An accountant calculator taxes 370.
(photo credit: Ivan Alvarado / Reuters)
The government sent its budget bill to the Knesset for debate and enactment on
June 17. It is formally known as the Draft Law for Changes in National
Priorities (Legislative Amendments for Achieving Budget Objectives in the Years
2013 & 2014) – 2013.
The intended commencement date for most clauses
is August 1, 2013. That doesn’t leave very long for advance planning, which
often may be worthwhile.
In view of the far-reaching potential effect of
the bill on many people, we are tracking its progress. We have commented before
on some proposals, but they are still evolving. It remains to be seen what will
be finally enacted and when.
The background to it all is the government’s
deficit in 2012 of 4.2 percent of GDP instead of the 2.2% originally planned.
The commentary to the bill blames this gap on a revenue
Therefore, the aims of the bill are: to raise revenues,
enhance tax enforcement using physical and technology means, and reform of the
overly complex pension tax regime.
As for olim and senior returnees
(lived abroad more than 10 years), they will continue to enjoy a 10-year Israeli
tax exemption for overseas income and gains under the proposals. But it is also
proposed to make them start disclosing the exempt income and gains on annual tax
However, this disclosure requirement would only apply to olim
and senior returnees who commence Israeli residency on or after August 1, 2013.
So potential olim and returnees have a small incentive to get their skates on
and take up Israeli residency by July 31. The prize is spending less time
filling out tax returns.
With regard to dividends from foreign-resident
companies, olim and returnees will only be exempt under the proposals if the
dividend is paid out of foreign-source profits. This would put paid to doing
business in Israel via a US LLC or S Corporation, for example.
regard to trusts, it is still proposed to tax all trusts with an Israeli
resident beneficiary, even if the settlor (grantor) is a foreign resident,
However, it seems that only income paid or allocated to Israeli residents will
be taxed, at a rate of 25% or 30%.
What happens if there are Israeli and
foreign-resident beneficiaries? We are left to assume that income paid or
allocated to foreign-resident beneficiaries won’t be taxed in Israel, but this
is NOT expressly stated. The Israel Tax Authority should have the courage to
clarify this. But it is clear that trusts will be taxed if they are settled by
professionals and others who are unrelated to the beneficiaries.
regard to privately owned “foreign professional companies,” Israel has long
tried to tax them. However, this is forbidden under most of Israel’s tax
treaties unless the foreign company has a “permanent establishment” (fixed place
of business) in Israel. Israeli exporters with a US marketing subsidiary were
shielded from Israeli tax by the US-Israel tax treaty.
It is proposed to
impose 26.5% company tax AND 30% income tax on the Israeli shareholders on
deemed dividends, even if the shareholders are individuals and not
Unfortunately, imposing company tax on individual shareholders
seems likely to contravene Israel’s tax treaties just like before.
doubtful if the Tax Authority ever tried to calculate Israeli tax under the
proposals; our spreadsheet had several loose ends, not to mention duplicate
foreign tax credits. So exporters and others with foreign service companies,
prepare to laugh and cry.As always, consult experienced tax advisers in
each country at an early stage in specific cases.
Harris is a certified public accountant and tax specialist at Harris Consulting
& Tax Ltd.