OrdinanceTax Law
Income Tax Ordinance [New Version]
פקודת מס הכנסה [נוסח חדש]
Published: 1961-04-25Last amended 2026-06-08✓ Amendment status checked against the Knesset legislation record on 2026-09-04
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Unofficial English translation — for reference only. It may contain errors or omissions and cannot be relied on as a legal text. Only the Hebrew text published in Reshumot is legally binding.More
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The Hebrew text as published in Reshumot (ספר החוקים) and on the Knesset website is the sole authoritative and legally binding version. In any discrepancy, the Hebrew text prevails.
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Chapter II: Deductions and Set-offs
Section A: Deductions of Expenses
Permitted deductions§
17.
For the purpose of ascertaining the taxable income of a person there shall be deducted – unless the deduction has been limited or disallowed under section 31 – expenditure and expenses incurred wholly in the production of income in the tax year and for that purpose only, including –
(1)
(a)amounts paid as interest or linkage differentials on money borrowed, if the assessing officer is satisfied that they are paid on capital employed in the production of the income;
(b)a taxpayer who claims a deduction for interest or linkage differentials under sub-paragraph (a) in a year in which he received interest or linkage differentials exempt from tax under section 9(24) shall not be allowed a deduction in an amount equal to the amount of the interest and linkage differentials so exempt, except for the higher of the following two amounts:
(1)an amount received in respect of excess tax that he paid because the assessing officer required him to pay it or that was deducted from him at source;
(2)an amount received in respect of that part of the excess tax that does not exceed 15% of the tax due from him according to his self-assessment;
(2)rent paid by a tenant of land or a building occupied by him for the purpose of producing the income;
(3)amounts expended on repairs to premises, plant or machinery used in producing the income, and also on the renewal, repair or alteration of tools, implements or articles used as aforesaid;
(4)bad debts that arose in a business or vocation and it has been proved to the satisfaction of the assessing officer that the debts became bad in the tax year, as well as doubtful debts to the extent estimated, to the satisfaction of the officer, as debts that became bad in the tax year, even if the time for repayment of the bad or doubtful debts fell before the commencement of the tax year; however, moneys collected in the tax year on account of amounts previously written off or deducted in respect of bad or doubtful debts shall be treated for the purposes of this Ordinance as receipts of the business or vocation for that year;
(5)amounts paid by an employer – on the conditions and at the rates prescribed under section 22 of the Supervision of Provident Funds Law as regular annual contributions to a provident fund, as well as amounts at the rates and on the conditions aforesaid but with the necessary modifications paid by an employer to the State, a local authority or another body designated by the Minister of Finance for this purpose, for the purpose of preserving the pension rights of his employee, as well as any amount or part thereof paid by an employer – with the approval of the Administrator – to a provident fund as aforesaid or to an institution or body as aforesaid otherwise than as a regular annual contribution;
(5a)amounts paid by an individual to a continuing education fund for the self-employed shall not exceed 4.5% of his determining income; for this purpose –
"determining income" – the taxable income of the individual from a business or vocation, before the deduction under this paragraph, up to an amount of NIS 156,000 per year;
"continuing education fund for the self-employed" – a continuing education fund intended for an individual who has income from a business or vocation;
(6)expenses in taking measures to prevent soil erosion and against floods and other natural disasters as shall be prescribed;
(7)expenses in taking precautionary measures against air attacks;
(8)a deduction for depreciation as referred to in Section B;
(9)amounts returned by a co-operative society to its members as an annual benefit, according to the ratio of its transactions with each member, provided –
(a)that no deduction shall be allowed in an amount exceeding that part of its taxable income before the return of the benefit, whose ratio to its total taxable income is as the ratio of the amount of its transactions with members to the total of all its transactions;
(b)that the benefit was given to members within nine months of the end of the accounting year to which it relates or at a later date prescribed by the Administrator;
(c)that the benefits shall be regarded as if received by the members on the last day of the accounting year to which they relate;
(10)(Repealed)
(11)
(a)expenses in connection with the preparation of returns and dealings in connection with tax in all assessment and appeal proceedings, provided however that if a court or a committee on the admissibility of books determined that the appeal or appeal was vexatious and there was no reasonable justification for filing them, the legal expenses connected therewith shall not be allowed; if legal costs were awarded in favour of the taxpayer, the amount of costs awarded shall be deducted from the amount of expenses claimed;
(b)expenses as referred to in this paragraph shall not be allowed in connection with income from a business or vocation in respect of which account books were not kept or if the return was not based on account books;
(12)rent paid by an individual for an apartment rented by him in Israel to which he moved to live by reason of his employment or occupation, for five years from the day he moved to live in that apartment; such rent shall be allowed as a deduction from the rent he receives for the letting of his permanent apartment during the same period;
(13)
(a)amounts paid by a taxpayer for lodging or renting an apartment in an area designated as a development zone under section 11, in which the taxpayer works on a permanent basis but does not live together with his family with whom he would have lived had he not worked there;
(b)the Minister of Finance may prescribe the ceiling of the amount to be allowed as a deduction under sub-paragraph (a) and the period of the deduction;
(14)other deductions to be prescribed in Regulations under this Ordinance;
(15)an oil profits levy or an excess profits levy, paid under the Natural Resources Profits Taxation Law, 5771-2011, by one who is liable therefor under that Law.
