Taxation in Israel

Israel’s tax system encompasses personal income tax, corporate income tax, social security contributions, consumption taxes, and property-related taxes.[1] Direct taxation includes income tax, National Insurance payments, and health tax, while indirect taxation includes value-added tax and taxes on products such as fuel and cigarettes.[5] Other major revenue sources include customs and excise duties, land taxes, and luxury taxes.[6]

Taxation operates at both national and municipal levels, but the 2022 framework included no local income taxes on individuals or corporations and no alternative minimum taxes.[1] Local authorities instead levy municipal property tax, known as arnona, according to characteristics including property size, location, and use.[1] This locally generated revenue is not earmarked, giving municipalities discretion over its use.[7]

The total tax burden, measured to include government taxes, social security contributions, local-authority taxes, and VAT on defense imports, was 32.5% of gross domestic product in 2022.[1] The corresponding figures were 32.2% in 2021, 29.6% in 2020, and 30.0% in 2019.[1] In the 2025 international comparison, Israel’s overall tax-to-GDP ratio was relatively low among OECD countries, with most tax instruments producing revenue below or near the organization’s averages.[4]

National tax administration is concentrated in the Israel Tax Authority, whose principal functions are tax collection and enforcement of import and export laws.[8] Its responsibilities include direct taxes, property taxes, extraordinary levies, payroll taxes, and revenue taxes, as well as VAT, customs duties, purchase tax on domestic production and imports, and fuel excise.[8] Municipal taxation, tax credits, and conditional exemptions form additional parts of the broader fiscal framework.[3][7]

The Knesset approved income-tax legislation and a law taxing company profits in May 1949, followed a month later by additional taxation of municipal property.[9] Early parliamentary and committee debates addressed how to tax spouses who both earned income and how to set income-tax limits while satisfying the government’s revenue needs.[9]

Tax collections expanded substantially during the following decades, averaging about 35% of GNP in the 1960s, 41% in the first half of the 1970s, and approximately 47% in the second half.[2] The increase came mainly from direct taxes and taxes on domestically produced goods, while taxation of imports declined slightly.[2] Direct taxes alone rose from 14.3% of GNP in fiscal year 1961 to 25.7% in fiscal year 1981.[2]

An income-tax reform implemented in July 1975 sought to meet budgetary needs while addressing inflation’s erosion of deductions and exemptions, high tax rates, and a tax base covering only part of economic earnings.[10] These conditions had encouraged tax evasion and compensation arrangements outside the taxable base.[10] The reform broadened taxation to income and compensation previously treated preferentially or classified as expenses, while introducing a simplified progressive rate table.[10]

The 1975 schedule ranged from a marginal rate of 25% on monthly income up to IL 3,000 to 60% on amounts above IL 8,500.[10] The highest applicable rate applied only to income falling within the relevant marginal bracket, rather than to the taxpayer’s entire income.[10] Plans to introduce VAT accompanied the reform: the proposed broad-based commodity tax was intended to generate substantial treasury revenue and offset anticipated income-tax revenue losses.[10]

By fiscal year 1981, VAT on domestic and foreign goods contributed a tax base equal to 8.7% of GNP.[2] The historical fiscal account also gives fiscal year 1986 figures of 33% of GNP for income taxes, 20% for value-added taxes, and 4% for customs duties; these are historical macroeconomic figures, not statutory tax rates.[2] During the 1980s, imported products could face purchase taxes, excise duties, stamp duties, and VAT in addition to tariffs.[2] These levies served both revenue and domestic-demand objectives, while export-subsidy arrangements rebated many charges to exporters, leaving the nonexport sector to bear most of them.[2]

The July 1985 Stabilization Plan responded to severe inflation, large government and current-account deficits, and financial instability.[11] It combined spending cuts, tax increases, and the abolition of subsidies with contractionary monetary policy, wage restraint, temporary price controls, and a fixed exchange rate following a large devaluation.[11] Tax reforms that year also introduced corporate taxation for business sectors previously untaxed and slightly reduced direct taxes on individuals.[6]

Tax increases remained an instrument of macroeconomic adjustment in later periods.[11] In 1997, contractionary fiscal policy included tax-rate increases that reduced disposable income and slowed private-consumption growth as the government addressed a rising deficit and excess demand.[11] In 2002, higher tax rates and spending cuts formed part of a response to economic and financial instability during recession, alongside a higher deficit target.[11]

From 2003 through 2006, budget policy combined restraint, structural changes, and a reduction in the tax burden.[11] The early-2000s reforms sought to contain government size and create a more business-friendly tax system, shifting the burden from direct to indirect taxation and cutting social transfers to strengthen work incentives.[12] In a 2007 assessment, then Bank of Israel Deputy Governor Zvi Eckstein described income tax as substantially reduced since 2003, relatively low for most workers’ average income levels, and close to European levels at upper incomes, while noting substantial growth in total tax revenues.[13]

