditions for the
receipt of a building completion certificate under the Planning and Building Law
5725-1965 (hereafter: Planning Law) have been met;
"income from a building" – income from the sale of the building, which is income
under section 2(1).
(2) The following provisions shall apply to an assessee who has income from a
building:
(a) In the first tax year in which the building was fit for use the assessee
shall report all the income he had from the building until that tax year and in
that tax year, and in every 20 tax year thereafter he shall report all the
income he had from the building in that tax year;
(b) for the purpose of determining the assessee's chargeable income from the
sale of part of a building that is fit for use, the proportional part of the
total cost of the building shall be taken into account, as is the proportion of
the area sold in that tax year to the area of the entire building, as specified
in the building license issued under the Planning Law, but for this purpose sold
parking spaces shall not be included in the sold area;
(c) the loss from a building shall not be taken into account for the
determination of chargeable income in the tax years that preceded the tax year
in which the building became fit for use.
Income under Section 2(6) or (7)
8B. Income under section 2(6) or (7) shall be included in the assessee's
chargeable income in the year in which he actually received it, even if it
constitutes deferred income, and expenses incurred in subsequent tax years in
the production of the income under the said provisions shall be deductible from
any source in the year in which they were incurred, but if they cannot be
deducted in the year in which they were incurred, provided that – if the
expenses cannot be deducted in the tax year in which they were incurred - they
may be deducted in the year in which the income was received, and the assessment
for the said year shall be deemed to have been amended accordingly; however, in
consideration thereof there shall be no obligation to pay interest and linkage
differentials under section 159A.
Date on which income from exchange rate differentials is charged
8C. A person's income from exchange rate differentials shall be deemed income in
the year in which it accrued, even when returns are filed on a cash basis.
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