All you need to know about Taxation and Accounting requirements from Israeli companies:
Limited companies:
Taxation
- The basis for corporate taxation system:
Israeli resident companies are subject to tax in Israel on their worldwide income while a non-Israeli resident company is subject to corporate tax in Israel only on income accrued or derived in Israel.
The basis of taxation is determined by the accounting profits but many adjustments are necessary to calculate taxable income. The only income tax imposed on corporations is the corporate tax at the rate of 24% which rate is scheduled to be further reduced to 23% in 2018.
2. Corporate tax rates
24% scheduled to go down to 23% in 2018.
An entity that is entitled to incentives under the Law for Encouragement of Capital Investments (ECIL) may be entitled to reduced tax rates.
3. Accounting periods for corporate tax
Corporation tax is charged in respect of the taxable year, which is 12 months in duration and which, except in special circumstances, is the same as the calendar year.
4. Allowable expenses and special reliefs
All business expenses of a revenue nature are allowable if incurred during the tax year wholly and exclusively in the production of income. The deduction of certain expenses is limited and advances must be paid to the tax authorities if actual expenses exceed such limits.
Illegal expenses, including bribes are not a deductible expense. The District Court, acting as an Administrative Tribunal, held that a bribe which was paid in order to obtain a service agreement with a foreign government in order to develop an agriculturist enterprise was not allowed as an expense for tax purposes (Company Ltd v Netanya Assessing Officer; Administrative Action (TA) 1015/03).
5. Offsetting of losses against future liabilities
Business losses may be offset in the current taxable year against income from any source. Loss may also be carried forward indefinitely and be offset against business income or profits and capital gains from the business. Losses incurred abroad are allowed as a deduction from Israeli income and from foreign source income subject to certain conditions. Losses may not be carried backwards.
However, the Israeli Supreme Court recently held that in certain cases and where appropriate where necessary to collect true tax and avoiding causing injustice, taxpayers may carry back (Damari and others v Rehovot Assessing Officer; Civil Appeal 4157/13). Following the Supreme Court judgment, the Tax Authority filed a request for further hearing, which was approved.
6. Capital gains and losses
Gains are divided into two components: real gain and inflationary amount. The real gain is taxed at ordinary corporate tax rate, and the inflationary amount accumulated before 1 January 1994 is taxed at 10%. The inflationary amount accumulated after 1 January 1994 is not taxed.
7. Short-term profits
Not currently subject to special rules.
8. Tax rates on dividends
Dividend income received by a company is generally exempt unless it emanates from foreign companies. Under special incentive laws and tax treaties, the rate may be reduced.
9. Taxation of groups of companies
Industrial companies of the same group may file a joint income tax return if they are in the same economic field or have an integrated line of production.
10. Double taxation agreements
Double tax relief is often available in respect of foreign income that is taxed both in Israel and abroad. General agreements now exist with, Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Ethiopia, Estonia, Finland, France, Georgia, Germany, Greece, Holland, Hungary, Ireland, Italy, Jamaica, Japan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Norway, Panama, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, UK, Ukraine, Uzbekistan, USA, Taipei, Thailand, South Korea, Vietnam, the Philippines and India.
Other forms of taxation:
Value added tax (VAT) is imposed at a standard rate of 17% on most goods and services. Certain items which include exports and the provision of certain services to non-residents are zero-rated. Some items such as insurance, finance and certain residential rents are exempt from VAT. Financial institutions such as insurance companies and banks are subject to payroll tax of 17% on payroll costs and to ‘profit tax’ of 17% on their income. Nonprofit organizations are subject to payroll tax of 7.5%.
Customs duties are payable on many imported goods to Israel; special reduced rates apply to items imported from European Community countries, the US and EFTA countries.
Purchase tax is imposed on a large range of commodities and on certain services at a percentage of the wholesale price.
National insurance contributions (social security). Is imposed on independent contractors and employees. The employer is required to pay with respect to national insurance premium as well as payments in respect of health insurance and the employee is required to pay national health insurance contributions. The amount payment for national and health insurance contributions is calculated in accordance with the employee level of income.
Land appreciation tax is imposed on capital gains from the sale of real property (including leases of 10 years or more, and also leases of less than 10 years when relating to state lands), and the rules are similar to those applicable to capital gains tax (see 6 above). A special exemption is granted for the sale of residential flats in certain circumstances.
Acquisition tax is imposed on the acquisition of real property. The tax rate is based on the purchase price of the assets and the type of asset.
Property tax was canceled in 2000 (the rate is 0%).
