Publications

| Inbar Barak-Bilu
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.

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.

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 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)

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.