Israel – a Tax Haven for Diamond Merchants and Manufacturers?

It is a well known fact that Israel is one of the most important and largest diamond centers in the world. In addition to its status as a leading polishing center, the Israeli Diamond Industry has developed into an international trade center through which rough and polished diamonds pass regularly. In fact, The United States, the world’s largest market for polished diamonds, imports over half of its polished diamonds from Israel.

That said, it is a less known fact that Israel is a Tax Heaven for diamond businesses, that are required to pay only 0.5% taxes on their turnover. This special arrangement between the Israeli Tax Authorities (ITA) and the local diamond industry was originally made in order to encourage the local diamond trade and manufacturing, and to enable the local industry to better compete globally. According to this agreement, ITA inspectors do not inspect diamond companies as long as the latter demonstrate that their taxable income is higher by 1.3% than the actual turnover.

Given the above it is advisable for foreign diamond companies that trade with Israeli diamond companies to either establish an Israeli daughter company or to register their foreign company to pay taxes in Israel for their Israeli-related activities. Furthermore, a foreign entity that registers a local Israeli branch also enjoys the fact that it is not subject to the tax-at-source deductions upon earnings distributions that do apply to local Israeli companies.

DISCLAIMER: This post is not meant as specific investment or tax advice. Individuals should consult with their own advisers for specific investment and tax advice.