August 12, 2016
On August 12, 2016, the Israeli budget proposal for 2017-2018, was approved by the Israeli government. The Proposal includes twelve clauses that were suggested as amendments to the Israeli tax code, and that are expected to be discussed for approval in November in the Knesset, together with the budget.
These clauses all have the same goal of reducing tax evasion and increasing tax enforcement laws. We will discuss some of the proposed changes in this article:
OFFSHORE COMPANIES
Offshore Companies may be considered “Israeli” for Tax Purposes
The law today in Israel imposes a tax liability on companies that are tax residents in Israel. A company is deemed to be a tax resident in Israel if incorporated in Israel or if the company was “effectively managed and controlled” in Israel. The "managed and controlled" test is not very clear and open to different interpretations.
It has therefore being suggested in the budget proposal to add a clause in the law stating that in the event that an offshore company of which 50% of its shareholders are Israeli tax residents and it is incorporated in a jurisdiction that imposes a corporate tax at the rate of 15% or less, the offshore company will be considered as “managed and controlled in Israel” if one of the following applies:
- It is incorporated in a jurisdiction that does not have a tax treaty with Israel; or
- The jurisdiction imposes tax only on a territorial basis.
The company will then be considered as if it is effectively controlled in Israel and will have to pay taxes on the income it produces.
A company can oppose this presumption and claim that even though the company meets the conditions above it is still not managed in Israel.
Additions to the Definition of Passive Income for Offshore Companies Managed by Israeli Residents
A proposed amendment to clause 75B of the Israeli tax code will include income derived from interest, linkage, rental income and royalties as passive income, even if business related, once it has accumulated and before it has been distributed as a dividend. This income would be subject to the dividend tax rate of 25%-30%. This will be a presumption that can be contradicted by the taxpayer, claiming that the income should not be considered passive.
REAL ESTATE
Capital Gains Tax for Real Estate Sales
Capital gains tax applies when one sells a real estate property, whenever there is a value difference between the original purchase price and the current sales price. Capital gains tax is imposed on the amount of the appreciation. Currently, the capital gains tax imposed is 25% on the gain after deducting recognized expenses (such as agent and legal fees, renovations etc).
The amendment proposes a second option which is to pay capital gains tax of 20% only, but without deducting any of the expenses. This streamline option of tax payment will relieve the burden of having to document all of the expenses relating to the property since it was purchased and up to the sale, and ease the calculation of the tax.
Random Real Estate Transaction
A proposed amendment to the Israeli Value Added Tax Law from 1975, suggests imposing VAT on a random real estate transaction i.e., a onetime transaction unrelated to the ongoing activity of the company. Up until now, the law excluded such real estate transactions from VAT. If the amendment is accepted, VAT will be imposed on a real estate transaction even if the transaction is a one-time transaction, as long as it is business related.
Email will be considered a Formal Way of Communication
It is a known fact that the regular snail mail in Israel is not very reliable and letters are lost or take a long time to arrive. Therefore, there is a proposal to add a clause to enable the Israeli Tax Authority, with the consent of the taxpayer, to communicate with the taxpayer by email. The clause will include also the terms and conditions that when met, the email will have been considered as received.
The content of this article is intended to provide a general guide to the subject matters and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.