Fiscal policy became expansionary in 2008 for the first time since 2004, primarily through further direct-tax reductions; the global downturn also reduced revenues and increased the deficit.[11] The broader policy shift ended in 2011 following social protests and emerging fiscal difficulties, when planned personal and corporate tax cuts were halted and partly reversed, personal income-tax progressivity increased, and some customs duties fell.[12]

The government taking office in 2015 pursued a low tax burden alongside greater family support.[12] VAT fell from 18% to 17%, corporate income tax fell from 26.5% to 23%, and family measures included higher allowances, an expanded earned income tax credit, and higher transfers.[12] The high-income surtax increased from 2% to 3%, while 2017 changes to rates and bracket widths reduced the burden for lower- and middle-income individuals and increased it for higher-income individuals.[12]

Administrative consolidation accompanied these policy changes.[8] A government decision in 2003 provided for merging tax departments, and the Israel Tax Authority was established on September 1, 2004, combining the Income and Property Tax Division, Customs and Value Added Tax Division, and Sha’am, the income-tax information-technology branch.[8][14]

The 2024 budget approved an increase in VAT from 17% to 18% beginning in January 2025.[15] The one-percentage-point increase was expected to raise revenue equivalent to 0.4% of GDP annually.[4] Other measures planned for 2025 included a carbon tax, taxation of undistributed accumulated profits of closely held companies, and a freeze in tax brackets during 2025–2026, with indexation expected to resume in 2027 without compensating for missed adjustments.[4]

Subsequent reporting on the 2026 budget described revised income-tax brackets applying retroactively from January 2026.[16] The 20% bracket was widened to NIS 19,000 monthly income and the 31% bracket shifted to NIS 19,001–25,100; employees earning below NIS 16,000 gross were not affected by those bracket changes.[16]

Personal income taxation is progressive, and individuals are taxed separately.[12] The framework includes progressive National Insurance contributions, resident tax credits, credits reflecting some family circumstances, and a refundable earned income tax credit introduced in 2008.[12] Income subject to taxation includes earnings from employment, trade, business, dividends, and other sources, with limited deductions; historical descriptions also identify withholding for salaried employees and advance payments in ten installments for self-employed taxpayers subject to assessment.[17]

As of December 31, 2022, the top personal income-tax rate was 47%, with an additional 3% surtax on total annual income above NIS 640,000.[1] The resulting combined top rate was therefore summarized as 50%.[1] An August 2023 legal survey identified rates of 31%, 35%, and 47% among the upper portions of the schedule, along with reduced rates for people aged 60 or older under specified conditions.[18] For 2026, reporting described seven brackets ranging from 10% at monthly income up to NIS 10,000 through rates up to 47%, with a further 3% surtax above NIS 60,130 per month.[16]

The general corporate income-tax rate was 23% at the end of 2022, having remained at that level since 2018 following the multiyear direct-tax reforms begun in 2003.[1] The same 23% general rate appeared in the August 2023 legal survey, which also gave a 25% rate for individual capital income and rates generally of 25% on dividends and capital gains, or 30% for substantial shareholders as legally defined.[18]

Investment incentives provide exceptions to general corporate taxation.[18] The Law for the Encouragement of Capital Investments was intended to foster productivity and employment opportunities in peripheral areas, offering qualifying firms preferential corporate rates, grants, and reduced dividend withholding taxation.[12] In the 2023 framework, preferred-company rates on qualifying income were 7.5% or 16%, depending on status and location, compared with the general 23% corporate rate.[18] These benefits were conditional rather than generally available to all businesses.[18]

The 2003 international-tax reform changed the basis of taxation from a territorial approach, centered on income’s geographic connection to Israel, to a personal approach taxing Israeli residents on worldwide income.[19] Controlled-foreign-company provisions could attribute a qualifying foreign company’s undistributed passive profits to Israeli controlling shareholders as deemed dividends, with a foreign-tax deduction available.[19] The reform, identified as Amendment No. 132, gave residency a more substantial role in determining liability.[20]

Individual residency tests include a presumption arising from spending at least 183 days in Israel during a tax year and a “center of life” assessment considering family location, economic interests, permanent home, and habitual abode.[20] Corporate residency often depends on incorporation or the location of management and control.[20] Israel’s income-tax treaty with the United States was signed in 1975, amended by protocols in 1980 and 1993, and entered into force on December 30, 1994.[21]

New immigrants becoming citizens on or after January 1, 2007, are eligible for specified tax benefits, including a ten-year exemption on foreign-source income.[22] Benefits also include a ten-year exclusion from Israeli-company-resident status for a company established abroad and owned by a new immigrant or senior returning resident, and an option to be treated as a foreign resident for tax purposes for one year after arrival.[22] Immigrant tax credits extend for 3.5 years for those making aliyah before 2022 or 4.5 years for those making aliyah after 2022, with possible extensions.[22]

