Tax alert

In 2005, a temporary order was added to the Income Tax Ordinance (ITO), within Section 97(B3) of the ITO, granting a foreign resident of a treaty country an exemption from capital gain tax upon the sale of securities of an Israeli company (or a foreign company whose assets are mostly in Israel).

In June 2015, a taxation decision (No. 8326/15) was published, stating a number of provisions or positions related to residency relocation of a foreign company from one foreign country to another.

In May 2015, Taxation Decision (No. 4528/15) on the subject of the date of commencement of residency in Israel, attribution of revenues of a family company owned by an eligible individual and establishing a mixed income mechanism, was published.

The provisions of the ITO state that a loan that an individual who is a "significant shareholder" in a company (one who holds 10% or more of the controlling interest of the company) will be subject to tax at the marginal tax rate applying to an individual (a rate of up to 48% today) instead of the 25% tax rate applying to interest income, or 15% (for a loan that is not index linked).

Recently, the Israeli Tax Authority ("ITA") has published an addendum to execution instruction 1/2010 concerning trusts (hereinafter: "the Addendum"), in view of recent changes in legislation that had entered into force primarily in the 2014 tax year and further to forms and various notices, that the ITA has published since the announcement of the legislation.

On February 15, 2015, the Israeli Tax Authority (hereinafter: "ITA") published a taxation decision on the subject of taxation of trusts (Taxation Decision No. 6893/15) (hereinafter: "the Decision"). Before we discuss the issues that arise from the decision, we must point out that in view of the Decision, incomes that have arisen from outside of Israel, whose beneficial owners are foreign residents – are taxed in Israel too.

As a rule, many Israeli companies are financed by shareholder loans. Interest that is paid to a shareholder, who is an individual, from a company that he owns (or that is held at a rate of at least 10%), is taxable at the marginal tax rate, according to the tax brackets of the shareholder (there is also the duty on the company to withhold the tax that applies in accordance with the maximum marginal tax rate, 48% today).

A foreign resident company (hereinafter: the "Foreign Company"), which is interested in operating in Israel may operate by setting up an Israeli company or through a branch that will be classified as a permanent establishment (hereinafter: a "PE").

Recently, the ITA published to the general public that it is conducting investigation and taking measures against Israelis, who did not report their ownership of foreign bank accounts and the income thereof. Following to information obtained and gathered by the ITA regarding these bank accounts owners, the ITA started to execute extreme measures against them, by arresting them and/or summoning them to inquiries