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Israel Corporate - Deductions

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Costs incurred by a branch or a company are deductible as a business expense for tax purposes where they are incurred ‘wholly and exclusively in the production of income’. The amount of the deduction may be limited or disallowed further to other ITO provisions and income tax regulations.


The ITO and tax regulations prescribe standard annual rates of tax depreciation for assets serving in the production of taxable income. Depreciation is generally on a straight-line basis for industrial and other enterprises based on the specific asset types as set out in the tax regulations.

Accelerated rates of depreciation may be available in regard to certain activities (such as industrial) where there is unusual wear and tear due to additional shifts of equipment use. Detailed rules apply.

Depreciation is not permitted on land.


In general, under Israeli tax regulations, goodwill purchased may be amortisable by the purchaser over a ten-year period (10% annually).

Organisational and start-up expenses

Organisational and start-up expenses are generally not immediately deductible but, rather, are to be capitalised for tax purposes.

Interest expenses

Interest expenses incurred in the production of taxable income are generally deductible. Since there are no thin capitalisation rules in Israel, there are no specific debt-to-equity ratio requirements and there is no limit to the amount of debt that may be used in establishing a branch or local company operation in Israel. Interest and linkage payments arising from late tax payments are generally not deductible for tax purposes. Interest charges between related parties must be set based on transfer pricing principles. Detailed rules apply.

Bad debt

Provisions for bad debts are deductible in the year in which it is evident that the debt has become irrecoverable. Detailed rules apply for making this determination.

Charitable contributions

Charitable contributions do not constitute a regular business expense. However, a tax credit may be available (see Tax credit for donations in the Tax credits and incentives section).

Research and development (R&D) costs

Special tax relief is provided under the ITO for R&D costs incurred (see the Tax credits and incentives section).

Pension expense

Pension fund contributions made to recognised funds are generally deductible for the employer, provided, inter alia, the contributions do not exceed a prescribed level and are effected on a regular basis.

Directors’ fees

Payments for commercially justifiable director fees should generally be deductible.

Accrued expenses

Payments are generally deductible on an accrual basis for commercially justifiable expenses representing arm’s-length consideration. However, when payments made to foreign residents attract WHT, the deduction will generally be allowed, provided the payment is effected within the tax year. Alternatively, such payments may be deductible in a tax year if the applicable WHT is deducted within three months after the tax year-end and remitted to the tax authorities within seven days of the deduction, together with index linkage differences and interest accrued since the year-end.

However, accrued expenses for severance pay, vacation pay, recreation pay, holiday allowances, and sick pay are not deductible, even if there is an obligation to make these payments. They are only deductible in the year in which they are actually paid to the beneficiary or to a recognised fund.

Contingent liabilities

Based on Israeli court decisions, contingent liabilities may be deductible for tax purposes upon satisfying the following criterion: (i) according to accepted accounting principles, the taxpayer must include in its balance sheet a suitable provision for the potential liability; otherwise, its income will be considered to have been incorrectly reported; (ii) the circumstances of the case and the technical means according to accepted accounting practice must be provided, enabling a determination of the amount of the liability; and (iii) there is a high probability that the potential debt with respect to which the provision was made will become an absolute debt.

Excess (disallowed) expenses

Israeli tax law disallows the partial deduction of certain employee-related expenses incurred by a company doing business in Israel. These include so-called ‘excess expenses’. Examples of these are (i) payments for business, travel, and meals that exceed allowable deductions; (ii) expenses incurred in respect of a benefit granted by an employer to its employees but that cannot be attributed to a particular employee; and (iii) certain vehicle maintenance expenses (all expenses relating to a company-owned vehicle that was also designated for use of an employee are generally tax deductible as the employee is taxed in this regard upon an imputed amount).

A company is obligated to pay a monthly advance on excess expenses in the amount of 45% of the excess expense. The amount paid as an advance in respect of excess expenses is deemed a payment on account of the regular tax advances and payments that the company must pay for corporate tax and is offset against them, but it is not refundable (i.e. when a taxpayer’s tax liability in a given year is lower than the excess expense advances paid, the unutilised amount shall be carried forward to future tax years). Detailed rules apply.

Fines and penalties

Payment of fines and penalties are generally not deductible.


Municipality taxes incurred in the production of taxable income are generally deductible.

Net operating losses

Business losses can be offset against income from any source in the same year. Loss carrybacks are not allowed. Losses may be carried forward and set-off without time limit against income from any trade or business or capital gains arising in the business, but not against income from any other source.

Payments to foreign affiliates

Payments of interest, royalties, and management fees to foreign affiliates are deductible if based on normal commercial terms and practices and evidenced by an inter-company agreement and transfer pricing documentation. Where such payments attract WHT, the deduction will only be allowed where such tax has been withheld and paid in accordance with certain requirements. All cross-border payments to foreign affiliates for goods and services have to comply with arm’s-length pricing standards (see Transfer pricing in the Group taxation section).

Last Reviewed - 01 December 2017

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