VAT operates through an input-output mechanism: a registered business generally credits VAT paid on purchases against VAT collected on sales and remits the balance.[23] A 2000 account described it as applying to nearly all transactions, including imports, with some transactions, such as exports, zero-rated.[23] The fiscal year 1999 import framework calculated VAT on landed cost plus purchase tax, allowed importers to recover it on resale, and ultimately placed the charge on consumers through the retail price.[24]

The standard VAT rate was 17% in the 1999 commercial guide and again in the 2022 fiscal framework, before rising to 18% in January 2025.[24][1] At 18%, it remained below the 19.3% average in 2024 among OECD countries applying VAT, and Israel had no reduced VAT rate.[4] Exemptions, including zero-rating, covered categories such as fruit and vegetables, inbound foreign tourism, and clothing and other shopping purchases in Eilat.[4]

In 2019, exemptions covering fruit and vegetables, Eilat, tourism services, and online purchases had an estimated fiscal cost of NIS 5.73 billion, or 0.43% of GDP.[12] Purchase taxes have also applied to selected products, primarily luxury and consumer items, while the 2022 framework identified high sales taxes on cars, alcohol, fuel, and tobacco.[24][1] Customs policy lowered duties as part of economic integration; the 2022 framework described imports from the European Union and United States as duty-free, while selected imports from countries without trade agreements remained subject to duties.[1]

VAT records also contribute to economic statistics.[25] The Central Bureau of Statistics Business Register draws on VAT business files and National Insurance employers’ files; its VAT component covers businesses active in the preceding twelve months and required to pay VAT on transactions, while excluding VAT-exempt businesses.[25]

Arnona is assessed using built area and a rate per square meter, with rates varying by use and generally higher for nonresidential than residential property.[7] In 2018, local authorities assessed NIS 30.2 billion in charges, averaging NIS 3,400 per resident.[26] Residential property accounted for about NIS 14.5 billion, offices, services, and commerce for NIS 7.5 billion, and industry and crafts for NIS 3.1 billion.[26]

Actual arnona revenue collected in 2018 was NIS 25.54 billion, including NIS 14.15 billion from nonresidential property.[7] Although nonresidential collections exceeded residential collections nationally, residential collections were higher in 164 of the 254 authorities examined.[7] Charges assessed and revenue collected measure different stages of municipal taxation.[7][26]

Municipal self-generated income includes arnona, levies, service fees, and other charges, while government participation includes general grants and support for education, culture, welfare, and religious affairs.[27] Arnona discounts follow state law and Interior Ministry regulations, with eligibility and levels varying by criteria, residence size, and household composition.[27] New immigrants may receive a discount of up to 90% on up to 100 square meters for twelve months during one of their first two years after aliyah.[22]

Real-estate transactions are generally taxed on real profits and also face a turnover tax varying with transaction value.[1] A separate property-improvement levy follows specified planning actions that increase real-estate value, with statutory exemptions for qualifying nonprofit institutional property or consideration used for listed public purposes.[3]

Qualifying public institutions receive income-tax exemption on income not derived from business, including examples such as bank interest, rent, and capital gains.[3] Such institutions must operate for a public purpose, devote their assets and income to that purpose, and submit an annual report satisfactory to the Tax Assessor.[3] Certain excess expenses face a 90% annual tax without exemption or deduction.[3]

A public institution’s activities may be classified wholly or partly as business or nonprofit for VAT purposes.[3] Business activity is charged VAT as an authorized dealer, whereas nonprofit-classified activity entails payroll tax; certain nonprofit property transactions and imports may nevertheless attract VAT.[3] Conditional exemptions also affect municipal tax, real-estate appreciation tax, and improvement levies.[3] Qualifying religious property may receive municipal exemption when used for specified religious, educational, health, or welfare purposes, but not when used to generate financial profit.[3]

State tax revenues reached NIS 384 billion in 2021, a 22% increase over 2020; including National Insurance and local-authority payments brought the total to approximately NIS 496 billion.[28] VAT represented 32% of state tax revenue, income tax 30%, and company tax 12%.[28] The Tax Authority collected a record NIS 509.3 billion in 2025, 12% above 2024, exceeding its revised target by 1% and original target by 8%.[29] Part of the increase was linked to digital invoicing and measures including the VAT increase, an additional surtax, and the Trapped Profits Law.[29]

