Your Taxes: What you have to know about the budget law

The Knesset passed the Budget Law on July 29. Generally it takes effect from August 1.

By LEON HARRIS
An accountant calculator taxes 370 (photo credit: Ivan Alvarado / Reuters)
An accountant calculator taxes 370
(photo credit: Ivan Alvarado / Reuters)
The Knesset passed the Budget Law on July 29. Generally it takes effect from August 1. Last week we reviewed most of the changes regarding trusts. Here is the continuation of our review:
SETTLOR OF TRUST MAKES ALIYA
Under the old and new law, if a settlor of a trust became a new or senior returning resident, the trust becomes an “Israeli residents’ trust” (IRT). Normally an IRT is fully taxable in Israel on its worldwide income in the year that income is derived. However, if the settlor is a new or senior returning resident, the 10-year Israeli tax holiday for overseas income applies to overseas trust income and gains.
For trusts formed on or after January 1, 2014, the tax holiday will only apply if all the beneficiaries are new or senior returning residents or foreign residents.
This will also apply to trusts formed after the settlor’s immigration to Israel.
Comment: Olim should consider forming trusts before 2014 with a view to enjoying the full 10-year exemption even if the settlor should die during the 10 years and leave non-oleh beneficiaries.
TAX-RATE INCREASES
Personal Israeli income-tax rates on earned income will range from 11 percent to 52% in 2014, compared with 10% to 50% in 2013. The regular rate of company tax will increase from 25% in 2014 to 26.5% in 2013.
Preferred enterprises in industry and technology will pay company tax of 9% in development area A and 16% elsewhere, and the withholding tax on their dividends will rise from 15% to 20% in 2014. The standard VAT rate went up by 1% to 18% on June 1.
ISRAELI REAL ESTATE
Numerous changes have been made to the Israeli taxation of Israeli real-estate interests. Here is a brief summary: Buying Israeli real estate: Acquisition tax rates on Israeli property were increased on August 1. The rates are now 0%-10% for an only home and 5%-10% for other homes.
Foreign investors not eligible for the lower single-home rates unless they are certified homeless by the tax authority of their home country, or they become Israeli residents within two years (the old 0.5% rate for olim has been repealed).
Selling Israeli real estate: On January 1, 2014, the tax rates for Israeli property sales will rise and the present exemptions will be scaled back. The maximum tax rate for individuals will decrease from 50% to 25%. The exemption for home sales once every four years will be replaced by an exemption if: (1) the sale is the seller’s only home (the seller can disregard a one-third interest and certain inheritances); (2) the exemption will be possible once every 18 months for a home held for 18 months; (3) the seller is an Israeli resident (or certified homeless in the foreign country of residence); (4) there will be no exemption to the extent the sales value exceeds NIS 4.5 million.
For a home bought before 2014, a transitional rule will apply to the sale of two homes in 2014-2017. This will enable an exemption on the pre-2014 pro rata portion of gain that would have been exempt under the old once-everyfour- year rule, on up to NIS 4.5m. of sale value.
FAMILY COMPANIES
Tax planning involving “family companies” is to be curtailed. Family companies are Israel’s equivalent of US Subchapter S corporations and LLCs.
A family company basically a private company owned by five or fewer members of one family, and the largest shareholder pays Israeli tax on the company’s income as if he was self-employed.
Under the new law, family-company status may only be elected within three months after its incorporation. Until now, this was possible by November 30 annually with regard to subsequent tax years, especially if a large profit was expected.
Existing regular companies may elect by this November 30 to be transformed into a family company from the beginning of 2014. However, all their profits generated up the end of 2013 will be treated is if they were distributed as a dividend.
The resulting tax (usually 30%) can be paid by the end of 2017 without interest or indexation. Assets acquired before the transformation and sold after it will be taxed on a time pro rata basis, but the pre-transformation gain after inflation adjustment will be taxed at 48%.
