08.06.2010

Are scholarships subject to income tax, or are they some kind of special exception?

As many parents and students know, education can be a heavy expense unless the student concerned lands a scholarship.

But are scholarships subject to income tax, or are they some kind of special exception and exempt? And what about academic research? A recent amendment clarifies the Israeli tax treatment of scholarships (Tax Ordinance Amendment 175 published March 3, 2010).

This amendment exempts scholarships that are given: (1) to a student during his period of studies at a higher education institution; or (2) to a researcher during his period of studies at a research institute or a religious research institute, but no more than NIS 90,000.

In addition, the VAT Law was amended to exempt such a scholarship so that it is not liable to the 7.5 percent wage tax.

To have a clearer idea of what scholarships from Israeli educational research institutions are exempt, several terms in the amendment should be understood:

Scholarship: grant, prize or exemption from payment given to a student or researcher, directly or indirectly, on a one-time basis or as scheduled in the period of studies, to finance tuition fees or subsistence in the period of studies, provided the student or researcher does not give any consideration for these and they are given during the period of studies. For these purposes, royalties for the use of the research will not be considered to be such a grant, prize or exemption.

Period of studies: for a student, as defined in the charter of the higher education institution for the type of studies, but subject to the following limitations: (a) for someone studying for a second degree (masters/postgraduate) – four years after commencing those studies; (b) for someone studying for a third degree (doctorate/ postdoctorate)- eight years after commencing those studies. In the case of a researcher, the period of studies is as defined by the research or religious institutions concerned, but no more than 12 years.

Student: someone who studies at a higher education institution in the field of studies facilitated there.

Researcher: (1) someone over 18 who serves at least five years as a researcher at a research or religious institution and studies in the fields of activity there; or (2) holds a degree from a higher education institution in Israel, or an academic institution abroad that is recognized by the Education Ministry, and serves as a researcher at a research or academic institution and studies in the fields of activity there.

Higher education institution: recognized under Section 9 of the Higher Education Council Law, or approved under Section 21A of that law, or issues degrees recognized under Section 28A of that law. A question arises whether this covers higher educational institutions outside Israel.

Research institution: a recognized public institution that promotes, prepares or conducts research in its field of activity and publishes research in publications of its own, or is assisted by or in cooperation with higher education institutions, and isn‘t itself a higher education institution.

Religious research institute: a public institution that promotes, prepares or conducts research in its field of activity and is eligible for support from the Culture Ministry under the Budget Principles Law, 1985.So now we have a clearer idea when scholarships from Israeli educational research institutions are exempt.

As always, consult experienced tax advisors in each country at an early stage in specific cases.
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Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd