Publications

| Daniel Paserman
January 10th, 2018

Daniel Paserman (C.P.A), Head of Tax at Gornitzky, was interviewed by Matthew Kalman of Bloomberg BNA on increased enforcement by the ITA.

 

Daniel Paserman (C.P.A), Head of Tax at Gornitzky, was interviewed by Matthew Kalman of Bloomberg BNA, addressing the increased enforcement by the ITA in relation to income generated by foreign internet companies operating in Israel. For further reading: 

November 9th, 2017

Daniel Paserman (CPA), Head of Tax, is quoted in Mathew Kalman's article in Bloomberg Law, in which he comments on the new legislation regarding the withdrawal of funds and utilization of company assets by its shareholders. For further reading:

 

Daniel Paserman (CPA), Head of Tax, is quoted in Mathew Kalman's article in Bloomberg Law, in which he comments on the new legislation regarding the withdrawal of funds and utilization of company assets by its shareholders. For further reading:


September 19th, 2017

Daniel Paserman (CPA), Head of Tax, and Ofer Levy (CPA), in a client update on LLC classification from an Israeli tax perspective. For further reading:

July 24th, 2017

Daniel Paserman (CPA), Head of Tax, and Inbar Barak-Bilu (C.P.A), in an update on a temporary reduced tax rate for dividend distribution, valid until September 30, 2017.

May 17th, 2017

Daniel Paserman(CPA), Head of Tax, and Ofer Levy CPA), in an update on Israeli Tax Residency of Individuals: A New Supreme Court Case.

February 28th, 2017

Daniel Paserman, partner and Head of Tax at Gornitzky & Co, together with associates Danielle Skald and Ofer Levy, in an article for Bloomberg BNA on the changes and trends in Israeli Taxation in 2017

Daniel Paserman, partner and Head of Tax at Gornitzky & Co, together with associates Danielle Skald and Ofer Levy, in an article for Bloomberg BNA on the changes and trends in Israeli Taxation in 2017

December 5th, 2016

Daniel Paserman (partner) surveys the tax residency of foreign companies in relation to the "control and management" test, recently updated by the ITA.

Recently, following the judgments in the Niagu, Yanko Weiss and Shai Zamarot cases, the Israeli Tax Authority (ITA) further clarified its position as to when a foreign company is considered to be "controlled and managed" from Israel and thus considered an Israeli tax resident.


Background - The "Control and Management" Test
Under the Israeli Tax Ordinance (ITO), a corporate entity is regarded as an Israeli tax resident if: (i) it was incorporated in Israel; or (ii) the control and management of its business are performed in Israel (known as the “control and management” test). While the question of incorporation is a factual question that is simple to determine, the ITO neither defines nor provides any guidance as to what would constitute “control and management” and Israeli courts have interpreted it based on the specific circumstances of the matter brought before them. In the past, upon implementation of the test, courts examined, inter alia, the legal and formal ownership, the location of shareholders’ meetings, and primarily, the location of meetings of the board of directors of the company. Today, as part of the general trend in law to place an emphasis on substance as opposed to form, the tendency is to examine the business – practical aspect of the “control and management”. For this purpose, an examination is conducted as to where and by whom the effective ability is held, to determine the company’s strategy and business policy and to instruct the subordinate ranks as to how the aforesaid policy and strategy should be implemented.


Income Tax Circular No. 4/2002
In 2002, the ITA published Circular 4/2002 (Circular) on the subject of “control and management” that sets the criteria for the implementation of the test. Although circulars published by the ITA are not binding, they provide a "safe harbor" for taxpayers who follow them. The Circular explains that “control and management” is exercised as a matter of fact, which must be examined based on the specific set of circumstances. Furthermore, the Circular provides guiding criteria for the application of the test, including, inter alia: where the decisions are made at the level of the business policy and the strategic management, the authorized entity which actually controls and manages the day-to-day and current management, the organ of the company that is granted extensive discretion to reach decisions, etc. The Circular emphasizes that in the past, great weight was given to the physical location of the convening of the board of directors, however, at the present time, given the current progress and the ever-increasing sophistication of means of communication and transport, the actual physical location of the convening of the board of directors is deemed to be an insufficient and out-of-date parameter.


Addendum No. 1 to Income Tax Circular No. 4/2002
In August 2016, the ITA published an addendum to the Circular (Addendum). The Addendum was published following the said judgments, in which the “control and management” test was reconsidered. This came about following a period of many years in which no judgments were published concerning the matter. The Addendum continues with the direction that was established in the original Circular, emphasizing substance rather than form and provides more details as to the various criteria. The Addendum states that a formal and technical examination is insufficient, and it is necessary to conduct a material and comprehensive examination for the purpose of determining the question of the existence of “control and management”. As indicated by the Addendum, it is necessary to determine the decision-making party (the driving force) that navigates the company’s operations and actually makes the material decisions in the matters of the Company’s business policy, and the location thereof.
The Addendum also instructs that protocols are to be requested for the purpose of examining whether in fact the board meetings were held or whether a "rubber stamp" was merely used for the decisions of another party. Additionally, it is necessary to consider the experience of the directors, their understanding of the activities of the company, whether they are employed by a professional management company that provides services to additional companies, what their compensation is and who determines it, whether they are fluent in the language in which the company conducts its activities, etc.
Following the new judgments and the Addendum, we notice that in practice, the Israeli Tax Authority has strengthened its examination of the matter of "control and management" of foreign companies held by Israeli shareholders, and in many cases claims that these companies should be viewed as Israeli tax residents since their control and management is carried out from Israel.

 

For further information please contact Adv. (CPA) Daniel Paserman, Head of Tax (paserman@gornitzky.com).

 

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This client update is designed to provide general information only, is not a full or complete analysis of the matters presented, and may not be relied upon as legal advice.

October 13th, 2016

Daniel Paserman (Partner) and Danielle Skald in an article for Bloomberg BNA on the Israeli Tax Authority’s tax circular, addressing the taxation of foreign entities that operate in Israel via the internet.

August 24th, 2016

A summary of the suggested international tax amendments proposed by the Israeli government as part of the new budget proposal for the year 2017-2018, by Daniel Paserman (Partner) and Inbar Barak-Bilu.

As part of the approval of Israel's budget for the years 2017-2018, the Israeli Tax Authority ("ITA") published an initial draft of its proposed legislative tax initiatives at the beginning of August. A revised draft was approved by the government cabinet on August 12, 2016, and it is expected that the legislative bill will be published within several weeks and brought to the approval of the Israeli parliament. As always, the proposed new budget includes a number of changes and reforms in the Israeli international tax regime. Below is a brief summary of the main suggested amendments (the "Amendment").

 

  • Tax Residency of Foreign Companies

Under Israeli tax law, a company is considered an “Israeli resident” for tax purposes if one of the following applies: (i) the company was incorporated in Israel, or (ii) the "control and management" of the company was carried out in Israel. However, there is no definition of the term "control and management" in the tax legislation and Israeli courts also tend to interpret it in accordance with the specific circumstances of each matter, and thus there are no clear and definitive rules to apply this criteria.
The Amendment offers a rebuttable presumption, according to which a company that was incorporated outside of Israel shall still be considered as an Israeli resident for tax purposes if the company is controlled by Israeli residents and the effective tax rate imposed on the company is 15% or less, and one of the following conditions takes place: (i) the company is a resident of a country that does not have a tax treaty with Israel; or (ii) the company is a resident of any other country that applies the territorial tax system, that is, it does not levy tax on income derived outside of it. In case such a foreign company does not consider itself an Israeli resident for tax purposes despite the existence of the presumption, it is still obliged to report its position in Israel.

  • “New Immigrants” and “Veteran Returning Residents”

Since 2007, "New Residents" and "Veteran Returning Residents" are exempt from Israeli tax and reporting with respect to foreign source income and assets during a period of 10 years, commencing on the date the individual became an Israeli tax resident.
In the initial legislative draft of the ITA it was suggested to abolish the exemption from reporting, starting January 1, 2017. In addition, it was suggested to cancel the possibility of extending the exemption period for an additional 10 years. At the end, this item was not approved by the cabinet and therefore the current legislation will remain unchanged.