Municipal rates are imposed on buildings and occupied land by the local authorities. The local councils set their own rates accordingly based on square meters of occupied real estate. Municipalities also impose a betterment levy when advantageous re-zoning has increased the value of real property.
Income Tax Act (Adjustments for Inflation) is suspended.
Capital duty is not applicable.
Estate tax – there is currently no estate tax in Israel
Accounting
Compliance:
- Sources of accounting regulation
Companies Law 5759-1999
accounting standards
Stock exchange regulations (listed companies only).
2. Requirement to keep accounting records
Records must be kept for seven years.
3. Location of accounting records
At the registered office or such other place as determined by the directors.
4. Accounting reference period
The reference period for financial statements is one year. The first accounting reference period must last no more than 18 months from the date of incorporation.
5. Accounts and reports
A balance sheet, profit and loss account, group accounts and auditor’s report must all be prepared.
6. Frequency of reporting
Public companies are required to report annually and quarterly. Private companies are required to report annually.
7. Accounts signatories
Public company The Chairman of the Board, the Chief Financial Officer and an additional Director.
Private company Any appointee(s) appointed to sign by the board of directors.
8. Circulation of accounts
Circulation of financial statements: Private company Shareholders and creditors in exceptional cases.
Public company Required to publish its financial statements and lodge them with the Registrar of Companies.
9. Presenting accounts to shareholders’ meetings
The financial statements must be presented to the shareholders, and the auditor’s report must be read out and be open to inspection.
10. Procedure for filing accounts at the registry
The financial statements of public companies only must be delivered to the Registrar of Companies.
11. Public availability of accounts
Public company Full financial statements are available for public inspection on application to the registrar.
Private company Financial statements are available for shareholders.
12. General accounting principles
Public company IFRS.
Private company IFRS or Israeli GAAP.
13. Company account presentation
Israeli GAAP (Generally Accepted Accounting Principles in Israel) – major features.
Cash Equivalents
Cash equivalents are short-term deposits in banks where the period of the deposit does not exceed the three months from the date of investment and which are not encumbered.
Fixed assets
Fixed assets that are useful for more than one period must be presented using the cost method as follows:
Fixed assets must be stated at cost, less accumulated depreciation and impairment losses, if they exist. Cost includes purchase costs as well as all the related costs incurred to bring the item to the location and condition necessary to operate in the manner intended by management. Qualifying fixed asset costs also include capitalized financing costs.
The projected useful length of life of an asset, depreciation method and residual value must be reviewed as of the end of each fiscal year. Any change is treated as a change in accounting estimate on a prospective basis.
Gains or losses recognized in the statement of operations from the sale of an asset will be calculated as the difference between the sale price and the book value.
Accessories and spare parts with no or slow movement are included at depreciated values according to management estimates.
Fixed assets must be amortized separately for each component of the depreciable fixed asset item having a significant cost relative to the total item cost. Amortization must be calculated systematically, using the straight-line method over the expected useful life of the item’s components, starting on the date on which the asset is ready for its intended use and accounting for the expected residual value at the end of its useful life which management may estimate as an insignificant amount.
In some circumstances, the company has to examine whether there are impairment indicators present for their Fixed Assets. If the indicators are present, the Fixed Assets have to be revalued with the losses going against the income statement.
There is also an option, after initial recognition, to account for report Fixed Assets at their fair values based on market values at each reporting date. Gains are accounted for in other comprehensive income.
Real Estate Investment
Real estate investments include real estate (land, buildings or both) owned by the Company in order to generate rental income or for capital appreciation, or both, and not for proprietary use or sale in the ordinary course of business.
Real estate investments are initially measured at cost, including acquisition costs directly attributable to the purchase. After initial recognition, real estate investments are carried at their fair values based on market values at each reporting date. Gains or losses arising from changes in the fair value of investment property are included in the income statement.
Real estate investments include real estate (land, buildings or both) owned by the Company in order to generate rental income or for capital appreciation, or both, and not for proprietary use or sale in the ordinary course of business.
Real estate investments are initially measured at cost, including acquisition costs directly attributable to the purchase. After initial recognition, real estate investments are carried at their fair values based on market values at each reporting date. Gains or losses arising from changes in the fair value of investment property are included in the income statement.
There is also an option to account for report Real Estate Investment at cost only, recognizing depreciation.
Goodwill and intangible assets resulting from the purchase of an investee:
Goodwill is the excess of the purchase price of the acquired company over the fair value of identifiable net assets, including intangible assets, less the fair value of its identifiable liabilities (net of associated taxes) at the date of purchase.
The goodwill must be examined once a year or more frequently if there are indications that there is a decline in value of goodwill value.
