(photo credit: Thinkstock/Imagebank)
Offshore companies and stock options came under the microscope of the Committee
for Reviewing Cash Box Companies and Holding Companies when it met
representatives of the Israeli CPA Institute, Law Society and Tax Advisors
Society on October 10.
According to an announcement of the Israeli Tax
Authority (ITA) on that date, the aim was to receive feedback before the
committee makes its final decision about what to propose.
is reportedly intent on taxing the annual undistributed profits of cash box
companies and holding companies, and is therefore considering two alternative
The first alternative proposal calls for individual
shareholders to be taxed on half the undistributed profits of cash box companies
and half the passive undistributed profits of private holding companies. None of
these terms are defined in the ITA announcement.
That would presumably
result in a 15 percent tax charge on such profits.
The second alternative
proposal calls for all highly profitable companies (not defined) to possibly be
subject to interest at a rate of 4%- 8% on undistributed profits.
options The committee is also reviewing the tax treatment of options for
employees – no details are included in the announcement.
JPOST VIDEOS THAT MIGHT INTEREST YOU:
to the announcement, the committee is expected to finish its work shortly and
will then report to the finance minister.
It remains to be seen what may
eventually be legislated.
Comments These are important topics, as
substantial amounts may be at stake for many people – from successful
businessmen and investors to employees in many Israeli
Therefore the committee really should publish its proposals in
draft form and consult the public.
Israel already has rules for taxing
undistributed profits of controlled foreign corporations, foreign professional
corporations and companies controlled and managed from Israel. It is not clear
why more rules are proposed.
Moreover, the committee seems to be going
the wrong way down a one-way street.
Taxing annually the retained profits
of foreign subsidiaries doesn’t usually work well – those profits are often
needed to pay for worthy acts like export marketing or financing customer
credit. So exceptions will be needed for various foreign subsidiaries of Israeli
The UK has already chosen to relax its rules in this area. And the
United States may as well after its presidential election by considering a move
to a territorial system of tax – i.e.
exempting income derived outside
Many other countries already have a territorial system – Hong
Kong, Singapore and Canada (partly), to name a few. Israel had a territorial
system before 2003.
If Israeli holding companies are also caught, this
will encourage reorganization of a group’s activities into fewer larger
companies – this is like re-shuffling the same cards, not dealing new ones. It
remains to be see if additional tax revenues ensue.
As for employee stock
options, Israel has well established rules in Section 102 of the Income Tax
Ordinance. If certain conditions are met, employees enjoy a 25% tax rate on
their gain, which only falls due when they realize their options (or shares) for
cash. The quid pro quo is that the employer entity cannot deduct the employee
benefit as an expense for Israeli tax purposes.
Usually the applicable
conditions are met as approved trustees hold the option title documents until
the tax is paid. So if the option system ain’t broke, why fix it? Employee
options are popular in Israel, especially in the successful hi-tech sector. So
this issue is potentially dynamite.
Final comment Perhaps reason will
prevail – a general election is approaching in Israel and the committee’s
proposals may affect a lot of voters.
Let’s hope the proposals aren’t
buried until after the election. As always, consult experienced tax advisers in
each country at an early stage in specific email@example.com The writer
is a certified public accountant and tax specialist at Harris Consulting &
Join Jerusalem Post Premium Plus now for just $5 and upgrade your experience with an ads-free website and exclusive content. Click here>>