Tax Alert No. 12 - 22.12.2011

On November 15^th, 2011, the Israeli Tax Authority (Hereinafter: “ITA”) published a circular concerning a temporary favorable procedure of voluntary disclosure, with regard to undeclared foreign assets and earnings outside of Israel. The procedure was set for a limited period of time commencing November 15^th, 2011 until June 30^th, 2012 (hereinafter: “The Temporary Provision“). The temporary provision is additional to the procedure of voluntary disclosure which the ITA published in 2005 (hereinafter: “The Regular Procedure (2005)”).

The temporary provision constitutes a breakthrough and a window of opportunities in relation to tax arrangements for Israeli residents, and in particular for those who own bank accounts, assets, capital etc. abroad (Hereinafter: “Foreign Assets”). According to the temporary provision, Israeli residents who own foreign assets may implement the procedure of voluntary disclosure, through which they would be granted both immunity from a criminal proceeding (in the tax laws aspect) as well as tax reliefs.

The objective of the temporary provision is to bring to the knowledge of the ITA information concerning income of Israeli residents from foreign assets, which were never reported in Israel, especially in light of “circumstances indicating the weakening of banking confidentiality in many countries”.

The procedure sets a number of conditions to those eligible to enter within its gates; however, it seems that the procedure does not fit all Israeli residents who would consider applying to the ITA. For example, the Temporary provision does not apply to an Israeli resident who owns assets in Israel – In this case the Regular Procedure (2005) should be implemented.

The benefit of the Temporary Provision (in contrast to the Regular Procedure (2005)) lies in the fact that the computed tax according to the civil assessment will not accumulate interest and fines! Regarding linkage differentials accumulated on the computed tax, reliefs may be granted.

It should be noted that most applications submitted according to the regular procedure (2005) during last year, resulted with imposition of interest, indexation and deficit fines at a rate ranging from 15% to 30% of the resulting tax burden. It is expected that interest and deficit fine would be nullified in the context of the Temporary Provision.

The short period of time that was set requires the taxpayers to take immediate action to obtain and gather the information, so that they may submit the applications and enjoy the benefits granted within the Temporary Provision. Applications which include a request to activate the Temporary Provision are submitted to a joint committee of 4 members, deputy director generals of the ITA, who shall handle the application regarding both civil and criminal aspects which arise from it. In the process, an examination is conducted, regarding the origin of the disclosed assets and the taxation in Israel of the foreign assets and the yields resulting from it over the years.

Your attention please: It is specifically mentioned in the Temporary Provision that: “An application which does not meet the criteria… shall not be handled according to the Temporary Provision. Nonetheless, the information given within the application would not be utilized on a civil or criminal level.”

We urge any taxpayer or practitioner who finds it useful, to examine this issue and to take advantage of the window of opportunities in order to benefit from significant tax reliefs.

Our office has filed numerous applications concerning of voluntary disclosure procedures.

In case you have any questions or need further clarifications please do not hesitate to contact us.

On December 6^th, 2011, following nationwide protests demanding socioeconomic change and “social justice”, a large tax amendment was published in the Official Gazette of the Israeli Government (2011) (Hereinafter: the “Legislation”). In this tax alert we attempt to describe the main changes which resulted from the Legislation, including the new tax rates which are levied through the new legislation. For your convenience, please find an abbreviated table presented at the end of this article which shows the tax rates & the calculation techniques which apply to selected sources of income.

• Capital gains (including tradable securities) & Dividends – The tax rate was increased by 5%, from 20% up to 25%; In case of a substantial shareholder (10% holding or more), the rate went up from 25% to 30%. According to Section 92A(4) of the Income Tax Ordinance, 1961 (Hereinafter: the “ITO”),  capital losses incurred upon sale of securities may be set off against capital gains realized in the current year or in each of the following tax years, under certain rules. Alternatively, such capital loss may be set off against interest or dividend paid for the same securities, and for other securities, but regarding the latter, only if the tax rate on this income did not exceed 25%. The legislator, deliberately, didn’t amend section 92A(4) in the course of the new legislation. Hence, substantial shareholders will be subject to the new tax rate of 30% on dividend received after January 1^st ,2012, and therefore will no longer be able to set off against such dividend, capital losses resulting in the sale of other securities.

• Capital gains tax rates on real estate (including real estate holding company) – Generally, an Israeli Company qualifies as a Real Estate Holding Company if all the assets which the company holds, directly or indirectly, constitutes of Israeli real estate. Following the new legislation, capital gains tax rates on real estate, as aforementioned, were increased by 5% – from 20% up to 25%; In case of a substantial shareholding in a Real Estate Holding Company, the rate was also increased from 20% to 30%.

