shekel versus dollar 521.
(photo credit: REUTERS)
Sometimes tax is used as a way to solve problems. Al Capone was arrested and put
away because he forgot to pay tax on his gains. And in a totally different
context, the Israeli government is about to apply fiscal brakes to the soaring
shekel exchange rate.
A good deal of Israel’s exports go to the United
States, so the dollar-shekel exchange rate is of critical importance. At the
time of writing, the dollar-shekel representative exchange rate published by the
Bank of Israel was NIS 3.485. But in recent years, the shekel has appreciated
and the dollar has dropped. The average dollar exchange rate was 4.48 in 2005,
4.45 in 2006, 4.10 in 2007, 3.58 in 2008, 3.93 in 2009 and 3.73 in
This matters a lot to Israeli exporters, especially hi-tech
start-ups. Suppose an Israeli firm breaks even if it generates sales of $1
million. If the exchange rate is 4.5, that means there is NIS 4.5m. to pay the
salaries and rent. If the exchange rate strengthens to 3.5, there will only be
NIS 3.5m. to pay the salaries and rent.
What should that firm do? Fire
about 25 percent of its employees? Or put up its dollar selling prices to
customers by about 25% in the hope they will continue buying? Perhaps they’ll
switch to a competitor and stop buying Israeli products altogether, meaning all
the employees must be laid off? The exchange rate also matters on the import
side. If the shekel strengthens, Israelis can buy more cars and stereos from
abroad.New Israeli tax measures
With all this in mind, last Wednesday
the Knesset Finance Committee approved regulations that will revoke various
exemptions for foreign residents on capital gains arising from certain Israeli
These exemptions were originally to encourage
foreigninvestor activity in the Israeli capital market; without them, Israeli
tax applies at a rate of 15% (if not index linked) or 20% (if so linked) or
company tax, as applicable.
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However, there was concern that the exemption
was being used by players on the foreignexchange market, intending to make
short-term gains and causing currency appreciation that may impair the long-term
competitiveness of the Israeli economy.
This was mainly regarding
purchase of short-term Bank of Israel debt (makam) and short-term government
Therefore, the Knesset Finance Committee agreed to repeal the
exemption for foreign residents regarding capital gains derived indirectly from
state loans bearing a date of maturity of no more than 365 days from the issue
date; that is, via mutual funds and futures transactions.
of this exemption will apply from July 7, giving foreign investors the
opportunity to consider what action to take. After this date, such income will
be subject to tax.
To complete the picture, it was announced that the
finance minister intends to propose an amendment to Israel’s related primary
legislation (Section 97(B2) of the Income Tax Ordinance), to also revoke the
exemption for foreign residents on a direct sale of short-term state loans and
to amend the tax regulations accordingly.Comment
It remains to be seen
whether these tax measures will dampen the appreciation of the
shekel. Israel has tax treaties with 50 other countries, and foreign
residents may sometimes claim an exemption from Israeli capitalgains tax under
some of those treaties.
However, it may prove necessary to apply to the
Israel Tax Authority for confirmation of treaty eligibility for such an
exemption. This may take time, and the ITA will probably check whether the
investors are “pros” conducting an investment business in Israel via a
“permanent establishment”; if they are, no exemption would apply.
other hand, many foreign investors will be indifferent to the new Israeli tax
measures because they will often be able to claim double tax relief in their own
country of residence; if so, they may continue driving up the shekel... time
Leon Harris is a certified public accountant and
tax specialist at Harris Consulting & Tax Ltd.
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