  • Reporting Requirements of International Groups

Following Action 13 of the BEPS report (Guidance on the Implementation of Transfer
Pricing Documentation and Country-by-Country Reporting), it is proposed in the Amendment to impose an obligation on companies that are part of an international group and operate in Israel to report to the Israeli tax authorities. The Amendment suggests issuing regulations that shall specify the documents and information that should be submitted, including, in certain circumstances, in respect of the foreign activities of the group in other jurisdictions.

  • CFC Rules

Controlled Foreign Corporation (CFC) rules, applicable in Israel today, provide, under certain conditions, that passive income of a foreign resident entity controlled by Israeli residents is considered as “deemed dividend” distributed to the Israeli shareholders. The current rules stipulate that income derived from interest, linkage differences, royalties and rent will not be considered passive income if they originate from a business.
The Amendment suggests setting a rebuttable presumption that income derived from interest, linkage differences, royalties and rent shall be regarded as passive income for CFC purposes, even if it was derived from a business.

  • Tax Exemption for Foreign Investors

Under Israeli tax law, the Minister of Finance has the authority to provide tax reliefs to foreign tax residents in case they cannot receive a tax credit in their home country. This authority is usually used in case of venture capital investments.
It is suggested in the Amendment to authorize the Minister of Finance to provide tax exemptions in these circumstances and thus simplify the current mechanism.

  • Encouragement of Capital Investments

The encouragement of Capital Law grants tax benefits to preferred enterprises, including reduced corporate tax rate of 16% and 9% (instead of 25%) and reduced withholding tax rate of 20% on dividends (instead of 25% or 30%).
The Amendment, which will apply to technology companies, includes new incentives intended, inter alia, to encourage foreign investors to invest in the Israeli high-tech industry. These incentives include, inter alia, a reduced corporate tax rate of 12% and 6%, and 4% withholding tax rate on dividends.

 

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For further information please contact Adv. (CPA) Daniel Paserman, Head of Tax (paserman@gornitzky.com) or Adv. (CPA) inbar Barak-Bilu (inbarb@gornitzky.com) at Gornitzky & Co., +972-3-7109191.

This brief memorandum provides general information and does not constitute or substitute any legal advice. As these issues are complex and of a circumstantial nature, which involve different tax and legal aspects, each case should be examined according to its individual circumstances.

July 21st, 2016

Partner Daniel Paserman (Adv., CPA.) in an article surveying the taxation of trusts in Israel, following the recent legislative amendments. 

December 1st, 2015

Capital Losses in Tax Law by Adv. Daniel Paserman (CPA)

In recent years, many Israeli taxpayers have absorbed significant capital losses in capital markets in Israel and overseas. The tax laws in Israel allow the offsetting of losses against taxable gains; however, they set forth restrictions with respect to the manner of offsetting these losses. Below is a brief overview of the rules with respect to the offsetting of capital losses as set forth in Section 92 of the Israeli Income Tax Ordinance 5721-1961 (the “Income Tax Ordinance”) (while there are additional rules that pertain, inter alia, to the offsetting of business (active) losses, this bulletin is limited to Section 92 of the Income Tax Ordinance and is not intended to exhaust the entire subject of offsetting losses).

 

The offsetting of capital losses that were created during the current tax year 

The Income Tax Ordinance determines that a capital loss that is realized in the current tax year may be offset against a capital gain or betterment (land appreciation). If the capital loss is sustained from the sale of an asset outside of Israel, it will first be offset against a capital gain from an asset outside of Israel, and only thereafter, will it be offset against a capital gain of an asset in Israel.

 

In addition to the foregoing, a capital loss that is realized from the sale of securities may also be offset against interest income or dividend income that were received in respect of the said security or against interest income or dividend income that were received in respect of other securities, provided that the tax rate that applies to the interest or to the dividend shall not exceed the corporate tax rate (which currently stands at 26.5%, but which, effective from January 1, 2016, will be reduced to 25%).

 

The offsetting of capital losses that were created in previous years (carryforward losses)

A capital loss that was not offset in its entirety during a specific tax year will be offset in the following tax years against capital gains only, provided that the following terms and conditions shall be satisfied:

 

  • A tax return was filed in the year in which the capital loss was created.
  • A capital loss from the sale of an asset outside of Israel will first be offset against a capital gain from the sale of an asset outside of Israel.
  • A carried forward capital loss must be offset against a capital gain that has been realized, even if the Israeli tax rate that applies to the said capital gain is lower than the regular rate of tax.
  • A carried forward capital loss may be offset only against a capital gain or betterment (land appreciation), and not against interest or dividends.