• Interest derived from capital market and deposits – for unlinked channels, the tax rate remains 15%; linked channels tax rates have increased from 20% to 25%.

• Individual top marginal income tax rate was increased from 44% up to 48%. This tax rate is levied on an individual’s annual income exceeding 489,480 NIS (40,790 NIS per month).

• Corporate income tax rate was increased from 24% (in 2011) to 25%, instead of a pre-enacted law gradually decreasing it to 18% (23% in 2012 down to 18% in 2016). We point out an important realization: According to section 126(C) of the ITO, dividend distributed to an Israeli company by another Israeli company is tax exempt only as long as the dividend is originated from earnings derived or produced in Israel. Had an Israeli company distributed dividend to another Israeli company, and the dividend originated from earnings outside of Israel, a tax credit mechanism is activated according to section 126(d) of the ITO. The direct outcome of the legislation is that dividends distributed to an Israeli company by another Israeli company, which originated from earnings derived or produced outside of Israel in the year 2011 (and were subject to 24% tax), would be subject to a 1% additional tax – to complete the updated corporate tax rate set to 25%.

• Tax credit for new fathers – according to the new legislation, 6 “credit points” (equivalent to approximately 15,000 NIS) are granted to a father of each “infant” as follows: one credit point in the birth year of the infant, two credit point in the next 2 years and one credit point in the year the infant has reached the age of 3.

Tax rates & the calculation techniques which apply to selected sources of income:

The real estate Taxation Act (increasing the supply of Residential Apartments – temporary order), 2011 as formerly reviewed in our tax alert no. 11, was legislated on 1^st August 2011. Our update concerns a temporary order supplement to the temporary order above mentioned, that was published (hereinafter: “Amendment no. 71“). According to Amendment no. 71 between 1^st January 2013 until 1^st January 2021 a betterment tax exemption upon a sale of a “qualifying residential apartment”(as defined in the law), will be granted only once in 8 years (!!) instead of 4 years as prior to the Amendment.

This exemption applies to an owner of one or more residential apartments. We indicate that the exemption granted to an owner of a single “qualifying residential apartment” hasn’t been amended and therefore, is still valid. This exemption can be used once every 18 months, subject to conditions.

On November 15^th, 2011, the Israeli Tax Authority (Hereinafter: “ITA”) published a circular concerning a temporary favorable procedure of voluntary disclosure, with regard to undeclared foreign assets and earnings outside of Israel. The procedure was set for a limited period of time commencing November 15^th, 2011 until June 30^th, 2012 (hereinafter: “The Temporary Provision“). The temporary provision is additional to the procedure of voluntary disclosure which the ITA published in 2005 (hereinafter: “The Regular Procedure (2005)”).

The temporary provision constitutes a breakthrough and a window of opportunities in relation to tax arrangements for Israeli residents, and in particular for those who own bank accounts, assets, capital etc. abroad (Hereinafter: “Foreign Assets”). According to the temporary provision, Israeli residents who own foreign assets may implement the procedure of voluntary disclosure, through which they would be granted both immunity from a criminal proceeding (in the tax laws aspect) as well as tax reliefs.

The objective of the temporary provision is to bring to the knowledge of the ITA information concerning income of Israeli residents from foreign assets, which were never reported in Israel, especially in light of “circumstances indicating the weakening of banking confidentiality in many countries”.

The procedure sets a number of conditions to those eligible to enter within its gates; however, it seems that the procedure does not fit all Israeli residents who would consider applying to the ITA. For example, the Temporary provision does not apply to an Israeli resident who owns assets in Israel – In this case the Regular Procedure (2005) should be implemented.

The benefit of the Temporary Provision (in contrast to the Regular Procedure (2005)) lies in the fact that the computed tax according to the civil assessment will not accumulate interest and fines! Regarding linkage differentials accumulated on the computed tax, reliefs may be granted.

It should be noted that most applications submitted according to the regular procedure (2005) during last year, resulted with imposition of interest, indexation and deficit fines at a rate ranging from 15% to 30% of the resulting tax burden. It is expected that interest and deficit fine would be nullified in the context of the Temporary Provision.

The short period of time that was set requires the taxpayers to take immediate action to obtain and gather the information, so that they may submit the applications and enjoy the benefits granted within the Temporary Provision. Applications which include a request to activate the Temporary Provision are submitted to a joint committee of 4 members, deputy director generals of the ITA, who shall handle the application regarding both civil and criminal aspects which arise from it. In the process, an examination is conducted, regarding the origin of the disclosed assets and the taxation in Israel of the foreign assets and the yields resulting from it over the years.

