Under the Economic Enhancement proposal for 2009-2010, published on July 2009, a temporary benefit provision was determined, as an incentive for distributions of profits from Israeli company. Currently, under certain conditions, distributable profits accumulated until 31.12.02 are entitled to a low 10% tax rate in the event of selling the shares or dissolution of the company.
According to the provision, dividends originated from distributable profits accumulated until the “determining date” (31.12.02), and distributed from October 1st, 2009 until September 30, 2010 (“The Benefit Period”), will be charged at a 12% tax rate instead of the regular tax rate of 25% (or 20% for a shareholder holding less then 10% of the distributing company).. In order to receive the abovementioned reduced tax rate, 4 cumulative conditions must be met:
1. The dividends were paid within the benefit period it should be considered when possible, to delay dividend distribution, whether as an actual distribution or as part of an agreement with the Israeli Tax Authority (“ITA”), in order to be able to benefit from the reduced tax rate of 12%.
2. The shares of the distributing company were purchased until the “determining date”-before January 1st, 2003.
3. The recipient of the dividend would have been entitled to distributable profits at 10% tax rate benefit as mentioned above.
4. The average income from the company that distributes the dividends remains unchanged – the shareholder’s income in the years 20092012 from salary, interest, linkage differentials or other payments from the distributing company mustn’t be reduced compared to the income average received by the shareholder during the years 2007-2008. When calculating the income for the years 2009-2012 the reduced dividend rate will not be taken into account according to this section.
This provision takes out of context many possible situations as follows:
a. A company that stopped producing an active income by the end of 2008, won’t pay its shareholders any kind of salary during the years 2009-2012, and as a result, won’t stand up to the income average exam.
b. The sanction for when the income average exam is not being held is not defined as a relative sanction and so, even a 100 NIS excess from the average income may rule out a benefit for the entire dividend.
To conclude, this temporary provision is blessed in its essence but the implementation of it is not simple. It raises countless number of methods and many arguments regarding the distributable profits. It is advices before distribution to examine the dividend sum. In addition there are several steps needed to be executed already in 2009 in order to create a high standard platform for effective use of the above mentioned benefit. We think that the legislator should reconsider the abovementioned provisions. Meanwhile, advisers should be cautious in what they advise a withdrawal at 12% that may end with paying 25% and wasting the 10% tax rate benefit forever.