 

 Recommendations 

In the event where there are both unrealized capital losses and income received from interest or dividends during the same tax year, it may be worthwhile to consider realizing the capital losses in order to offset the capital losses against such income. It is important to note that the realization of the capital loss must occur in the same tax year in which the income from interest or dividends was generated. Similarly, in the event of both an existing capital loss which has not been utilized (whether such capital loss has been carried-forward or is related to the current tax year) and unrealized capital gain, it may be worthwhile to consider realizing such capital gain so that the non-utilized capital loss may be used to offset such capital gain. 

Furthermore, the foregoing shows that capital losses that were sustained in previous years (carryforward losses) may only be offset against capital gains that will be realized in the coming succeeding years (and not against income from interest or dividends). Therefore, in order to offset the carryforward capital losses, it is necessary to invest in assets that may generate capital gains (and not interest or dividends). Examples of such assets may include: shares, options, "short" transactions, funds which invest in securities (e.g. in interest bearing bonds), real estate, etc.

 

  

For further information and advice please contact Adv. (CPA) Daniel Paserman (paserman@gornitzky.com) at Gornitzky & Co., +972-3-7109191.

 

 

This tax bulletin provides general information and does not constitute or substitute any legal advice. As these issues are complex and of a circumstantial nature, which involve different tax and legal aspects, each case should be examined according to its individual circumstances.


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September 17th, 2014

In their article on the the new Israeli voluntary disclosure program , Daniel Paserman and Yoav Kremer give an overview of the main criteria and the guidelines of the new program.  The program, which was launched on September 7, 2014, enables non-compliant taxpayers to come forward and arrange their reporting and tax obligations in exchange for which the Israel Tax Authority undertakes not to initiate any criminal proceedings against such taxpayers.


July 3rd, 2012

This article, by Pinhas Rubin and Daniel Paserman, examines two aspects of the reclassification of transactions under Israeli tax law: its effect on the question of burdens of proof in tax appeals, and its potential effect on third parties, uninvolved in the tax dispute. Due to these repercussions, the authors argue that the reclassification tool should be applied in a restrained manner and in exceptional cases only.

Hebrew Item
December 15th, 2017

Daniel Paserman (CPA), Head of Tax, is quoted in Mathew Kalman's article in Bloomberg Law, in relation to the proposed US tax reform, which may deter foreign investors from investing in Israel. For further reading:

Daniel Paserman (CPA), Head of Tax, is quoted in Mathew Kalman's article in Bloomberg Law, in relation to the proposed US tax reform, which may deter foreign investors from investing in Israel. For further reading:

November 7th, 2017

Daniel Paserman (CPA), Head of Tax, and Danielle Skald (CPA), in a client update on the transfer of funds overseas without being subject to withholding tax in Israel. For further reading:

Daniel Paserman (CPA), Head of Tax, and Danielle Skald (CPA), in a client update on the transfer of funds overseas without being subject to withholding tax in Israel. For further reading:

September 19th, 2017

Daniel Paserman (CPA), Head of Tax, Aviram Handel, Partner, and Assaf Hasson, Associate, in a client update on the relaxation of the requirements for the issuance of Israeli passports. For further reading:

June 28th, 2017

Daniel Paserman, Partner and Head of Tax at Gornitzky & Co, together with associate Adi Haya Raban, in an article for The Accountant, on "The Nature of Goods" (Hebrew). 

Daniel Paserman, Partner and Head of Tax at Gornitzky & Co, together with associate Adi Haya Raban, in an article for The Accountant, on "The Nature of Goods". 

May 3rd, 2017

Daniel Paserman (CPA), Head of Tax, and Ofer Levy (CPA) in an update on how Israeli Banks are Increasing Enforcement of US Estate Tax on Israeli Investors.

Israeli Banks are Increasing Enforcement of US Estate Tax on Israeli Investors

 

US estate tax is imposed on U.S situs assets of a decedent, who is a non-resident, non-citizen of the U.S ("NRA"), including real estate assets in the U.S and certain securities of U.S corporations (unless the estate tax will be repealed as currently suggested). As opposed to US citizens and domiciliaries who are exempt from federal estate tax on estates up to an amount of USD 5,490,000, the NRAs’ exemption amount is merely 60,000 USD. The tax rates on taxable estates can reach up to more than 40% (depending on state estate tax as well).

 

Since many Israeli tax residents invest in US real estate and securities of US corporations, estate tax exposure regarding their US investments may exist. In addition, although an investment in securities of US corporations by NRAs may be exempt from capital gain taxation in the US, such an investment may be subject to US estate tax.

 

Until recently, as a matter of practice, Israeli banks have not enforced the US estate tax liability. However, it seems that a policy change has recently taken place, deriving, inter alia, from the Foreign Account Tax Compliant Act (“FATCA”), which requires Israeli banks to disclose financial information regarding their US clients to the US tax authorities. As a result, Israeli banks have increased enforcement on tax matters, including non-Israeli related tax matters. Recently, several Israeli banks have informed their clients that in order to inherit bank accounts that include US assets, an approval from the US Tax Authority for a tax exemption or payment of taxes may be required.

 

There are in fact several different alternatives for mitigating US estate tax exposure on NRAs’ investments in US real estate and securities of US corporations. Among the various alternatives, we note the use of trusts, life insurance, investing in ADRs and investing through foreign corporations.

 

A relatively simple and inexpensive solution for investing in securities of US corporations is through the use of an Israeli Family Company. An Israeli Family Company is treated for Israeli tax purposes as a ”Transparent Entity” and therefore its taxable income is regarded as the income of the company’s individual shareholder. Notwithstanding, from a US tax perspective, as a default matter, an Israeli family company is regarded as a corporation under “Check the Box” regulations (unless the corporation has elected to be treated differently). Thus, the investment in securities of US corporations will be excluded from the Israeli investor’s estate from a US estate tax perspective, as he holds shares in an Israeli corporation (as opposed to holding securities directly in the US corporations), while for Israeli tax purposes the taxation remains substantially similar, since the taxable income of the Israeli Family Company is attributed to the individual shareholder.

 

For further information please contact Adv. (CPA) Daniel Paserman, Head of Tax (paserman@gornitzky.com).

 

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January 31st, 2017

Daniel Paserman (Partner, head of tax) and Danielle Skald in an article for Bloomberg BNA on the implementation of Amendment 13

November 20th, 2016

Daniel Paserman (Partner), Inbar Barak Bilu and Michal Karzbum surveying the main points of the voluntary disclosure procedure, now allowing diamond dealers to take part in the process (Hebrew)

September 20th, 2016

An Update regarding the draft bill, published by the ITA, on the reportable tax acts, which for the first time, proposes to include a list of acts relating to trusts, by Daniel Paserman (Partner).

In 2006, special regulations were enacted, providing an exhaustive list of tax planning acts that must be reported to the Israel Tax Authority (Reportable Acts). These Reportable Acts include, inter alia, the sale of property to a “relative” that creates a deductible loss for the seller, waiving the debt of a “relative”, acquisition of a company with carryforward losses and others, all in accordance with the conditions prescribed in the regulations. These Reportable Acts, including the parties involved and the amounts that were paid, are to be reported using a special form attached to the annual tax return. Failure to report is a criminal offense. Moreover, in a situation where a Reportable Act creates a tax shortfall in a final assessment exceeding 50% of the tax liability, a deficiency fine of up to 30% of the shortfall may be levied.

 

Recently, a draft bill was published to amend the regulations in respect of acts from 2017 onwards, and for the first time, the Tax Authority proposes to include a list of acts relating to trusts. It seems that the initiative to include acts related to the trusts was born inter alia in the wake of the amendment to the Israeli Income Tax Ordinance, which came into force in 2014. This amendment expands the Israeli tax basis regarding trusts, and eliminates certain exemptions and reliefs. Inter alia, the amendment stipulates that in circumstances where there is an Israeli beneficiary in a trust, the trust will be subject to tax and reporting in Israel, even if the settlor is a foreign resident. Consequently, Following these legislative amendments, many trusts were modified. With this regard, Israeli beneficiaries have been excluded from foreign trusts that were created by foreign residents. In order to trace these changes and deter trustees and beneficiaries from taking such actions, the Tax Authority now also seeks to amend the regulations and apply them to certain acts relating to trusts. Reportable Tax Acts in relation to Trusts.

