1. Foreign Account Tax Compliance Act (“FATCA”)
On January 16th, 2017, the Israel Tax Authority announced, that, after the partial implementation of the FATCA agreement, during November- December 2016, data regarding the accounts of U.S. residents and citizens (for the tax years 2014 –2015) were transferred to the tax authorities in U.S.A., the Israel Tax Authority received information about more than 35,000 US bank accounts of Israeli residents.
The government of Israel and U.S.A. signed an agreement, on June 30th, 2014, to improve the international tax enforcement, and the implementation of the directives of the FATCA legislation, and during the year 2016, the unit for international taxation in Israel signed agreements that formalize the transfer of information to the Inland Revenue Service (IRS). Later, agreements were reached on the reciprocal transfer of financial information from the IRS to Israel, concerning US bank accounts of Israelis.
Further to receiving the present information, and in accordance with the agreement, the Israel Tax Authority is expected to receive information, automatically, form the American tax authority, each year, as part of a global process to expand the transparency, and exchange of information between tax authorities. This procedure is part of a broader process of receiving financial information about Israeli residents, which includes receiving information from many countries within the framework of the Common Reporting Standard (CRS) agreement, which determines automatic exchange of information regarding the financial accounts of foreign residents, which was instigated by the OECD. In May, 2016, the Israeli Tax Authority signed an agreement to implement the CRS, according to which, Israel is expected to exchange information with various countries regarding bank balances for the year 2017, by September 2018. An instruction of this nature, was sent by the Tax Authority to banks in Israel, in order that they will be prepared to transfer the information by June, 2017.
2. “Voluntary Disclosure” Procedure
An additional, important subject, connected to tax law in Israel, is the “Voluntary Disclosure” procedure, which has recently finished, on December 31st, 2016, and was an unprecedented success for the Tax Authorities in Israel. In view of this, it seems likely that the procedure will be renewed for a further period.
The major advantage of the “Voluntary Disclosure” procedure, was making possible the submission of “anonymous” requests, and administering a process of negotiation with the tax authority, anonymously. Only at the end of the process, and with the approval of the client, were his particulars given to the tax authorities.
Under this procedure, approximately 7,500 requests were submitted, which disclosed unreported capital of approximately 5.5 billion U.S. dollars.
On December 29th, 2016, the Israel Tax Authority published a principle document to help operate the “Voluntary Disclosure” procedure for the diamond trade (while granting an extension). As part of the “Voluntary Disclosure” procedure, the Tax Authority is interested in allowing diamond Dealers to correct their reports, and to pay tax as required by law (while receiving immunity from criminal charges, for those who comply with the terms of the procedure). This is part of a comprehensive settlement of taxation in the Israel diamond trade, including an update of the “calculation” for the diamond trade, recording inventory on the basis of historical cost, and managing the inventory in the constant inventory, method.
It should further be pointed out that as part of the procedure, there is immunity from criminal charges for money laundering offences, and tax offences.
3. Income Tax Circular 4/2016 – the activity of foreign corporations in Israel by means of the internet (April 11th, 2016).
In recent years, the global, and Israeli, economic activity has expanded by means of the internet, both in the field of commerce, and also in the field of providing services. Transactions by means of the internet are conducted by foreign corporations, also for Israeli customers, where the contract is made, directly or indirectly, by means of a connected company, or sub – contractors, or representatives, who conduct marketing activities, provide commercial, and/or technical support services, to Israeli customers, in return for money. In some of the cases. In order to provide services to the Israeli customer, or for the sake of selling products, the foreign corporation constructs a special internet site, in the Hebrew language, for Israeli users and surfers. In other cases, the global site services as a platform for ordering services, or products, by Israeli customers. Sometimes, the foreign corporation provides advertising or agency services to Israeli customers in other internet sites.
According to the directives of the Israel income Tax regulations, the commercial revenue of a foreign corporation, from providing services, or selling products in Israel is liable to Israeli tax, if that revenue was produced in Israel. If the foreign corporation is a resident of a treaty country, the obligation of tax in Israel will apply, if the activity of the foreign corporation reaches “permanent establishment”, as defined in the relevant treaty.
The objective of the circular is to explain in which situations, according to the Israel Tax Authority, the revenues of a foreign corporation, from selling products or providing services, by means of the interne, as revenue of “permanent establishment” in Israel, and consequently to determine the rules for the ratio of profit for that “permanent establishment”.
In addition, the circular relates to the possible liability to V.A.T., to the obligation for registration, and reporting in Israel, etc.
4. Income Tax Circular 3/2016 – Taxation of Trusts (August 9th, 2016)
In the last decade, there have been a number of amendments to the legislation concerning the taxation of trusts, as below:
Amendment 147 to the Income tax ordinance (the “ITO”) (August 10th, 2015) – arranged for the first time, in Israeli law, the taxation of trusts.
Amendment 165 to the ITO (June 11th, 2008) – a complementary amendment to amendment 147 regarding the taxation of trusts, which arranges, inter alia, the obligations to report, notifications, declarations, and requests connected to trusts.
Amendment 168 to the ITO (September 16th, 2008) – arranges, and expands, inter alia, the benefits for new immigrants and returning residents.
Amendment 197 to the ITO (August 1st, 2013) – expanded the tax basis of the taxation on trusts, closed a number of loopholes, and added the obligation to report, connected to trusts (article 131 of the regulations).
