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Changes to income tax system — Orbitax Tax News & Alerts

Following the 2002 move from a territorial tax system to a tax system on a worldwide basis, the following changes have been introduced as per 1 January 2006 (unless otherwise indicated). Preceding these tax changes, which are mainly meant to enhance the tax competitiveness of the Israeli income tax system, were an expansion and simplification of tax incentives under the Law of Encouragement
Highlights of the changes are as follows:

-   the gradual reduction of the corporate income tax rate from 35% in 2005 to 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009, and 25% in 2010;
-   the withholding tax rate on dividends distributed by Israeli resident companies is reduced from 25% to 20%. However, the rate remains at 25% in respect of distributions to substantial shareholders (i.e. at least 10% shareholding);
-   a participation exemption regime applies if an Israeli resident company makes an investment of at least NIS 50 million (approximately, USD 11 million), which amounts to at least 10% of the shares in the foreign subsidiary. Detailed rules apply in regard to the "qualifying foreign country", and the extent of the exemption in regard to dividends and capital gains;
-   generally, the rate for "real" (as opposed to "inflationary") gains on capital assets is reduced from 25% to 20%; and
-   The listing of shares on a stock exchange is no longer regarded as a deemed sale (and hence a taxable event) for capital gains tax purposes. Upon an actual sale of the listed shares after 1 January 2006, a tax is imposed at a rate between 20%/25% on the gains. Gains from publicly traded bonds or securities, that are either denominated in foreign currency or not linked to the CPI, are taxed at 15%.