 

Below is a summary of acts that will be considered Reportable Acts according to the proposed amended regulations:

1. An Israeli resident that was a beneficiary of a trust and was excluded therefrom, received a loan or an asset from someone who was or is still a trustee or beneficiary in the trust, free of charge, and the person transferring the asset or granting the loan was a foreign resident at any time between the exclusion date and the date of the Reportable Act.

2. An Israeli resident beneficiary received a loan from the trust or, alternatively, a trust asset served as collateral for a loan taken by the beneficiary.

3. Abeneficiary provides management or consulting services to the trust or to companies held by the trust; acts in a managerial position of a company or an enterprise held by the trust or is part of the trust’s investment committee or holds another administrative role in the trust.

4. The exclusion of an Israeli resident from being a beneficiary in a trust, whereas, if there was no exclusion, the trust would have been taxable in Israel.

 

The said Reportable Acts will require notification to the Tax Authority in Israel when filing the annual tax return, either by the beneficiary or the trustee, as determined in the regulations. It is important to emphasize that at this stage this is only an initial draft of of the amended regulations.

 

For further information please contact Adv. (CPA) Daniel Paserman, Head of Tax (paserman@gornitzky.com).


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This brief memorandum provides general information and does not constitute or substitute any legal advice. As these issues are complex and of a circumstantial nature, which involve different tax and legal aspects, each case should be examined according to its individual circumstances.

August 1st, 2016

Update regarding the extension of Israeli Voluntary Disclosure Procedure & Inclusion of Tax Offences in Prohibition on Money Laundering Law, by Daniel Paserman (Partner) and Inbar Barak-Bilu. 

On June 30, 2016, the Israel Tax Authority issued a notice stating that the Voluntary Disclosure Procedure will be extended until December 31, 2016 and will also apply to money laundering offences, consolidated by original offences, which shall be considered tax offences liable to the Voluntary Disclosure Procedure. 
It should be noted that on April 7, 2016, amendment No. 14 to the Prohibition on Money Laundering Law was published, adding several tax offences pertaining to Income Tax, Value Added Tax and Real Estate Tax as money laundering offences.

The Extension of the Voluntary Disclosure Procedure

Until December 31, 2016, voluntary disclosure applications under the Voluntary Disclosure Procedure ("VDP") may be filed through one of the following paths: (1) a “regular” application; (2) an anonymous application; and (3) a short application, as follows:
  • Under the “regular” application path, the identity of the taxpayer is disclosed once the application is submitted. 
  • Under the anonymous application path, the disclosure is submitted on a no-name basis and the identity of the taxpayer is disclosed only after a tax agreement has been reached with the Israel Tax Authority (“ITA”) to settle the outstanding tax liability. 
  • Under the short application path, the disclosure is handled through an expedited settlement process, allowing taxpayers to submit revised tax returns. The short application path is available only to taxpayers whose undisclosed capital does not exceed NIS 2 million and whose aggregate undisclosed taxable income does not exceed NIS 0.5 million. 
Immunity from Criminal Proceedings in Accordance with the VDP
In accordance with the VDP launched on September 7, 2014 the immunity is granted only to tax offences mentioned under the tax laws, among others, the Income Tax Ordinance, the Real Estate Taxation Law, Value Added Tax Law and any relevant tax order. 
In accordance with the ITA's latest publication, because of the amendment to the Law (see below), the VDP will also apply to offences of money laundering originating from tax offences.

