(photo credit: REUTERS)
The budget bill has been published and has passed its first reading in the Knesset. It is now being hotly debated in the Knesset Finance Committee. Below we briefly mention a few of the draft tax measures currently proposed.
Currently, individuals pay income tax at rates ranging from 10% to 48% plus a 2% surtax if total annual income and gains exceed NIS 803,520 in 2016. For 2017, it is proposed that income tax rates would range from 10% to 47%, plus a 3% surtax if total annual income and gains exceed NIS 640,000. So the top rate would still be 50%, from a lower level.
Currently, the regular rate of company tax is 25%. It is proposed to reduce the company tax rate to 24% in 2017 and 23% in 2018.
Dividends paid to company owners (holding 10% or more) will continue to subject to 30% tax before surtax, or 33% including the surtax, subject to any applicable tax treaty.
Consequently, based on the proposals, the combined Israeli tax rate for distributed profits is expected to be 49% in 2016, 49.08% in 2017 and 48.41% in 2018, subject to any applicable tax treaty.
Various rates remain possible in industry and tech for “privileged enterprises” pursuant to the Law for the Encouragement of Capital Investments.
A tough batch of proposals are in store for so-called “wallet companies” that made money.
If major shareholders (holding 10% or more) or parties related to them borrow money from a company, it is proposed to tax this as salary, dividend or other income, unless the money is repaid within 90 days.
If major shareholders use company assets, such as a home, art, jewelry, ship, plane or other prescribed assets, the company will be taxed as if the assets were sold, and the major shareholder will be taxed on the resulting after-tax amount, according to the proposals.
And virtual employees who use their own private-held companies to bill out their activities primarily to one company, or serve as officers, may be taxed as if they received salary.
And companies sitting on a cash pile may be forced to declare a taxable paper dividend at the discretion of the tax director.
A separate bill, published on June 27, proposes to relax the limitations on tax free corporate reorganizations. Among other things, it is proposed to allow a 75% dilution of existing investors’ interest in the two-year period after the reorganization, instead of 49% now.
Multi home tax
A controversial proposal calls for individuals with three or more homes in Israel to pay a new annual tax on the third home and above, at the rate of 1% of a calculated value, but no more than NIS 18,000 per home. This would include homes held through a company.
The taxpayer would be able to choose which two homes shouldn’t be subject to this proposed tax. It is unlikely that foreign investors would be able to credit such a tax in their home country as it would not really be an income tax.
The proposed new tax is drawing heavy flak because three cheap flats in, say, Beersheba would trigger the new tax, whereas two fancy mansions in, say, Herzliya Pituah would not.
Moreover, it seems that if a landlord divides up an apartment into three or more mini apartments, without planning permission, he may apparently avoid the proposed new tax.To sum up
The above is a brief summary of what went to the Knesset Finance Committee for debate. It remains to see what will be enacted and on what terms.
As always, consult experienced tax advisers in each country at an early stage in specific cases.[email protected]
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.