Corporate tax in Palestine

Summary

Corporate Income Tax Rate (%) 15 (a)
Capital Gains Tax Rate (%) 15 (a)
Branch Tax Rate (%) 15 (a) (b)
Withholding Tax (%) (c)
Dividends 0 (d)
Interest 10 (e)
Royalties from Patents, Know-how, etc. 5
Payments for Services and Goods 10 (f)
Other Payments to Nonresidents 10
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 5

a) This is the standard corporate income tax rate. For other rates, see Section B.

b) Foreign branches operating in Palestine are taxed like Palestinian companies.

c) In general, the withholding taxes may be credited against income tax due.

d) See Section B.

e) No withholding tax is imposed on interest received from banks.

f) This withholding tax applies to resident and nonresident companies. It applies to payments of higher than ILS2,500 if the vendor does not provide a deduc­tion-at-source certificate.

Taxes on corporate income and gains

Corporate income tax. Palestinian companies and branches of for­eign companies carrying on business in Palestine are subject to corporate income tax. A company is considered Palestinian if it is registered in Palestine. A branch of a foreign company register­ed in Palestine is treated like a Palestinian company.

Rates of corporate income tax. The standard rate of corporate in­come tax is 15% of taxable income. Telecommunication compa­nies and monopoly companies are taxed at a rate of 20%. The tax rate on life insurance companies is 5% of the total life insurance premiums owed to the company. Interest income derived by banks from small and medium-sized entities’ finance programs is subject to income tax at a rate of 10%.

Under the Law for Encouragement of Investments, as amended in 2014, approved companies may pay income tax at the following rates:

  • 5% for a period of five years beginning on the date of reali­zation of profit but not exceeding four years from the beginning of the company’s operations
  • 10% for a period of three years after the end of the first phase
  • The standard rate after the end of the three-year period

An application must be filed with the Palestinian Investment Promotion Agency to obtain approval for these tax benefits.

Capital gains. Capital gains are taxable. However, gains arising from the sale of shares and bonds are exempt. The expenses re­lated to these exempt gains are not deductible for tax purposes. These nondeductible expenses are calculated according to a for­mula in the law and subtracted from the total expenses of the entity.

Administration. Companies must file a corporate tax return by the end of the fourth month after their year-end. All companies must use the calendar year as their tax year, unless the tax au­thorities approve a different tax year. As a result, tax returns are generally due on 30 April. Any balance of tax due must be paid by the due date of filing the annual tax return.

Payment of income tax on account must be made in accordance with instructions issued by the Minister of Finance. The tax regu­lations provide incentives for advance tax payments made during the tax year. The incentive rates are announced at the beginning of the tax year.

Special incentives are granted for companies who file and pay within a certain period after the tax year-end. For filing and pay­ing during the first and second months after the year-end, the discount is 4%. The discount is 2% for the third month.

Dividends. Under the Income Tax Law amendments in 2014, divi­dends are subject to income tax. Dividends distributed by compa­nies resident in Palestine are subject to withholding tax at a rate of 10% and are considered as a payment on account. However, in January 2015, the Ministry of Finance put the application of this withholding tax on hold.

Interest. Interest is subject to income tax at the applicable income tax rate.

Determination of trading income

General. Taxable income is the income reported in the companies’ financial statements, subject to certain adjustments.

All types of income are taxable, unless otherwise stated in the law.

All business expenses incurred to generate income may be de­ducted, with limitations on certain items, such as entertainment and donations. A certain percentage of entertainment expenses is deductible. Head-office charges are limited to 2% of branch net taxable income.

Inventories. The tax law does not specify a particular method for determining the cost of inventory.

Provisions. In general, provisions are not deductible for tax pur­poses, except for banks and insurance companies. Banks can deduct bad debt provisions, and insurance companies can deduct part of its unexpired risks’ and outstanding claims’ provisions.

Depreciation. The Palestinian tax law provides straight-line tax de – preciation rates for various types of assets. These rates are applied to the purchase prices for the assets. If the rates for accounting purposes are greater than the tax depreciation rates, the excess is disallowed but may be used for tax purposes at a later date. The following are the straight-line rates for certain assets.

Asset Rate (%)
Industrial buildings 4
Transportation
Land transportation
Cars, trains, buses, trucks and trailers 10
Cars and buses for public transportation
and for driving schools
12
Air transportation
Aircraft 8
Cable cars 5
Sea transportation
Ships for transportation, cargo and freezing 5
Boats and yachts 8
Sport and racing boats 15
Other ships or boats that work over
or under the water
15
Office equipment 7 to 10
Equipment used in industrial activities 5 to 10
Equipment used in agricultural activities 7 to 25
Technological equipment 20 to 25
Office furniture and decoration 10 to 15
Computers 20

Groups of companies. Companies must file separate financial state­ments for tax purposes.

Relief for losses. Companies may carry forward losses to the fol­lowing five tax years.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax (VAT)
Standard rate 16
Wages and profit tax; imposed on financial
institutions instead of VAT and in addition
to corporate income tax
16
Property tax; based on 80% of the assessed
rental value
17

Foreign-exchange controls

The Palestinian Authority does not have a currency. Major curren­cies used in Palestine include the Israeli shekel (ILS), Jordanian dinar (JOD) and the US dollar (USD).

Tax treaties

The Palestinian Authority has entered into double tax treaties with Jordan, Oman, Serbia, Sri Lanka, Sudan, Turkey, the United Arab Emirates and Vietnam.

The Palestinian Authority has also entered into tax treaties related to customs with the European Union, Japan, Turkey, the United States and certain Arab countries. Under these treaties, goods imported from the treaty countries have either full or limited cus­toms exemption, depending on the type of goods imported.