The Inclusion of Tax Offences in Prohibition on Money Laundering Law

In this regard, it should be noted that on April 7, 2016, amendment No. 14 to the Prohibition on Money Laundering Law, 2000 (the "Law") was published, and it shall come into force on October 7, 2016. 
In accordance with the new amendment, the Law will include specific severe tax offences relating to income tax, value added taxation and real estate taxation as money laundering offences.
The Following Offences shall be Considered Money Laundering Offences
The Law now includes, inter alia, omitting income statements; making a false statement or entry; providing a false answer, whether verbal or written; preparing, maintaining or allowing another to prepare or to maintain false account books or other false records; using any fraud, artifice or contrivance; and presenting a fraudulent document to whoever paid the income in order to prevent or reduce the deduction of tax at the source.
Implications of the Amendment to the Law
  • Stricter penalty of up to ten years in prison, as opposed to a lesser prison term under the tax legislation. 
  • Under the Law, the property of the offender may be confiscated to the sum of the property that was used in the offence, or used to commit the offence or was intended for the purpose of making the offence.
  • Exchange of information between the Israel Money Laundering and Terror Financing Prohibition Authority and the Israel Tax Authority. 
For further information please contact Adv. (CPA) Daniel Paserman, Head of Tax (paserman@gornitzky.com) or Adv. (CPA) Inbar Barak-Bilu (inbarb@gornitzky.com) at Gornitzky & Co., +972-3-7109191.
 
 

This brief memorandum provides general information and does not constitute or substitute any legal advice. As these issues are complex and of a circumstantial nature, which involve different tax and legal aspects, each case should be examined according to its individual circumstances.

April 18th, 2016

Update regarding the New Israeli Voluntary Disclosure Program by Adv. Daniel Paserman (CPA)

  • On September 7, 2014, the Israel Tax Authority ("ITA") launched a voluntary disclosure program (the "VDP") to grant non-compliant taxpayers the opportunity to voluntarily disclose their previously unreported tax affairs in exchange for the ITA (in collaboration with the State Attorney) undertaking not to initiate criminal proceedings. The VDP applies to undisclosed income and assets, whether in Israel or abroad, passive or active.
  • Until 30 June, 2016, voluntary disclosure applications under the VDP may be made under one of the following two paths: (i) an anonymous application; and (ii) a short application, as follows:
  • Under the anonymous application path, the disclosure is submitted on a no-name basis and the identity of the taxpayer is disclosed only after a tax agreement has been reached with the ITA to settle the outstanding tax liability.
  • Under the short application path, the disclosure is handled under an expedited settlement process, and allows taxpayers to submit revised tax returns. The short application path is available only to taxpayers whose undisclosed capital does not exceed NIS 2 million and whose aggregate undisclosed taxable income does not exceed NIS 0.5 million.
  • Following 30 June, 2016 and until 31 December, 2016, all voluntary disclosure applications are to be made on a fully named basis, without expedited treatment.
  • The ITA may extend the anonymous path and the short path until 31 December, 2016.

 

Tax Liability for the Purposes of the VDP

 

  • Based on our experience, the tax liability to be imposed under a voluntary disclosure application will generally be composed of the following elements:
  • Taxation at the prevailing rates on financial income (i.e. income from interest, dividends and capital gains) gained in the last ten years.
  • Taxation at the prevailing tax rates for new deposits of funds not supported by sufficient documentation. Without providing a satisfactory explanation regarding the source of the funds, it is presumed that the funds constitute business income and taxable at the full applicable tax rates.
  • In general, the ITA will impose a further tax on the value or balance of the capital at the beginning of the reporting period of the voluntary disclosure application, at a tax rate in the range of 10%-15% of the capital amount, which is in addition to the taxation of the gains and profits made during the ten year reporting period of the voluntary disclosure application. In the event that a taxpayer can provide satisfactory documentation to demonstrate that the source of the capital at the beginning of the reporting period of the voluntary disclosure application is exempt from tax (e.g. inheritance or gift), the taxation on such capital is likely to be reduced. In cases where such capital is derived from business activity, the applicable tax rate may be higher.


VDP Now Available to the Diamond Industry

 

  • Until recently, the ITA did not handle voluntary disclosure applications by diamond dealers due to the complex nature of the taxation framework of the diamond industry.
  • However, following efforts made by both the Israel Diamond Exchange and the Israel Diamond Manufacturers Association (represented by our firm), participants of the diamond industry may now submit voluntary disclosure applications under the VDP.
  • We note that the diamond industry is still currently negotiating with the ITA to establish industry-wide principles regarding the treatment of the unreported tax affairs for the participants in the diamond industry.

 

For more information please click here to see our memorandum from September 2014. 

 

For further information and advice please contact Adv. (CPA) Daniel Paserman (paserman@gornitzky.com) or Adv. (CPA) Inbar Barak-Bilu (inbarb@gornitzky.com) at Gornitzky & Co., +972-3-7109191.