Your attention please: It is specifically mentioned in the Temporary Provision that: “An application which does not meet the criteria… shall not be handled according to the Temporary Provision. Nonetheless, the information given within the application would not be utilized on a civil or criminal level.”

We urge any taxpayer or practitioner who finds it useful, to examine this issue and to take advantage of the window of opportunities in order to benefit from significant tax reliefs.

Our office has filed numerous applications concerning of voluntary disclosure procedures.

In case you have any questions or need further clarifications please do not hesitate to contact us.

On December 6^th, 2011, following nationwide protests demanding socioeconomic change and “social justice”, a large tax amendment was published in the Official Gazette of the Israeli Government (2011) (Hereinafter: the “Legislation”). In this tax alert we attempt to describe the main changes which resulted from the Legislation, including the new tax rates which are levied through the new legislation. For your convenience, please find an abbreviated table presented at the end of this article which shows the tax rates & the calculation techniques which apply to selected sources of income.

• Capital gains (including tradable securities) & Dividends – The tax rate was increased by 5%, from 20% up to 25%; In case of a substantial shareholder (10% holding or more), the rate went up from 25% to 30%. According to Section 92A(4) of the Income Tax Ordinance, 1961 (Hereinafter: the “ITO”),  capital losses incurred upon sale of securities may be set off against capital gains realized in the current year or in each of the following tax years, under certain rules. Alternatively, such capital loss may be set off against interest or dividend paid for the same securities, and for other securities, but regarding the latter, only if the tax rate on this income did not exceed 25%. The legislator, deliberately, didn’t amend section 92A(4) in the course of the new legislation. Hence, substantial shareholders will be subject to the new tax rate of 30% on dividend received after January 1^st ,2012, and therefore will no longer be able to set off against such dividend, capital losses resulting in the sale of other securities.

• Capital gains tax rates on real estate (including real estate holding company) – Generally, an Israeli Company qualifies as a Real Estate Holding Company if all the assets which the company holds, directly or indirectly, constitutes of Israeli real estate. Following the new legislation, capital gains tax rates on real estate, as aforementioned, were increased by 5% – from 20% up to 25%; In case of a substantial shareholding in a Real Estate Holding Company, the rate was also increased from 20% to 30%.
• Interest derived from capital market and deposits – for unlinked channels, the tax rate remains 15%; linked channels tax rates have increased from 20% to 25%.
• Individual top marginal income tax rate was increased from 44% up to 48%. This tax rate is levied on an individual’s annual income exceeding 489,480 NIS (40,790 NIS per month).
• Corporate income tax rate was increased from 24% (in 2011) to 25%, instead of a pre-enacted law gradually decreasing it to 18% (23% in 2012 down to 18% in 2016). We point out an important realization: According to section 126(C) of the ITO, dividend distributed to an Israeli company by another Israeli company is tax exempt only as long as the dividend is originated from earnings derived or produced in Israel. Had an Israeli company distributed dividend to another Israeli company, and the dividend originated from earnings outside of Israel, a tax credit mechanism is activated according to section 126(d) of the ITO. The direct outcome of the legislation is that dividends distributed to an Israeli company by another Israeli company, which originated from earnings derived or produced outside of Israel in the year 2011 (and were subject to 24% tax), would be subject to a 1% additional tax – to complete the updated corporate tax rate set to 25%.
• Tax credit for new fathers – according to the new legislation, 6 “credit points” (equivalent to approximately 15,000 NIS) are granted to a father of each “infant” as follows: one credit point in the birth year of the infant, two credit point in the next 2 years and one credit point in the year the infant has reached the age of 3.

Tax rates & the calculation techniques which apply to selected sources of income:

The real estate Taxation Act (increasing the supply of Residential Apartments – temporary order), 2011 as formerly reviewed in our tax alert no. 11, was legislated on 1^st August 2011. Our update concerns a temporary order supplement to the temporary order above mentioned, that was published (hereinafter: “Amendment no. 71“). According to Amendment no. 71 between 1^st January 2013 until 1^st January 2021 a betterment tax exemption upon a sale of a “qualifying residential apartment”(as defined in the law), will be granted only once in 8 years (!!) instead of 4 years as prior to the Amendment.

This exemption applies to an owner of one or more residential apartments. We indicate that the exemption granted to an owner of a single “qualifying residential apartment” hasn’t been amended and therefore, is still valid. This exemption can be used once every 18 months, subject to conditions.