Individual - Income determination

Last reviewed - 10 March 2024

Employment income

Under Israeli sourcing rules, employment income is regarded as being sourced at the place where the related work is performed. Accordingly, employment income derived by a foreign resident relating to the employee's performance of services in Israel would be subject to Israeli taxation, unless a tax treaty exemption is available in accordance with the relevant double tax treaty (DTT).

The definition of taxable employment income is broadly defined in the ITO and covers salary, bonuses, cost of living allowances, tax equalisation payments, and virtually all types of fringe benefits (including benefits from stock based compensation plans). The value of the use of an employer provided car as set in Israeli tax regulations is also included as employment income.

Israeli taxation of security based compensation for employees who relocate to or from Israel is a complex subject matter whose taxation depends upon the specific facts and circumstances of the benefit plan and the person's period of residency in Israel.

Employer contributions to approved pension and benefit schemes and to further education funds are exempt from income tax (subject to certain requirements and maximum levels of contribution).

Capital gains

Capital gains tax is generally payable on capital gains by residents of Israel on the sale of assets (irrespective of the location of the assets) and by non-residents on the sale of the following:

  • Assets located in Israel.
  • Assets located abroad that are essentially a direct or indirect right to an asset or to inventory, or that are an indirect right to a real estate right or to an asset in a real estate association located in Israel. Taxation applies only in respect of that part of the consideration that stems from the above property located in Israel.
  • Assets that are a share or the right to a share in an Israeli entity.
  • Assets that are a right in a foreign resident entity that is essentially a direct or indirect right to property located in Israel. Taxation applies only with respect to that part of the consideration that stems from the property located in Israel.

The cashless transfer of rights and assets arising from certain mergers, spin-offs, and asset transfers may be exempt from tax upon meeting various requirements.

See the Other taxes section for a description of the LAT imposed on gains from the sale of Israeli real estate.

Determination of the capital gain

Tax on capital gains is imposed on the disposal of fixed and intangible assets where the disposal price is in excess of the depreciated cost.

Computation of real gain and inflationary components

For tax purposes, the capital gain is generally calculated in local currency, and there are provisions for segregating the taxable gain into its real and inflationary components. The inflationary amount is the original cost of the asset, less depreciation (where applicable), multiplied by the percentage increase in the Israeli consumer price index (CPI) from the date of acquisition of the asset to the date of its sale. The inflationary amount component is exempt to the extent it accrued after 1 January 1994 and is generally subject to tax at the rate of 10% if it accrued before that date.

The real gain component, if any, will be taxed at the rates set out further below, plus the 3% surtax, if applicable.

A non-resident who invests in capital assets with foreign currency may elect to calculate the inflationary amount in that foreign currency. Under this option, in the event of a sale of shares in an Israeli company, the inflationary amount attributable to exchange differences on the investment is always exempt from Israeli tax. In respect of a security held by an individual, which is denominated in foreign currency or value linked
to a foreign currency, the currency exchange rate shall be deemed the index. 

Traded and non-traded securities acquired from 1 January 2003 and thereafter

The real gain, if any, realised upon the sale of shares purchased on or after 1 January 2003 is generally taxed at a rate of 25% for individuals. This rate is increased to 30% where the seller was a 10% or more shareholder at the date of sale or during any of the 12 months preceding the sale; detailed definitional rules apply (hereinafter ‘10% or more shareholder’).

Traded and non-traded securities acquired before 2003

A blended tax rate shall apply, as follows:

  • The ordinary individual tax rate (determined in accordance with the individual’s marginal tax rate in the range of 31% to 50%) will be applied to the gain amount that bears the same ratio to the total gain realised as the ratio the holding period commencing at the acquisition date and terminating on 1 January 2003 bears to the total holding period.
  • The remainder of the gain realised will be subject to capital gains tax at a 25% rate (or 30% rate where a 10% or more shareholder).

Special rule for retained profits upon sale of shares

Special provisions apply to part of the real gain that is attributed to the seller’s share of retained profits in the case of a sale of (i) non-traded shares that were acquired prior to 1 January 2003 or (ii) publicly traded shares where the seller was a 10% or more shareholder.

The share of ‘retained profits’ is the amount of gain equal to the proportional part of the retained profits of the company that the seller of the shares would have rights to by virtue of those shares. Detailed rules apply in determining this profit component.

  • The part of the retained profits that is attributed to the period ending on 31 December 2002 will be subject to tax at a reduced rate of 10%.
  • Generally, the seller’s proportionate part of the company’s retained profits will be taxed as if this amount had been received as dividends immediately before the sale (e.g. at a tax rate of 25% or at a tax rate of 30% where the seller is a 10% or more shareholder).

Special exemptions for non-residents

Non-resident are exempt from tax on capital gains from a sale of shares of an Israeli company traded on the Israeli stock exchange or on a foreign stock exchange.

For non-traded shares of an Israeli company acquired from 1 January 2009 and thereafter, a non-resident shall be exempt from tax on capital gains, provided that the following conditions are met:

  • The investment is not in a company in which, on the date of its purchase and in the two preceding years, the main value of the assets held by the company, directly or indirectly, were sourced from an interest in (i) real estate or in a real estate association (as defined in the ITO); (ii) the use in real estate or any asset attached to land; (iii) exploitation of natural resources in Israel; or (iv) produce from land in Israel.
  • The investment is not in a company the majority of whose assets are real estate assets in Israel.
  • The shares were not purchased from a relative.