Restrictions on Deduction of Certain Expenses§
18.
(a)A severance grant, vacation pay, recuperation pay, holiday pay, sick pay and other similar expenses — their deduction under section 17 shall be permitted only in the tax year in which they were paid to the person entitled thereto or to a provident fund, provided that payments as aforesaid that were paid to a provident fund in respect of the last month of the tax year shall be deemed to have been paid within the tax year if they were paid to it within one month of the end of the tax year.
(b)Employment income, management fees, linkage differentials or interest, or other payments, paid by a company controlled by not more than five persons within its meaning in section 76 to one of its members who is a controlling shareholder within the meaning of section 32(9) — their deduction under section 17 in a particular tax year shall be permitted if they were paid to him in that tax year or if he included them in his return of income for that tax year and the tax thereon was withheld pursuant to the salary withholding Regulations not later than three months after the end of the tax year or the special assessment period, as the case may be, and was transferred to the assessing officer within 7 days of the date of withholding, together with linkage differentials and interest from the end of the tax year or the special assessment period until the date of withholding.
(b1)The Minister of Finance may, with the approval of the Finance Committee of the Knesset, prescribe that the provisions of subsection (b) shall not apply to categories of payments that constitute exempt income in the hands of a controlling shareholder, and may, with such approval, make his prescription subject to conditions.
(c)Where a person's income includes income in respect of which a special rate of tax has been prescribed or which is exempt from tax (hereinafter — preferred income), the expenses incurred by that person in order to earn the preferred income shall be permitted for deduction under section 17 only against that income; where it is not possible to determine the expenses as aforesaid, a proportionate part of the expenses incurred in the production of all of his income shall be deducted against the preferred income, in the ratio of the preferred income to all of his income; however, the Minister of Finance may direct a different manner of apportioning the expenses if he sees fit to do so in the circumstances.
(d)
(1)In this section —
"work unit" —
(1)a structure whose construction period exceeds one year, including its components whose execution period is as aforesaid, and including works as referred to in paragraph (2) that form part thereof, and if it is a capital asset — where it has not yet begun to serve in the production of income in the first half of the tax year or the special assessment period, and all this whether the income from its sale is income under section 2(1) or is capital gain or betterment;
(2)excavation works, sewage works, road or highway paving, and earthworks — whose execution period exceeds one year;
"interest expenses" — interest and linkage differentials permitted for deduction under section 17, as well as interest and linkage differentials in respect of capital used for the construction or acquisition of a capital asset, less income from interest and linkage differentials on loans granted to a financial institution, to the State, to a local authority, to a government company, to a government subsidiary, or to another person prescribed by the Minister of Finance;
"other income" — income not derived from any of the following:
(1)the sale of a work unit;
(2)the sale of land;
(3)interest and linkage differentials on loans granted to a financial institution, to the State, to a local authority, to a government company, to a government subsidiary, or to another person prescribed by the Minister of Finance;
(4)
(a)during the period of application of the Inflation Taxation Law — the sale of a capital asset that is not unprotected traded securities within its meaning in that Law;
(b)during the period of application of the Inflation Adjustments Law — the sale of a fixed asset within its meaning in that Law;
(c)during the period following the application of the Inflation Adjustments Law — the sale of an asset as defined in section 104;
provided that with respect to income from securities as referred to in this paragraph, only the amount of the change in their value or the profit therefrom, as the case may be, shall be taken into account in other income;