If the largest shareholder is entitled to special tax benefits (such as an exemption due to disability), this will be granted pro rata to his shareholding in the company from 2014.
Additional detailed rules were also enacted in the budget law.
Comment: Family companies will still have their uses. They avoid a layer of Israeli tax, and they may block foreign estate and inheritance taxes. But evaluate and elect family-company status, if desired, within 90 days after incorporation, as it will no longer be possible to switch in and out of family-company status.
UNDERLYING COMPANIES (TRUST-OWNED VEHICLES)
The rules for underlying companies of trusts were clarified. These are Israel’s offshore companies. Registration with the Israel Tax Authority will now be needed in applicable cases, and they will not be granted Israeli residency certificates for tax-treaty purposes.FOREIGN INVESTORS, CAPITAL-GAINS TAX
Previously, foreign resident investors were exempt from Israeli capital-gains tax upon a sale of Israeli securities (equity or bonds) unless the investment was part of a business operation in Israel (e.g., securities trading in Israel) or related to Israeli real estate. Commencing August 1, foreign resident investors are no longer exempt if they sell rights to exploit natural resources “in Israel.”
Comment: This measure seems designed to tax foreigners who invest in Israel’s newly found gas resources in the Mediterranean Sea. But the tax it is unclear if the gas is “in Israel.” Israel claims certain sovereign rights over the continental shelf, but its territorial waters extend only 12 nautical miles from the coast. Is the gas in Israel or not?
DEGREE HOLDERS
Tax credits granted to academic degree holders for several years will be restricted to one tax year.REVALUATION GAINS
The Israeli tax law has not yet taken IFRS accounting on board. One of the resulting questions is how to tax dividends paid by a company out of revaluation gains. Commencing August 1, revaluation gains regarding assets in Israel are treated as taxable capital gains from a deemed sale and repurchase of the revalued assets at their revalued value.
The cost basis of those assets would be “stepped up” to that value for future depreciation and capital-gains tax purposes.
This means tax will be accelerated, but it may also facilitate tax planning in some individual cases. For overseas assets, these provisions will not apply until regulations for avoiding double tax are promulgated.
NONCOMPLIANCE FINES
If a taxpayer is found to have under-reported income and underpaid tax exceeding NIS 0.5m., representing 50% of the tax due, the assessing officer may, commencing with the 2013 tax year, impose a fine of 30% of the tax deficiency.
This may apply in any of the following cases: reportable tax-shelter transactions; noncompliance with an express reasoned tax ruling issued to the taxpayer in the three years before a tax return was filed without disclosing this on a specific form; (3) artificial transaction.
Parallel provisions will apply to similar VAT and land-taxation wrongdoings.
DISCLOSURE OF MONEY TRANSFERS TO ISRAEL TAX AUTHORITY
Money changers (as defined in detail) will have to disclose a wide range of transactions and money transfers exceeding NIS 50,000 to the Israel Tax Authority.
Until now, only the Bank of Israel has been privy to such information.
The new rules will only commence once detailed regulations are promulgated and will last for three years. Various safeguards of privacy are prescribed, but they won’t protect against tax offenses.
NEW IMMIGRANTS
Proposals were dropped that would have required new residents and senior returning residents (who lived abroad five to 10 years) to start disclosing their non-Israeli-source income and gains derived in their first 10 years in Israel.
Such income and gains are currently exempt from any Israeli tax liability, but they would have become reportable on annual Israeli tax returns from August 1 under the original proposal. Instead, the proposals were hived off from the budget bill and may be debated and perhaps enacted by the Knesset in the coming weeks or months.
New immigrants may well be affected by other new measures outlined herein.PROPOSALS NOT ENACTED
Other budget-bill proposals not enacted include those relating to pensions, controlled foreign corporations, foreign professional corporations and disclosure of tax opinions given.
As always, consult experienced tax advisers in each country at an early stage in specific cases.leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.