Israeli Tax of Scholarships

Israeli Tax of Scholarships


Until recently, Israeli tax treatment of scholarship income was whatever you thought it was.

Until recently, Israeli tax treatment of scholarship income was whatever you thought it was. Learned tax experts in the public and private sectors would go back to basic principles and disagree about whether tax was due, and if so, how much.

For example, can an employer pay an exempt scholarship to worthy employees who study something? And on the academic and research side, what are the criteria for a bona fide scholarship? An amendment that went into effect on March 3 laid down the Israeli tax treatment of scholarships (Tax Ordinance Amendment 175). But on November 2, the Israel Tax Authority (ITA) announced its own ‘‘clarification‘‘ of the law – and some students may be in for a surprise.

According to the ITA announcement, students and researchers who study and carry out research at academic and/or research institutions are sometimes fortunate to receive money from those institutions, directly or as a reduction of their tuition fees, etc.

There are three types of scholarships according to the announcement:

1. The first type of scholarship is for excellence or socioeconomic status. They are awarded for academic achievement, advanced research and voluntary activities such as teaching children from problem families, assistance to the elderly, etc.

They are also awarded to students who face difficulty paying their tuition fees due to their socioeconomic status. The ITA accepts that these grants are outside the tax net, and they are given as an honor with no obligation on the recipient to provide any consideration now or in the future.

2. The second type of scholarship is given for service rendered; for example, teaching at the academic institution, research on its behalf, training exercises, marking exam papers and projects, etc. In such cases, payments recorded as scholarships are taxable as employment income.

3. The third type of scholarship is for subsistence. They are given to students (typically those studying for a second degree or a third degree) and researchers toward their living expenses while they study or conduct academic research. In such cases, there was disagreement whether the scholarships were taxable as consideration for research conducted.

According to the ITA announcement, the aim of Amendment 175 is to sort out the question of the taxation of subsistence scholarships by granting a tax exemption for students and researchers who receive scholarships during the period of study or research.

This amendment provides that: (1) scholarships that are given to a student during his period of studies at an institution of higher education are exempt from without limit; and (2) scholarships awarded to a researcher during his period of studies at a research institute or a religious research institute are exempt, but for no more than NIS 90,000. Other detailed rules were enumerated in the amendment.

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.

Who gets no tax relief? Employees who get a scholarship grant from their employer, unless they fall into one of the above categories.

As always, consult experienced tax advisers 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.

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