Israel – UK Tax Treaty

Business activity in the United Kingdom

The UK hosts one of the most diverse economies in the world. For years, financial services have been a cornerstone of the economy, with London standing as a global financial center. This sector contributed roughly 8% to the in 2021 GDP through various banking methods, personal and commercial insurance, and asset management. Manufacturing is another major sector; according to the world bank manufacturing accounts for 9% of the country’s GDP. Manufacturing encompasses a variety of industries; however the UK specializes and is well known for its automotive and aerospace industries with popular companies such as Jaguar, Land Rover, and Airbus making an international presence.

The technology sector in the UK is valued at over £1 trillion now making it the third largest technology sector in the world only trailing the United States and China. This industry includes products related to fintech, AI, cybersecurity, and more. It thrives in technology hubs such as London’s Tech City, Manchester, Cambridge, and Edinburgh.

Consequently, the UK is recognized as the 5th largest economy in the world according to its nominal GDP and continues to be a pivotal piece in worldwide trade.

Bilateral agreements between the United Kingdom and Israel

Several agreements were signed between Israel and the United Kingdom:

1. Convention on Social Security (Social Security)
2. Free Trade Area Agreement (ASH)
3. Double Taxation Treaty

Social Security Agreement between Israel – United Kingdom

In 1957, a social security treaty between Israel and the United Kingdom was signed. The purpose of the treaty was to prevent a situation of an individual subject to dual social security contributions. The full document detailing the convention can be found here.

Free Trade Agreement between Israel – United Kingdom

A free trade agreement is designed to lower or, in some cases, eliminate tariffs on goods within specified trading regions. It removes import regulations and dismantles barriers, fostering easier access to goods, services, and government contracts. Additionally, the agreement includes provisions that offer legal protections for investments and intellectual property.

The United Kingdom and Israel signed a free trade agreement on February 18, 2019, ahead of the UK’s exit from the European Union. This agreement was designed to ensure that trade between the two countries would continue without disruptions after Brexit. It largely mirrors the trade provisions that were in place while the UK was a member of the EU. The agreement entered into force on January 1, 2021, after the end of the transition period for the UK’s withdrawal from the EU.

The full document detailing the convention can be found here.

Convention on the Prevention of Double Taxation Between Israel – United Kingdom

Double taxation treaties are bilateral agreements. If two states are party to the agreement, it stipulates that the tax rules will apply to income and assets that are related to the two states. In addition, the treaties include principles for the exchange of information on tax issues between countries. The original tax treaty between Israel – United Kingdom entered into force in 1962. In 2019, an amending protocol to the treaty was signed due to Brexit. This amendment entered into force on 1/1/2020. For the full United Kingdom – Israel tax treaty click here.

Applicability of the MLI

Although Israel and the United Kingdom both signed the convention in 2017, the convention will not apply to the existing bilateral treaty. This is attributed to the fact that neither country listed the other in the reservation’s clause submitted to the OECD.

The full original agreement can be found on the Ministry of Finance website.

Residency for tax purposes in the United Kingdom

Residence of an individual

In the UK, tax residency is determined by the Statutory Residence Test (SRT) introduced in 2013. It assesses an individual’s tax residency based on their physical presence, ties to the country, and specific circumstances. The SRT consists of three tests: Automatic Overseas, Automatic UK, and Sufficient Ties.

• The Automatic Overseas Test applies if an individual spends fewer than 16 days in the UK, making them a non-UK tax resident.
• The Automatic UK Test applies if an individual spends 183 days or more in the UK, making them a UK tax resident.
• The Sufficient Ties Test applies if an individual spends between 16 and 182 days in the UK, considering factors like family connections, accommodation availability, work commitments, and past UK presence.

The number of ties determines the allowed days of presence in the UK. Detailed calculations and rules apply, particularly for individuals with prior UK tax residency or specific job positions.

Residency of a company

For tax purposes, a company’s residency in the UK depends on its place of incorporation. UK-incorporated companies are automatically considered UK tax residents, taxed on their worldwide profits. Companies incorporated outside the UK follow the “Place of Effective Management” (POEM) concept. If key management and control decisions are made in the UK, the company is a UK tax resident. If such decisions are made outside the UK, the company is a non-UK tax resident, subject to UK taxation on UK-sourced income and specific UK-related activities.

The tax system in the United Kingdom

The country Tax Authority is called Her Majesty’s Revenue and Customs (HMRC)

Click here for the official website of the country tax authority.

Income taxation:

• Personal Allowance: The first £12,570 of income is tax-free.
• Basic Rate: Income above the Personal Allowance up to £50,270 is taxed at the Basic Rate of 20%.
• Higher Rate: Income above £50,271 and up to £125,140 is taxed at the Higher Rate of 40%.
• Additional Rate: Income above £125,140 is taxed at the Additional Rate of 45%.

Corporate tax: 25%

VAT: 20% (some goods and services have a lower rate of 5%/0%)

Capital gains tax: ranging from 10% to 28% depending on the exact circumstances

Withholding Tax

Inheritance tax and estate tax in the United Kingdom

The current inheritance tax threshold is £325,000, meaning that the first £325,000 of an individual’s estate is exempt from inheritance tax.