In the event that at the time of acquisition negative goodwill was created, it is allocated first to intangible assets and non-current assets. In the event that negative goodwill remains after this allocation, it is recognized as profit and is charged immediately to the statement of operations.
For the purpose of examining the impairment in value, the goodwill is allocated to each of the cash-generating units of the group that are expected to benefit from the synergy of the merger. Cash-generating units to which the goodwill is allocated are examined for the purpose of discerning the impairment in value each year, or more frequently when there are indications that attest to a possible impairment in value of the unit, as stated. If the recoverable value of the cash-generating unit is lower than the book value of that unit, the loss from impairment in value is allocated first to the decreased book value of any goodwill that was allocated to the cash-generating unit. Afterward, the remainder if any, of the loss from impairment in value, is allocated to other assets of the unit, pro-rated on the basis of the book value of each asset in the unit. The loss from impairment in value of the goodwill is not canceled in future periods.
Impairment in the value of assets
A company must examine at each balance sheet date the recoverable value of its assets. Whenever there are any signs that indicate the possibility that the value of these assets may have been impaired. Should the book value of an asset exceed the recoverable value, a loss from impairment in the value of an asset is recognized. Such impairment in the value of assets, except goodwill, is eliminated only when a change takes place in the estimates used in the determination of recoverable value, from the date on which the last impairment loss was recognized. The book value following that cancellation may not exceed the book value that would have been established for the asset had such a loss from impairment not been recorded in previous years. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, regardless of whether there is an indication that the asset may be impaired. In addition, the standard determines the components that need to be taken into account while calculating value in use of the asset, including the reasonability of assumptions on which the current cash flows forecasts are based and their consistency with actual past results.
Recoverable amount is the higher of fair value less selling costs and value in use. In assessing value in use, the estimated future cash flows must be discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Regarding testing the impairment in value of the goodwill that was acquired in a business merger, the goodwill must be allocated from the time of the acquisition to each of the cash-generating units (or groups of units) of the purchased company and of the purchaser company if they are expected to benefit from the synergies of the combination.
When an entity re-organizes the reporting structure in a way that changes the composition of one or more cash-generating units to which goodwill was allocated, the goodwill must be reallocated to the units that are influenced.
Deferred taxes
Deferred taxes are calculated with respect to:
- timing differences between the recognition of assets and liabilities at cost in the financial statements and their calculated value for tax purposes,
- carry forward tax losses whose realization is anticipated,
- the adjustment of non-financial assets for the gap between the book value and the tax value.
The deferred income taxes are computed at the tax rates expected upon realization of the provision of the tax benefits based upon the tax laws that are effective as of the balance sheet date.
Investments in Associates
Investments in associates must be presented in the Company’s balance sheets using the equity method on the basis of their Audited Financial Statements. An unattributed book surplus will represent goodwill.
Investment in non-marketable assets
Investment in non-marketable assets are presented at cost less impairment.
Investment in non-marketable assets
Investment in marketable assets are presented at market value.
Inventories
Inventories must be stated at the lower of cost and net realizable value. The cost of the inventories includes the costs incurred in purchase of inventories and in bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
The basis for Revenue Recognition
Revenue must be measured at the fair value of the consideration received or receivable and presented net of estimated customer returns, rebates and other similar allowances.
Revenue from the sale of goods shall be recognized when all of the following conditions are recognized:
- the entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
- the entity does not retain any managerial or other control normally associated with ownership over the goods.
- the amount of revenue can be reliably measured.
- it is probable that the economic benefits of the sale will flow to the company.
- the costs incurred in respect of the sale can be reliably measured.
Revenue from providing services must be recognized in accordance with the phase of completion of the transaction once all of the following conditions have been met:
- the amount of revenue can be measured reliably
- it is anticipated that the financial benefits related to the transaction will flow
- the phase of completion of the transaction on the date of the balance sheet can be measured reliably
- the costs incurred in the transaction and the costs required for completion can be measured in a reliable manner.
Research and Development Expenditure
Research and Development costs must be presented according to accepted accounting principles in Israel (Israel GAAP), are therefore not discounted, and are recognized as incurred. These costs generally comprise direct research and development costs, including wages and the provision of staff development, sub-contractors’ fees, travel expenses etc.
Development costs are eligible for capitalization as intangible assets when:
- a product/process is technically feasible
- the entity intends to complete the development
- the intangible asset may be used to derive economic benefits
- there are financial and technical resources and other resources to complete the development
- it is possible to measure the expenditure attributable to the intangible asset.
It should be emphasized that this publication does not constitute a substitute for professional advice.
