Shekel money bills.
(photo credit: REUTERS)
In principle, foreign-resident investors are generally exempt from Israeli capital-gains tax when they sell securities issued by Israeli companies, subject to a few exceptions. However, those exceptions were expanded on August 1, 2013, by Amendment 197 to the Income Tax Ordinance. The Israel Tax Authority (ITA) issued circular 3/2014 on July 27 that clarifies the amendment and further expands those exceptions.
What does law say?
Subject to a tax treaty, nonresidents are subject to Israeli tax on their capital gains relating to: (1) assets located in Israel; (2) assets located abroad that are primarily direct or indirect rights to assets, inventory or real estate in Israel or to a real-estate association; (3) shares or rights to shares (for example, warrants and options) in an Israeli resident entity; (4) a right to a nonresident entity that primarily represents a direct or indirect right to property in Israel.
Any resulting tax is reportable and payable within 30 days after the transaction. In addition, payers and their Israeli banks are under an obligation to withhold 25 percent tax unless advance written clearance is obtained to apply any applicable lower rate.
Notwithstanding the above, foreign-resident investors not doing business in Israel may enjoy an exemption from Israeli capital-gains tax when they sell Israeli securities (shares of stock and bonds) acquired on or after January 1, 2009. This does not apply to Israeli real-estate-related investments or to securities attributable to an Israeli permanent establishment.
Different rules apply to pre-2009 investments.
Last year’s amendment repealed the above exemption for foreign residents who sell securities that derived their main value on their date of purchase and in the two years before their sale, directly or indirectly from: (1) Israeli real-estate rights or rights to a real-estate entity. This is basically an entity whose assets are entirely Israeli real-estate rights as well as cash, securities or chattels that do not generate income or have a relatively immaterial value; (2) right to use real estate or any fixture to real estate in Israel; (3) right to exploit natural resources in Israel; (4) the right to the fruits of land in Israel.What does the circular say?
The above circular reviews these provisions generally.
According to the circular, Israeli real-estate rights do not include a leasehold interest lasting less than 25 years. This implies that if a foreign investor sells shares in an Israeli industrial company that rents its factory building, no Israeli tax may be imposed. However, the circular says tax should be imposed if the lease is for less than 25 years, but: (1) the lease is customarily renewed from time to time; (2) if there is an option that could extend the lease beyond 25 years; or (3) the lease is held via a real-estate entity.
The circular goes on to declare that Israeli land fixtures include farms, farm equipment, the right to operate transportation routes and rights in a public private partnership (PPP) that has, for example, rights to erect and use buildings such as an industrial plant or residential apartments. So a foreign investor can be taxed upon a sale of shares in an Israeli PPP or agricultural company.
Regarding rights to exploit Israeli natural resources, the circular cites as examples Israeli companies that exploit quarries or a “preliminary permit” or a “license” or a “holding” as defined in the Petroleum Law, 1952. The circular clarifies that this means no exemption for foreign investors in companies that exploit Israeli natural resources, including: (1) those in its economic waters or in the area of its continental shelf; (2) rights to explore or locate such natural resources to exploit them; (3) rights to process and exploit natural resources and their byproducts.
All this implies that foreign investors may now be taxed upon a sale of shares in an Israeli oil or gas company. Israel has, of course, recently discovered large quantities of gas on the continental shelf in the Mediterranean off the Israeli coast.
These changes create unnecessary complexity. The amendment and the circular seek to impose tax on foreign investors who sell gas company shares even if the gas is located in the sea beyond Israeli territorial waters, which extend 12 nautical miles from the coast.
Furthermore, the circular tries to bring leaseholds under 25 years into the Israeli tax net through the back door.
In any event, foreign investors should also check the tax position in their home country and whether they can credit any Israeli tax on capital gains.
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.