Over the longer term, Israel’s tax burden fell by twelve percentage points of GDP between its 1986 peak and 2020.[28] Compared with 1986, the 2020 system had lower income-tax levels and higher VAT and taxes on fuel, tobacco, and alcohol.[28] In a historical tax model reproduced in a 2017 chapter, indirect taxes exceeded half of total collections in 2010, following declining direct-tax rates and rising indirect-tax rates.[5]

Taxes on goods and services generated more than 11% of GDP in 2018 and had exceeded OECD averages as shares of GDP and total revenue since at least the mid-1990s.[12] VAT supplied 65% of this category’s revenue and excise taxes 13%, with recurring taxes on the use of goods also important.[12]

Personal income-tax payments are concentrated among higher earners.[12] In 2018, the top two income deciles paid 90% of personal income tax, while the bottom five paid 0.4%, reflecting the income distribution together with rates and credits.[12] An earlier historical model placed 41.4% of gross income and 74.7% of income tax in the top decile, which also supplied approximately 65% of direct taxes.[5] That model drew on Ministry of Finance modeling and a 2011 newspaper report, rather than current estimates.[5]

About half the population in that earlier account earned below the income-tax-paying threshold.[5] Similarly, 2021 figures indicated that about half of people with income theoretically liable to taxation fell below the payment threshold.[28] These income-tax figures do not encompass the VAT, excise, and other taxes included in wider household tax calculations.[30]

International comparisons depend partly on definitions.[28] A 2022 report placed Israel’s 2020 burden at 29.7% of GDP, ranking it 28th among 38 OECD members, 1.2 percentage points below the weighted average and 3.8 points below the simple average.[28] The United States, accounting for 40% of OECD GDP with a 25.5% tax burden, lowered the weighted average.[28] Compulsory Israeli employer pension contributions, introduced in 2008, flow to private bodies and are excluded from the tax burden; including them would add 2.8 percentage points, whereas pension contributions to public bodies are counted in many OECD countries.[28]

Tax law also connects modern Israeli institutions with Jewish legal traditions.[31] Article 86 of the Income Tax Ordinance permits a tax official to disregard a tax-reducing transaction considered “artificial or invented.”[31] In Mapi Ltd. v. the Tax Assessor for Large Businesses, the Supreme Court drew on Jewish legal discussions of circumvention in interpreting artificial transactions through the question of whether they possessed substance or purpose beyond reducing tax.[31]

Another Supreme Court tax-interpretation case drew on a medieval responsum by Solomon ben Abraham Aderet, known as Rashba.[31] His ruling held that the clear wording of a communal tax enactment should govern despite an unforeseen reduction in one taxpayer’s obligation, a principle later used in Israeli statutory interpretation.[31] A tax museum established in Jerusalem in 1964 preserved material on Jewish tax law and taxation in historic Israel and the modern state, sponsored research, and supported a tax periodical.[31]

Tax administration also has a regional fiscal role.[32] An INSS account says the April 1994 Paris Protocol established a customs union between Israel and the Palestinian Authority, under which Israel collects indirect taxes including import taxes, excise, and VAT, together with a 75% share of direct taxes collected from Palestinians employed in Israel, after commission and collection charges.[32] The same account says these revenues have supplied at least two-thirds of the PA budget since its establishment.[32]

The distribution of tax increases and the value of exemptions have generated policy debate.[4][33] The 2025 budget combined higher National Insurance and health taxes, VAT at 18%, and frozen income-tax brackets; INSS analysts argue that these measures placed much of the burden on workers, especially the middle class.[33] The OECD’s 2025 survey treated removal of VAT exemptions as a policy proposal rather than an enacted measure and argued that lower-income households are especially exposed to high prices because they spend almost all their income on essentials such as food, housing, and transport.[4]

A household study reported in 2024 estimated average monthly income and capital-gains tax of NIS 292 in the third-lowest decile, NIS 2,243 in the seventh, and NIS 15,403 in the highest.[30] Including all taxes produced averages of NIS 3,769 for the lowest decile, NIS 9,154 for the fifth, and NIS 36,465 for the highest.[30] The same study estimated that services received exceeded taxes paid by NIS 4,107 monthly for haredi households and NIS 1,037 for Arab households, while non-haredi Jewish households paid NIS 6,115 more than services received.[30] These estimates depend on methodological choices, including attribution of corporate taxes and public goods such as defense and infrastructure.[30]

Interpretation and implementation of Israeli-Palestinian tax-transfer arrangements are politically contested.[34] A Jerusalem Center analysis interprets the agreements as preserving each side’s direct-tax policy while providing for Israeli collection and transfer of specified revenues; it describes initial transfers of 75% of income tax from legally employed Gaza and Jericho residents working in Israel and 100% from those working in Israeli settlements, with the arrangement extended in 1995.[34] Its reported cumulative VAT-related transfers of NIS 28,859,090,333 cover January 2010 through August 2023 only, not a comprehensive historical total.[34]