As we entered 2014, it was two steps forward, one step back on the Israeli tax front.
On the plus side, there is no longer an Israeli tax penalty if you and your spouse work together in the same business.
Until 2013, there was no separate taxation of the second spouse (the wife) if she made more than NIS 49,680 from the family business. This was to prevent the possibility of tax planning by way of “income splitting” – i.e., each spouse pays tax on part of the business profit instead of taxing the husband on it all.
Commencing January 1, 2014, a much fairer system now applies, thanks to amendment 199 of the Income Tax Ordinance. This allows each spouse to be separately taxed on income from a common source if certain conditions are met.
• First, the personal effort of each spouse must be required to generate income from a common source. Presumably that means one person can’t do as well on their own.
• Second, each spouse receives income that matches their contribution to the generation of income from a common source, and the income is in direct relation to their contribution to such income.
• Third, if the income is generated in the couple’s home, the home serves on an ongoing basis as the source of common income, and most of the related activity is done there. In other words, the wife can’t work at home if the husband doesn’t (or vice versa).
As for going back, planned personal tax rises of 1 percent to 2% scheduled for 2014 were repealed. That means the maximum personal tax rate will be 50% instead of 52%. We welcome this kind of backward progress. The standard rate of company tax will still rise from 25% to 26.5% in 2014. And the standard rate of VAT will remain at 18%.
• Fourth, when purchasing Israeli real estate, a revamped tax regime takes effect in 2014 (covered in an earlier article).
Nevertheless, it has now been decided to continue for two more months, until February 28, with a system of withholding tax on Israeli real-estate transactions of 7.5% to 15%, which is due once the seller has received 40% of the sale consideration.
• Fifth, if loans are made with interest below a prescribed rate, the difference is taxable. The prescribed rates have just been updated for 2014. In the case of loans to service providers or loans to 5% shareholders, the rate has dropped from 5.47% to 4.31%, and the recipient is taxed on any difference.
For other loans given in shekels by other businesses required to keep double entry books to another Israeli party, the rate has dropped from 4/1% to 3.23%, and the lender is taxed on any difference. Various detailed rules and exceptions apply. For example, the rate remains 3% on foreign-currency loans and market rates for cross-border loans with related parties.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
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