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an Israeli company or branch, as detailed in the taxpayer’s audited financial statements,
form the basis for computing the taxable income of the business.
The base amount is then adjusted pursuant to the provisions of the tax law to arrive
at ‘taxable income’.
Dividend income
Received by an Israeli-resident company
Dividends received by an Israeli-resident company from another Israeli-resident
company that originate from income accrued or derived in Israel are exempt from
corporate tax, except for dividends paid from income taxed under a reduced tax
regime. This affords the opportunity to transfer after tax profits within an Israeli group
of companies for further investment.
Dividends received by an Israeli-resident company from a non-resident company,
as well as dividends received from an Israeli company that arise from foreign-source
income of the distributing company, are generally taxable for the receiving company
at the rate of 26.5%. Under certain circumstances, the receiving company may elect
to be taxed on such dividends at the corporate tax rate, in which case it will also be
entitled to a foreign tax credit with respect to corporate taxes paid by the company
distributing the dividend (i.e. an ‘underlying’ tax credit).
Received by a non-resident shareholder
Dividends received by a non-resident shareholder froman Israeli company are generally
subject to tax at the rate of 25% (30% if paid to a 10% or more shareholder), subject
to a reduced rate of tax under an applicable tax treaty.
Several of Israel’s tax treaties have very beneficial withholding tax (WHT) rates for
dividends being paid from Israel. The ITA is very sensitive to treaty shopping, and it will
be necessary to demonstrate to the ITA that the foreign holding entity has business
substance in its country of residence that will support its residency for treaty purposes
and that the structuring of the holding through that entity was not implemented for
tax treaty benefit purposes. Furthermore, many of the treaties contain a beneficial
ownership clause as a condition to enjoying the treaty WHT rates.
Interest income
Received by an Israeli-resident company
Interest income received by an Israeli-resident company is subject to the regular
corporate tax rate.
Received by a non-resident
Interest income received by a non-resident company is generally subject to tax at the
corporate tax rate or subject to a reduced rate of tax under an applicable tax treaty.
Interest received by a non-resident from deposits of foreign currency with an Israeli
bank is exempt from tax, subject to certain conditions.
Rent/royalties income
Rent and royalty income, less allowable deductions for tax purposes, is subject to tax
at the regular corporate tax rate.
Partnership income
From an Israeli tax perspective, a partnership is, in principle, a fiscally transparent
vehicle. Accordingly, Israeli tax law does not tax partnerships as such; however,
generally, each partner is taxed in respect of its share of the partnership income, with