 


This brief memorandum provides general information and does not constitute or substitute any legal advice. As these issues are complex and of a circumstantial nature, which involve different tax and legal aspects, each case should be examined according to its individual circumstances.


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November 15th, 2015

Partners Pinhas Rubin and Daniel Paserman covered the latest trends in Israeli tax law in the 2015 publication of "Doing Business in Israel".

September 14th, 2014

The New Israeli Voluntary Disclosure Program by Adv. Daniel Paserman (CPA)

  • On September 7, 2014, the Israel Tax Authority ("ITA") launched a new voluntary disclosure program (the "New VDP"). The New VDP enables non-compliant taxpayers to come forward and arrange their reporting and tax obligations in exchange for which the ITA (in collaboration with the State Attorney) undertakes not to initiate any criminal proceedings against such taxpayers. The New VDP applies to any undisclosed income and assets, whether in Israel or abroad, passive or active. The New VDP replaces previous programs and is in effect until the end of 2016.
  • This brief memorandum presents the main criteria and guidelines of the New VDP.

  • The Voluntary Disclosure Procedure
  • The application is submitted to the Chief Investigations and Intelligence Officer of the ITA. Once the latter approves the application, the taxpayer will be referred to the relevant civil officer, in order to reach an agreement that will determine the tax liability.
  • The New VDP includes two special alternatives, which are available only for the coming year (although the general New VDP will be in effect until the end of 2016):
    • An anonymous application - according to this alternative, the application is submitted on an anonymous basis and the identity of the taxpayer is disclosed only after a tax agreement has been reached with the civil officer. However, once the taxpayer is referred to the civil officer, he is required to disclose his identity within 90 days, unless the civil officer grants him an additional 90 day extension. If after this period his identity has not been disclosed, the application will be denied. Since this is a relatively short period, it is important to collect and prepare all relevant information and documents in advance.
    • "Green Track" application - if the total capital included in the application does not exceed NIS 2 million and the aggregate taxable income does not exceed NIS 0.5 million, the taxpayer may apply according to this special alternative. The application is submitted to the Chief Investigations and Intelligence Officer together with amended tax returns for the relevant period. Once the application is approved, the amended tax returns will be accepted and the taxpayer will pay the tax liability and receive criminal immunity.
  • Offsetting Losses - Losses declared under the above two alternatives may be offset only against income and capital gains disclosed in the same application and with respect to the same tax years (losses not offset cannot be carried forward). At the same time, losses reported outside the voluntary disclosure application cannot be offset against income and capital gains disclosed in the application.


  • Conditions for the Voluntary Disclosure Procedure
  • The voluntary disclosure is honest, all-encompassing and done bona fide.
  • At the time of the application, the ITA has no information regarding the voluntary disclosure, and no investigation or examination has been conducted by the ITA or by the Israeli Police with respect to matters related to the voluntary disclosure, including with respect to the spouse, their controlled companies or partners' files.
  • The ITA is entitled not to authorize a voluntary disclosure application if there is information related to the voluntary disclosure in any other governmental authority, the media or in civil or criminal proceedings conducted before a judiciary body in Israel or abroad.
  • In exceptional cases, where there are personal and extraordinary circumstances (such as serious illness), the ITA is entitled to approve a voluntary disclosure application, even if it is in possession of information as detailed above.

 

  • Additional Limitations
  • If the application has not been approved, the ITA will not use the information disclosed in the application in any criminal or civil proceedings. If, however, the application has not been done bona fide and with full disclosure, the information may be used as evidence in a criminal or civil proceeding.
  • A person is entitled to benefit from the voluntary disclosure procedure only once. An additional application will only be accepted under special circumstances (e.g. - serious illness, advanced age, etc.).
  • The New VDP will not apply to income originating from illegal activities.

 

 

For further information and advice please contact Adv. (CPA) Daniel Paserman (paserman@gornitzky.com) or Adv. Yoav Kremer (yoavk@gornitzky.com)  at Gornitzky & Co., +972-3-7109191.

 


This brief memorandum provides general information and does not constitute or substitute any legal advice. As these issues are complex and of a circumstantial nature, which involve different tax and legal aspects, each case should be examined according to its individual circumstances.


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