Inheritance tax is typically levied at a flat rate of 40% on the value of an estate that surpasses the inheritance tax threshold.

Various exemptions and reliefs are available to help reduce the inheritance tax liability. These include exemptions for spouses or civil partners, charitable exemptions, etc.

Relocation

The UK’s is an appealing destination and has become increasingly popular; in 2022, approximately 1.2 million people migrated to the country which ultimately accounted for about a 600,000 increase in net migration.

Additionally, the UK is renowned for its esteemed educational institutions, such as the University of Cambridge and the University of Oxford, making it an enticing destination for students and researchers. In turn, many students choose to pursue a career in the UK post-graduation due to its opportunistic and diverse economy.

The UK also sees its fair share of wealthy individuals migrating to the country due to its competitive tax system, offering advantageous rates and incentives.

Real estate taxation in the United Kingdom

In the UK, real estate taxation involves several elements. Council Tax is imposed on residential properties based on valuation bands determined by property value as of specific dates. Stamp Duty Land Tax (SDLT) is paid when purchasing properties, with rates varying for residential and non-residential properties. Additional SDLT applies to second homes and buy-to-let properties, while Scotland and Wales have their own property taxes (LBTT and LTT). Capital Gains Tax (CGT) is levied on the profit from selling assets, including real estate, with rates based on income and asset type.

Transfer of funds from Israel to United Kingdom

 In accordance with Section 170(a) of the Income Tax Ordinance in Israel, certain money transfers from Israel to the United Kingdom require the approval of an assessor on behalf of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into Pound sterling pounds, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of business entities in the United Kingdom

In the UK, there are several types of business entities that individuals and companies can choose from:

1. Sole Trader: A sole trader is a self-employed individual who runs their business as an individual. They have complete control over the business and are personally responsible for its liabilities. This is the simplest and most common form of business entity in the UK.
2. Partnership: A partnership is formed when two or more individuals (partners) carry on a business together with a view to making a profit. The partners share the profits and losses, and each partner is personally liable for the partnership’s debts.
3. Limited Liability Partnership (LLP): An LLP is a hybrid business entity that combines features of both a partnership and a limited company. It offers limited liability to its members, meaning they are not personally liable for the debts of the LLP. Each partner’s liability is limited to their agreed contribution or investment in the LLP.
4. Private Limited Company (Ltd): An Ltd (Limited) is a separate legal entity that provides limited liability to shareholders, protecting their personal assets from company debts. It offers stability, continuity, and ownership through shares, without exposing shareholders to personal liability.
5. Public Limited Company (PLC): A public limited company is similar to a private limited company but can offer its shares to the public. It must have a minimum share capital and comply with additional regulations, such as issuing a prospectus before shares are offered to the public.
6. Community Interest Company (CIC): A CIC is a special type of limited company that exists to benefit the community rather than private shareholders. It must use its assets and profits for the public good and meet certain community-oriented criteria.
7. Limited Liability Company (LLC): While not a specific legal entity in the UK, the term “Limited Liability Company” is sometimes used to refer to a limited company (Ltd) or limited liability partnership (LLP).

 Incentive laws in the United Kingdom

The UK offers various incentive laws and programs to encourage economic growth, investment, and innovation. Some of the key incentive laws and schemes in the UK include:

1. Research and Development (R&D) Tax Credits: The R&D tax credit scheme allows companies to claim tax relief on qualifying R&D activities. It provides financial incentives to encourage research and development activities, supporting innovation and technological advancement.
2. Patent Box: The Patent Box is a tax incentive that allows companies to apply a reduced rate of corporate tax to profits earned from patented inventions. It aims to encourage innovation and the commercialization of intellectual property in the UK.
3. Enterprise Investment Scheme (EIS): The EIS is designed to encourage investment in small and medium-sized enterprises (SMEs). It provides tax benefits to individual investors who invest in qualifying EIS companies, including income tax relief, capital gains tax exemption, and inheritance tax relief.
4. Seed Enterprise Investment Scheme (SEIS): The SEIS is a similar scheme to the EIS but targeted at even smaller, early-stage companies. It offers generous tax incentives to individuals who invest in qualifying SEIS companies, including income tax relief and capital gains tax exemption.
5. Entrepreneurs’ Relief: Entrepreneurs’ Relief allows eligible individuals to pay a reduced rate of capital gains tax (10%) on the sale of all or part of their business. It is aimed at incentivizing entrepreneurship and rewarding business owners who sell their businesses.
6. Enhanced Capital Allowances (ECAs): ECAs provide accelerated tax relief for qualifying capital expenditure on energy-saving and environmentally beneficial technologies. It encourages businesses to invest in energy-efficient equipment and technologies.
7. Regional Development Grants: The UK government offers grants and incentives to support regional development and investment in specific areas or sectors. These grants aim to stimulate economic growth, create jobs, and support businesses in underdeveloped regions.
8. Freeports: Freeports are designated areas that enjoy special customs and tax benefits to attract investment and promote trade. The UK government has established several freeports across the country to encourage economic activity, job creation, and innovation.

United Kingdom Double Tax Treaties