What are the tax ramifications of investing in Israeli stocks and bonds? In this article, we'll explore the ins and outs of taxation on capital gains, dividends and interest for foreign investors and for Israelis.
As with any capital market investing, there are different types of income resulting from your Israeli investments: capital gains, bond interest, dividends and cash interest. Each is taxed differently, and the tax rate can range from 0% (for many foreign residents' investments) to 25%. For the most part, where you reside most of the year will determine whether you pay taxes to Israel or not.
This information is not meant to be a replacement for a discussion with your tax professional regarding your personal tax situation and your country's tax rules.
Those residing outside of Israel do not have to pay taxes to the State of Israel on capital gains from their stock and bond investments. When the investor opens an Israeli brokerage account, he/she declares their country of residence, and mainly based on not residing in Israel for over half of the year, the government here does not require the brokerage to withhold Israeli taxes. Even Israeli citizens living abroad are exempt from Israeli taxes on capital gains.
Those residing in Israel (citizens or not) will have capital gains tax automatically withheld by the brokerage upon the profitable sale of a security at a rate of 25% (of the real gains above inflation). In many yield/inflation circumstances, this works out to be 20% effective taxation. Those Israeli residents with low income can often get a refund/reduction from the Israeli Tax Authority on tax paid on capital gains.
Israel makes no distinction between short-term and long-term capital gains - the tax rate is the same irrespective of the amount of time the security was held.
Foreign investors are exempt from paying taxes to Israel for bond interest payments on bond with maturities of over one year. Israelis pay 15% tax for adjustable and fixed-rate bonds, and 25% for inflation-linked bonds (on the non-inflation gain), which as described above, can often work out to 20% effective taxation or less.
Many Israeli stocks pay dividend payments during the year. These dividends are taxed at 25% (of the real gains above inflation). According to international tax treaties, tax on dividend payouts are paid to the country in which the company is incorporated. What this means practically is that whether you are an Israeli resident or not, tax on dividends from Israeli companies is automatically withheld by the Israeli brokerage and transferred to the State of Israel. Because of the tax treaty, the foreign resident should not pay tax on this same dividend in his country of residence (a tax credit is earned as an offset).
Interest on Cash and Short-Term Government Treasuries
Cash in shekels not invested in your brokerage account automatically earns interest. These interest payments, paid once per month, have 15% tax automatically deducted for tax. This tax is paid by foreign investors and Israelis alike, and should be offset-able as a foreign tax credit by foreign investors.
Short-term Government Treasury Notes ("Makam") are zero-coupon bonds for the period of 1-12 months. The interest earned from these specific bonds is taxed at 15%.
The majority of Israeli mutual funds are taxed at 25% (of the real gains above inflation) for Israeli and foreign residents. In many yield/inflation circumstances, this works out to be 20% effective taxation. Upon sale of the mutual fund, tax is automatically withheld by the Israeli brokerage and transferred to the State of Israel. Because of tax treaties, the foreign resident should be credited with the tax already paid to Israel, thus not paying tax twice.
No Yearly Tax Reporting
Foreign residents and Israelis are not required to file a yearly tax return to the State of Israel. This is because any tax due is taken at the source (the brokerage withholds the correct amount of tax before crediting the payment to the investor's account).
Investors may request from the brokerage a gains report so that he can pay any yearly taxes due in his country of residence. For example, many investors receive a form in March for the previous calendar year for tax purposes.
Foreign residents who paid taxes to Israel for dividends, cash or Treasury Bond interest can list that foreign tax paid on their local tax return to receive a foreign tax credit, offsetting their own tax burden. The report above will also show taxes taken for dividends and interest.
Offsetting Capital Losses
Israelis who have capital gains during a particular month can sell other securities that may have losses, and offset the loss against the gain. This reduces or eliminates the tax paid to the Israeli government at the end of that month. Any capital loss can be carried through the next months, and utilized to offset gains until the end of the calendar year. After that point, tax gain-loss reconciliation must be done by submitting a tax form to the Israeli Tax Authority.