"financial institution" —
(1)a company or cooperative society engaged in receiving monetary deposits in current accounts for the purpose of paying therefrom by cheque on demand;
(2)a company lawfully using the word "bank" as part of its name, excluding a company whose name references a company or cooperative society to which paragraph (1) applies;
"general and administrative expenses" — any expense that is not within the category of interest expenses and which the taxpayer does not habitually attribute directly to a work unit, to land or to other income;
(2)A taxpayer whose occupation is the construction of work units, who in a particular tax year had or was executing work units or land that is business inventory, shall have the general and administrative expenses and the interest expenses incurred by him in that tax year attributed to each work unit or land as aforesaid, as follows:
(a)to each work unit shall be attributed a proportionate part of the general and administrative expenses, being the ratio between the sum of the expenses incurred by the taxpayer in the tax year for the execution of that work unit and the total of all expenses incurred by him in that tax year for the execution of all work units plus the amount of other income he had in the tax year;
(b)
(1)to each work unit or land shall be attributed a proportionate part of the interest expenses, being the ratio between the total cumulative expenses incurred by the taxpayer up to the end of the tax year for the execution of that work unit or for the acquisition of that land and the total cumulative expenses incurred up to the end of the tax year for the execution of all work units and for the acquisition of all land plus the amount of other income he had in the tax year;
for this purpose, "expenses for the execution of a work unit and for the acquisition of land" — including expenses to be attributed to a work unit and to land pursuant to this section, up to the end of the preceding tax year;
(2)the balance of interest expenses not attributed as referred to in paragraph (1) shall be permitted for deduction such that the part thereof which bears the ratio of preferred income within its meaning in section 18(c) to all other income shall be attributed to that preferred income as aforesaid.
(e)Income of a non-resident from which tax is to be withheld pursuant to sections 164 or 170 — its deduction under section 17 in the tax year to which it relates shall be permitted only if it was paid in that year or if the tax thereon was withheld not later than three months after the end of the tax year or the special assessment period, and was transferred to the assessing officer within 7 days of the date of withholding, together with linkage differentials and interest from the end of the tax year or the special assessment period until the date of withholding.
19.§
(Repealed — תשס״ה־9)
Authority to Prescribe Rules Regarding Certain Deductions§
20.
(a)The Minister of Finance may, with the approval of the Finance Committee of the Knesset, prescribe rules regarding the deduction of amounts as detailed below, in whole or in part, the duration of such deduction and its annual rate:
(1)amounts paid by the owner of a building let in whole or in part under protected tenancy in respect of the eviction of a protected tenant, or as a contribution towards the construction of the pavement or road adjacent to the building or drainage connected to the building and the like;
(2)amounts paid by a long-term lessee of real property in respect of the long-term lease or in respect of investment in the leased real property or in connection therewith;
(3)amounts expended by a taxpayer for the purpose of replanting;
(4)other capital expenditure.
(b)The Minister of Finance may, with the approval of the Finance Committee of the Knesset, prescribe rules —
(1)regarding the grant of an additional depreciation allowance in respect of a building let in whole or in part under protected tenancy, the rate thereof and the duration of the period during which it is granted;
(2)regarding the reduction of the unrecouped balance of an orchard that has been uprooted, in whole or in part, where its owner has planted another orchard before or after the uprooting, and regarding the treatment of the reduction for the purpose of determining the original price for the purposes of depreciation and of the capital gain of the new orchard.
Deductions for Scientific Research§
20a.