Amendment 223 to the ITO (April 7th, 2016) – added article 131(a)(b5)(7) to the ITO, under which an Israeli beneficiary over the age of 25, is obligated to submit a report to Income Tax, even if there were no distributions in the trust, on the condition that the value of the trust’s assets were at least NIS 500,000, and he is aware that he is a beneficiary of the trust.
The objective of the circular is to specify, and clarify, various aspects of taxation regarding trusts, including the application to special cases, such as: emissaries, real estate transactions, etc.
5. Income Tax draft circular dated January 11th, 2017 – taxation of activity in virtual currency (such as Bitcoin)
In recent years, as part of the expansion of digital commerce, there has been a great increase in the use of “virtual currency”, such as Bitcoin, and Litecoin. Virtual currency is a digital, computerized unit, with a value, with is used for the purpose of barter trading, and/or a unit of a virtual account. It is the belief of the Israel Tax Authority (as expressed in the draft of the circular) – that virtual currency constitutes property, and/or an asset of a person, and therefore, its sale constitutes the sale of an asset, and will be classified as a capital gain that is liable to tax. Moreover, the Tax Authority claims (in the draft) that such a sale, as stated, will be liable to V.A.T.
6. Income Tax Circular 5/2016 – A Foreign Professional Company (October 31st, 2016)
As part of amendment 198 to the ITO, the arrangement that applies to a foreign professional company has been amended. These directives are intended to deal with the tax planning of the establishment of a foreign company by individual Israeli residents, and the provision of professional services through such a company.
Through the arrangement, the revenue of the foreign company for special professional services was charged, as revenue that was generated in Israel, and the dividend that it distributed – was liable for tax in Israel. As a rule, a foreign professional company is a foreign company where 75% of its means of control are held by Israeli residents, and its main revenue is from a special profession.
In view of the fact that the stated mechanism, conflicted with the tax regulations, amendment 198 determined that this tax model must be adapted to that which is accepted in the world. In a way that the taxation on the revenue created outside Israel, by a special profession, will be imposed on the individual (and not on the company).
Comprehensive Tax Reform- Changes in tax legislation for the years 2017 – 2018
On December 29th, 2016, there were published in Israel, two laws attached to the Budget (“The Omnibus Law of Arrangements”), which include many amendments to laws, including in the area of taxation. Below, the principle amendments to the taxation laws will be specified concisely.
a. The Law for the promotion of capital investment
The rate of taxation on income from “a preferential enterprise” in Development Area A, has been reduced from 1.1.2017 7.5% (instead of 9%), and in the center of Israel, the rate, will remain unchanged, that is 16%. Recently, the OECD has adopted, together with the G20 organization, rules and terms for providing tax relief for hi – tech industry, that is, tax relief on income from intangible assets, such as: a registered patent, computer software, etc. The amendment to the Omnibus Law of Arrangements, adopted the principles of those rules, and created additional tax channels for a “preferential hi – tech enterprise”, on income from preferential technology (a tax rate of 7.5% in area A, and 12% in other regions), and for a special, preferential hi – tech enterprise, a tax rate of only 6%. The changes include relief in the prerequisite for the “special, preferential enterprise” track, which grants a tax rate of 5% in area A, or 8% in other regions. Furthermore, the definitions of “preferential income”, “preferential company”, “improved revenue” and more.
b. Decrease in the rate of corporate tax
After the rate of corporation tax in Israel was decreased from 1.1.2016, from 26.5% to 25%, the Omnibus Law of Arrangements continued the afore – mentioned trend, and lowered the rate of tax in the year, 2017, to 24%, and to 23% in 2018.
c. Amendment to the rate of tax for individuals
The Omnibus Law of Arrangements increases the rates of “surtax” (tax on high income) from an additional 2% to 3%, on an overall, annual income of NIS 640,000 (approx. USD 178,000).
d. Taxation of Personal Service Companies (“PSC”)
The principle of the two – tier taxation of companies, and the principle of tax considerations, by which the difference between rates of taxation applicable to income deposited with an individual, and that same income deposited with him by means of a company, is decreased, are the foundation principles of the system of corporation taxation in Israel. The decision to act by means of a company is driven by many, varied considerations, including commercial, economic and legal considerations. One of the substantial advantages of acting through a company, from the point of view of tax law, is the control on the timing of the charge of the tax, at the second stage – the stage at which the income is divided between the shareholders. This control enables the shareholders, in many instances, to avoid paying tax, or to bring about a significant delay in the payment of the tax. The objective of the amendments in the Omnibus Law of Arrangements is to give the Israel Tax Authority the tools to deal with tax planning that constitutes abuse of the two – tier tax system that applies to companies.
In view of what has been stated, anti – planning instructions have been set, for the taxation of “close – held” companies (controlled by up to 5 (five) people) and their substantial shareholder, as follows: (a) taxation on the withdrawal of money, or the use of assets by the substantial shareholder; (b) taxation of “Personal Service companies” – the liable revenue of close – held companies, which emanates from the activity of a single person, who is its substantial shareholder, will be considered to be the revenue of the individual; (c) granting permission to the assessment clerk to consider profits that were not distributed, as if they had been distributed (d) a temporary provision to distribute dividends to a substantial shareholder, in the period from January 1st, 2017 to September 30th, 2017, at a final, decreased rate of 25% (twenty – five per cent) including surtax (instead of 30% to 33%).