Global Tax Alert | 6 August 2013

Israel approves 2013-2014 Budget

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The Israeli Parliament recently approved the Budget Law for fiscal year 2013-2014 (Budget) which was published in the Official Gazette on 5 August 2013. The Budget contains important changes for both individual and corporate taxpayers.

The most notable aspects of this Budget for international groups are:

  • Increase in the standard corporate income tax rate, from 25% to 26.5%
  • Changes in the corporate income tax rates applicable to Privileged Enterprises
  • Increase in the rate of dividend withholding tax applicable to distributions made from Privileged Enterprises, from 15% to 20%
  • Restriction of the domestic capital gains tax exemption for non-residents
  • Taxation of revaluation accounting profits

The Budget's new provisions will generally become effective as of 1 August 2013, except the changes in the tax rates that will become effective as of 1 January 2014.

This Alert provides a summary of the key tax measures.

Changes in the corporate income tax and dividend withholding tax rates

Standard corporate income tax rate

The standard corporate income tax rate will increase from 25% to 26.5%.

Corporate income tax rates under the new tax incentive regime

Privileged Enterprises (which enjoy tax benefits under the new tax incentives regime) will be subject to the following corporate income tax rates:

  • Special Economic Zone A (including Jerusalem): 9%
  • Rest of the country: 16%

Dividend withholding tax rate

The dividend withholding tax rate imposed on distributions of qualifying earnings made by Privileged Enterprises (and certain other qualifying companies) will be increased from 15% to 20%.

Deferred tax implications

The rate changes will have significant implications for any deferred tax assets and liabilities held on balance sheets. The corporate income tax rates for Privileged Enterprises were supposed to be gradually reduced pursuant to the current law, to up to 6% and 12% respectively.

Narrowing the domestic capital gains tax exemption for nonresidents

In general, capital gains derived by non-Israeli residents from the sale of shares in an Israeli company – other than shares which constitute rights in real estate – should be exempt from tax in accordance with the Israeli domestic law. The Budget narrows this exemption by reference to the definition of the term “real estate” in the OECD model treaty, which includes (inter alia) usufruct of immovable property and rights to payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources.

This amendment may significantly affect holding structures of overseas shareholders of companies which hold licenses to exploit gas and minerals in Israel (which – based on the Israeli tax authority's approach – includes Israeli economic waters).

Revaluation to fair value of assets (under general applicable accounting principles)

The Budget imposes capital gains tax on a company that distributes dividends out of revaluation results higher than one million NIS1 (i.e., revaluation to fair value of stock or other tangible or intangible assets according to GAAP), as if the underlying asset was sold and re-purchased by the distributing company.

This provision will become effective only after the publication of legislative tax regulations defining what should be considered as revaluation results and additional regulations which will aim to mitigate double taxation in cross border structures (where the underlying asset is situated outside Israel). These regulations have not been published to date.

Other matters

The Budget also contains the following additional tax measures:

  • Definition of “Industrial Company” - The Budget narrows the definition of the term “Industrial Company” to companies that are incorporated in Israel and operate their enterprise in Israel. This amendment may affect (among others) the tax position of Israeli companies which subcontract certain manufacturing processes to overseas subcontractors.
  • VAT – The standard VAT rate was already increased from 17% to 18% in June 2013, before the Budget was approved, under a separate legislative procedure. The Budget now imposes 30% penalty fines on VAT entrepreneurs in certain circumstances.
  • Excise duty – The Budget amends the Excise Duty Law. The Budget clarifies (inter alia) the timing of taxation and introduces new compliance and anti-avoidance provisions.


Taxpayers may now wish to consider the impact of the new Budget's provisions which will become effective on 1 January 2014.

The changes to the Israeli tax law may require a review of the tax position of multinational groups which do business in Israel.


1 Israel's local currency – the New Israeli Shekel.

For additional information with respect to this Alert, please contact the following:

Kost Forer Gabbay & Kasierer, Tel Aviv
  • Sharon Shulman
    +972 3 5687485
Ernst & Young LLP, Israel Tax Desk, New York
  • Ram Gargir
    +1 212 773 1984

EYG no. CM3708