(a)
(1)In determining the taxable income of a person who has incurred expenses, including capital expenses, for scientific research in the fields of industry, agriculture, transport or energy that has been approved for this purpose by one authorised by the Minister in charge of the ministry within whose area of activity the research falls, such expenses shall be permitted for deduction from all of his income in the tax year in which they were paid, provided that one of the following conditions is met:
(a)the research is carried out by, or commissioned by, the owner of an enterprise that is in one of the aforementioned branches, for the development or advancement of his enterprise;
(b)the expenses are those of the person conducting the research who is not the owner of an enterprise in those branches, or they constitute participation in the financing of research conducted by another person in consideration of a right in the fruits of the research results that is reasonable in proportion to his participation in the research expenses, and all this where the State participates in the financing of the research by way of a grant; "grant", for this purpose — including a loan of a type prescribed by the Minister of Finance with the approval of the Finance Committee of the Knesset, provided that expenses constituting such participation shall be permitted for deduction as follows: in the tax year in which the expenses were paid — a proportionate part thereof in the ratio of the number of months remaining from the month following the month in which they were paid until the end of the tax year, divided by 12, and the balance — in the following tax year; and for the purpose of calculating the proportionate part as aforesaid, an advance commitment to pay expenses in twelve equal monthly instalments shall be deemed expenses all paid at the time of the first payment;
(1a)A participant in the financing of research conducted by another person as referred to in paragraph (1)(b) may set off the tax saved against the tax withheld at source from employment income or against advance payments for which he is liable pursuant to section 175 from the month following the month in which he paid the expenses; if a balance remains for set-off in respect of a particular tax year, the set-off shall be permitted upon submission of the return for that year; for this purpose, "the tax saved" — the amount of tax from which the taxpayer was relieved as a result of the deduction under paragraph (1), however for the purpose of set-off against advance payments only, the tax saved shall be calculated at a tax rate of 55% — in respect of a taxpayer who is an individual, and at the average tax rate for the preceding tax year — in respect of a taxpayer who is a body of persons;
(1b)For the purposes of section 190a, a set-off against the withholding at source or advance payments pursuant to paragraph (1a) shall be treated as a set-off of an amount withheld at source as referred to in section 177;
(1c)If the person conducting research approved by one authorised as aforesaid in paragraph (1) to approve it has raised from investors in research and development amounts that together with the amount he himself invests in that research exceed the amount he expended on carrying out that research, the amount in excess of the amount he expended shall be deemed taxable income in his hands, to which the applicable tax rate is 100%, without any right to exemption, deduction or set-off whatsoever, and the date of its payment, for the purpose of determining interest and linkage differentials pursuant to section 159a, is the day on which the excess amount arose; the Minister of Finance, with the approval of the Finance Committee of the Knesset, shall prescribe rules for the calculation of the excess amount and the day on which it arose;
(2)capital expenses for scientific research incurred by a person for the advancement or development of his enterprise, to which paragraph (1) does not apply, shall be permitted for deduction in three equal annual instalments commencing in the tax year in which they were paid;
(3)the amount of a grant as referred to in paragraph (1)(b) given by the State for the purpose of financing scientific research shall be reduced from the amount of expenses whose deduction was permitted pursuant to this subsection.
(b)No amount of an expense invested in an asset on which depreciation is deductible under section 21 shall be permitted for deduction under subsection (a).
Overall Ceiling on Deduction for Research and Development§
20a1.
(a)The amount permitted for deduction in respect of participation in the financing of research and development conducted by another person, under section 20a(a) and under any other law, shall not exceed 40% of the taxpayer's taxable income in the tax year in which the expenses were paid.
(b)The provisions of subsection (a) shall not apply in respect of participation amounts of an industrial holding company in a company under its control; for this purpose —
"industrial holding company" — a company at least 80% of whose assets throughout the entire tax year — excluding assets originating from funds received from a public offering on a stock exchange outside Israel until the end of one year from the date of the offering — is invested in the share capital of an industrial company, or in loans of at least three years granted to an industrial company;
"industrial company" — as its meaning in the Industry Encouragement (Taxes) Law, 5729-1969;
"control" — as its meaning in section 25.
Deduction for Research and Development — Addition to the Advance Payments Base§
20a2.
The amount of tax from which the taxpayer was relieved as a result of the deduction by reason of participation in the financing of research and development conducted by another person, under section 20a(a) and under any other law, shall be added to the amount of tax constituting the basis for the determination of advance payments pursuant to section 175.
20a3.§
(Repealed — תשמ״ד־10)
Deduction in Respect of Maintenance Payments to a Non-Resident§
20b.
In determining the taxable income of an individual who is a resident of Israel and who has paid maintenance to a non-resident pursuant to a judgment of a competent judicial authority outside Israel given at a time when the payer was also a non-resident, he shall be permitted a deduction of the part of the maintenance amount paid by him that exceeds an amount prescribed by the Minister of Finance with the approval of the Finance Committee of the Knesset and does not exceed an upper amount prescribed as aforesaid.
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