(photo credit: Thinkstock/Imagebank)
Pessah is coming, otherwise known as the season of our freedom. We celebrate the
headlong rush by the children of Israel out of slavery, through the Red Sea and
into the desert for 40 years. This prompts us to ask and answer 4.0 questions
about the process. Here are a few more frequently asked questions about the tax
system facing today’s children of Israel and their parents:
Question 1: We live
in Israel and my wife is a US citizen. How can we avoid Israeli and US
estate and gift taxes?
Answer 1: The first part is easy – there are no estate or
gift taxes in Israel, although gifts of assets to foreign residents are subject
to Israeli capital-gains tax if there is any gain. As for the United States,
check with US advisers whether you should put assets into a dynasty trust. In
this way you may beat US estate and gift taxes – currently 35 percent (federal
rate) and are expected to rise to 45% or 55% in 2013.Q2: I live in
Israel and expect to inherit a building in Manhattan from my Dad, which cost him
$10,000 in 1962 and is now worth $20 million. Most of that was subject to about
40% in federal and state estate taxes. If I sell it, will I also have to
pay Israeli capital-gains tax?
A2: Yes, Israeli capital-gains tax will be due at
rates of up to 48%. But to avoid severe double-tax indigestion, consider: (1)
applying to the Israel Tax Authority to step up the historical cost to the
probate value, or (2) a special trust arrangement. Professional Israeli advice
is needed.Q3: Should I establish my start-up business offshore?
Perhaps, but check the alternative of low Israeli tax rates for a “preferred
enterprise” in industry or tech. If 25% of revenues are from export markets and
other conditions are met, company tax rates are currently 5% to 10% in
development area A and 8%-15% elsewhere in Israel. R&D expenditure is
deductible over one to three years. Various grants are available.Q4:
Fine, but what about a deduction for my investment as an angel in an Israeli
A4: Foreign and Israeli resident individuals may deduct from total
taxable income for Israeli tax purposes a “qualifying investment” of up to NIS 5
million in shares of “target companies” over a “benefit period” of three tax
years commencing with the tax year in which the investment is made. The
investment must be made in the years 2011- 2015. At least 75% of the amount
invested by the individual must be used for R&D expenditure approved by the
Chief Scientist’s Office by the end of the benefit period.
And two extra
frequently asked questions, to help celebrate the Mimouna festival...Q5:
What about capital-gains tax upon an exit from an Israeli start-up?
investors may enjoy an exemption from Israeli capital-gains tax when they sell
Israeli securities 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.
Investors should check the tax situation
in their home country. Israeli resident investors currently pay capital gains tax
at a rate of 30% if they hold 10% or more of the company, or at a rate of 25% in
other cases.Q6: I set up an offshore discretionary trust for the benefit
of my wife and kids. We all live in Israel. Will Israel try to tax it?
Since 2006, Israel imposes tax on worldwide income of trusts set up by Israeli
residents for the benefit of Israeli residents. The trustees are responsible for
reporting and paying the tax, regardless of any foreign law. Exemptions are
available for olim settlors (i.e., grantors), foreign-resident settlors,
foreign-resident beneficiaries, etc.
As always, consult experienced tax
advisers in each country at an early stage in specific
email@example.com Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.