On December 6^th, 2011, following nationwide protests demanding socioeconomic change and “social justice”, a large tax amendment was published in the Official Gazette of the Israeli Government (2011) (Hereinafter: the “Legislation”). In this tax alert we attempt to describe the main changes which resulted from the Legislation, including the new tax rates which are levied through the new legislation. For your convenience, please find an abbreviated table presented at the end of this article which shows the tax rates & the calculation techniques which apply to selected sources of income.

• Capital gains (including tradable securities) & Dividends – The tax rate was increased by 5%, from 20% up to 25%; In case of a substantial shareholder (10% holding or more), the rate went up from 25% to 30%. According to Section 92A(4) of the Income Tax Ordinance, 1961 (Hereinafter: the “ITO”),  capital losses incurred upon sale of securities may be set off against capital gains realized in the current year or in each of the following tax years, under certain rules. Alternatively, such capital loss may be set off against interest or dividend paid for the same securities, and for other securities, but regarding the latter, only if the tax rate on this income did not exceed 25%. The legislator, deliberately, didn’t amend section 92A(4) in the course of the new legislation. Hence, substantial shareholders will be subject to the new tax rate of 30% on dividend received after January 1^st ,2012, and therefore will no longer be able to set off against such dividend, capital losses resulting in the sale of other securities.

• Capital gains tax rates on real estate (including real estate holding company) – Generally, an Israeli Company qualifies as a Real Estate Holding Company if all the assets which the company holds, directly or indirectly, constitutes of Israeli real estate. Following the new legislation, capital gains tax rates on real estate, as aforementioned, were increased by 5% – from 20% up to 25%; In case of a substantial shareholding in a Real Estate Holding Company, the rate was also increased from 20% to 30%.

• Interest derived from capital market and deposits – for unlinked channels, the tax rate remains 15%; linked channels tax rates have increased from 20% to 25%.

• Individual top marginal income tax rate was increased from 44% up to 48%. This tax rate is levied on an individual’s annual income exceeding 489,480 NIS (40,790 NIS per month).

• Corporate income tax rate was increased from 24% (in 2011) to 25%, instead of a pre-enacted law gradually decreasing it to 18% (23% in 2012 down to 18% in 2016). We point out an important realization: According to section 126(C) of the ITO, dividend distributed to an Israeli company by another Israeli company is tax exempt only as long as the dividend is originated from earnings derived or produced in Israel. Had an Israeli company distributed dividend to another Israeli company, and the dividend originated from earnings outside of Israel, a tax credit mechanism is activated according to section 126(d) of the ITO. The direct outcome of the legislation is that dividends distributed to an Israeli company by another Israeli company, which originated from earnings derived or produced outside of Israel in the year 2011 (and were subject to 24% tax), would be subject to a 1% additional tax – to complete the updated corporate tax rate set to 25%.

• Tax credit for new fathers – according to the new legislation, 6 “credit points” (equivalent to approximately 15,000 NIS) are granted to a father of each “infant” as follows: one credit point in the birth year of the infant, two credit point in the next 2 years and one credit point in the year the infant has reached the age of 3.

Tax rates & the calculation techniques which apply to selected sources of income: