Tax Implications of a foreigner investing in Palestine

Tax Implications of a foreigner investing in Palestine: 

The tax implications on a Private limited company or a Public company operating in Palestine – the Palestinian tax laws , corporate law and commercial laws do not address the foreign ownership of a company and thus the same laws apply to a company and its owners regardless of the identity of a the owners being a foreign investor or a local one.

Value Added Tax:

In accordance with “customs law on locally manufactured products (16)/1963” ,Value added tax is levied on all services and products sold in Palestine to a resident– Resident being defined as a Palestinian citizen that resided in Palestine for a total of 120 days or a foreigner that resided a total of 183 days or more be it consecutive or nonconsecutive. Services sold to nonresidents where the subject of the service is within the borders of Palestine are also subject to Value added tax.

Zero Value Added Tax & Exemptions:

In the case of service provider delivering to a foreigner entity on subject matters that are not related to Palestinian entities or to objects within the jurisdiction of the Palestinian authorities are subject to Zero value added tax[1]. a significant difference of Zero value added tax and tax exempted transactions is the ability of the producer/service provider to reclaim input Value added tax on procurements incurred for the purpose of delivery of the zero value added tax services or products where in the case of exemption the input tax is forfeited.

Value Added Tax on Sale of Stocks:

Generally Value added tax is not levied on the sale of stock or the transfer of ownership it is not considered a transaction that constitutes a service or product and hence not subject to Value added tax. However, in the case that the purchase and resale of shares and title deeds is the main business of an entity – financial instruments trader- Value added tax is levied on the difference between the purchase price and the sales price[2].

Income Tax:

In accordance with “Income tax law (17)/2004” and its relevant amendments.; Legal persons – limited liability companies - are subject to a flat 15% tax bracket on its taxable income^[3].If Legal persons are entitled to certain monopolies dedicated by law the Legal person is subject to a flat 20% tax bracket on taxable income^[4].

Income Tax on the sale of stocks:

On the Purchase/Sale transaction , the original shareholders of the company will enjoy a tax free transaction regardless of the amount^[5] this transaction if it is a non-reoccurring transaction and doesn’t constitute the main business of the original owners .moreover, the new shareholders of the company will not be subject to any taxes on the procurement of the shares.

The new and original shareholders will be responsible for the results of operations of the company on years prior to the ownership transfer as well as going forward. The company should maintain records for 7^[6] years from the date of the submittal of tax basis financial statements.

Capital Gains Tax:

There is no capital gains tax on non-reoccurring sales or purchase of assets, unless capital gain is the main business of the company and thus is a reoccurring transaction[7]. The fact that the shareholder of the Palestinian company is a foreigner is not a factor for the purpose of implementation of law.

Dividends Tax:

Detailed in the deduction at source tax #3 dividends and interest revenues are subject to 10% flat rate that should be deducted by the Legal person distributing the dividends or paying the interest. Transfer of the funds should be transacted within 30 days of the deduction.to further detail:

• Liquidating dividends are not subject to any taxes.
• Retained earnings are not subject to any withholding taxes.

The deduction of the dividends tax is executed on the date of declaration of dividends regardless of the date of transfer of the funds.

Deduction at Source Tax:

The responsibility of tax collection and transfer to the treasury is assigned to the Legal person in certain transactions:

1. Taxes on the salaries of employees are the responsibility of the employer to deduct and transfer to the treasury within 15 days of deduction. Each employee in accordance to their applicable tax bracket.
2. Taxes on transactions with any entity or person that doesn’t supply the Legal person with a tax invoice, the Legal person is assigned the responsibility to deduct 10% from any contract in excess of 2,500 ILS. Transfer of the funds should be transacted within 30 days of the deduction.
3. Dividends and interest revenues are subject to 10% flat rate that should be deducted by the Legal person distributing the dividends or paying the interest. Transfer of the funds should be transacted within 30 days of the deduction.
4. Board of directors compensations are subject to 10% flat tax bracket that are the responsibility of the Legal person to deduct and transfer of the funds should be transacted within 30 days of the deduction.

Any transaction that is subject to deduction at source and is not deducted by the Legal person is levied on the Legal person as if it where originally a taxable transaction on that Legal person. Furthermore, if the transaction constitutes an expense to the Legal person – Salaries- the expenses will not be a deductible expense for the purposes of taxable income calculation unless taxes on these expenses are supported by the appropriate deductions.

Disclaimer:

The information presented is relevant and accurate to the date of the report. It is possible that new legislation, rulings or amendments to be introduced that will result in material tax implications. This report identified the characteristics of the transaction based on the details of the “engagement background” it is the responsibility of the client to deliver any and all information that is relevant to the transaction