For non-traded shares acquired in the period 2005 to 2008, the exemption is also conditioned on the seller having been a resident of a tax treaty country for at least ten years prior to the sale, the seller filing a tax report in their local country of residency reporting the sale, and that notice of the purchase of the shares was given by the person to the ITA within 30 days of the purchase of the security, and subject to additional conditions. Detailed rules apply.

A foreign resident may also be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty.

Capital losses

Capital losses may offset all capital gains (including gains from Israeli or foreign securities) and gains from the sale of property (whether Israeli or foreign source).

Where the capital loss is from a non-Israeli asset, the loss must first be offset against foreign-source capital gains.

Capital losses derived from the sale of securities may also be offset against interest and dividend income generated from the sold security and also against interest and dividend income received from other securities (where the income was not subject to tax of more than 25%).

Capital losses can generally be carried forward indefinitely and set off only against capital gains. Capital losses carried forward from the sale of a foreign asset should first be offset against foreign-source capital gains arising in the carryforward year.

Exit tax

When an Israeli tax resident ceases to be an Israeli resident for tax purposes, the individual's assets shall be deemed to have been sold one day before the individual ceased being an Israeli resident.

Any gain attributable to the deemed sale of assets may be paid on the day the residency ceased or it may be postponed until the date the assets are actually realised. The amount of the Israeli capital gain portion shall be determined by taking the real capital gain at the time of realisation, multiplied by the period of ownership from the day on which it acquired the asset until the day it ceased being an Israeli resident, divided by the entire period from the day of the asset's acquisition until the day or realisation. The Minister of Finance has been authorised to prescribe provisions for the implementation of the exit tax, including provisions for the prevention of double taxation and the submission of tax reports, but no provisions have yet been issued.

Dividend income

Dividends shall generally be subject to tax at the rate of 25% (or 30% in the case of a 10% or more shareholder).

For a non-resident, the tax rate may be reduced by an applicable tax treaty.

A 15% to 20% rate generally applies for dividends distributed from certain enterprises qualifying under The Law for the Encouragement of Capital Investments. A lower rate for non-residents may be available for distributions from certain types of qualifying enterprises and also under a relevant tax treaty.

Under the controlled foreign corporation (CFC) regime in Israeli tax law, an Israeli individual may be taxed on a proportion of the undistributed profits of certain Israeli-controlled non-resident companies in which the Israeli shareholder has a controlling interest (10% or more of any of the CFC’s ‘means of control’). A CFC is a company to which a number of cumulative conditions apply. These include the fact that most of its income or profits in the tax year derive from passive sources (e.g. capital gains, interest, rental, dividend, royalties) and such passive income has been subject to an effective tax rate that does not exceed 15%.

A surtax at the rate of 3% may additionally apply.

Cash withdrawals or personal use of company assets

Withdrawals from a company by a 10% or more shareholder of (i) cash whose accumulated balance during any year exceeds ILS 100,000 (including certain shareholder loans and guarantees) or (ii) the personal use by such shareholder of an apartment, art, jewellery, airplanes, or boats owned by the company (or of other company assets as will be published by the Finance Ministry) shall be taxed to the shareholder as a dividend, as salary in the case where the company has no retained earnings and there is an employer-relationship, or as other taxable income. These rules also apply when the recipient is a relative of the 10% or more shareholder as defined in the tax law.

For cash withdrawals, the tax event will arise if the withdrawn money has not been repaid to the company by the end of the tax year following the tax year in which the withdrawal was made. When there is a use of other company assets, the tax event shall be at the end of each tax year in which the asset was used for personal use until the asset is returned to the company.

Detailed rules apply.

Interest income

Interest income shall generally be subject to tax at a rate of 25%.

Interest from investments in financial institutions or in traded securities that are not linked to the CPI may be eligible for a 15% rate.

For a non-resident, the tax rate may be reduced under an applicable tax treaty.

Interest paid to a non-resident from deposits of foreign currency with an Israel bank is exempt from tax, subject to certain conditions.

In order to promote foreign investment in the Israeli corporate bonds market, an exemption from tax is provided with respect to interest income received by foreign investors on or after 1 January 2009 on their commercial investments in Israeli corporate bonds traded on the Tel Aviv Stock Exchange (TASE), subject to certain conditions.

A surtax at the rate of 3% may additionally apply.

Rental income

Individual landlords of residential homes are eligible, under certain conditions, to select one of the following taxation alternatives.

  • Individual landlords are eligible, under certain conditions, for a complete exemption from income tax for rental income (from Israeli homes) not exceeding a prescribed amount per month (ILS 5,654 in 2024). No special approval is needed to qualify for this exemption. If the rental income is higher than the prescribed amount, then a certain portion of the rental income will be taxed at the individual’s marginal tax rate.
  • For rental income derived from Israeli residential property, individual landlords are eligible, under certain conditions, to elect to pay tax at the rate of 10% on their gross rental income from homes (no deductions are allowed). For rental income from residential property abroad, the rate is 15%.

Depreciation is generally allowable on a straight-line basis for expenditures on buildings, but not on land. Detailed rules apply.

Passive losses from leasing a building may only be used to offset rental income from the same building in future years, or land appreciation realised upon disposal of that building. Detailed rules apply.

Losses from an active property rental business operation may be used to offset other taxable income in the same year from any source, or against future active business income and certain capital gains.