taxes good 88.
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Tax planning may on occasion have its attractions - but it tends to attract the attention of the Israeli Tax Authority.
Recently, in this column, (The Limits Of Tax Planning, April 13) we mentioned that the Israeli Tax Authority would soon be publishing a blacklist of reportable tax planning acts.
A draft blacklist was published on May 23. If you commit any reportable tax planning act on the blacklist, you must report it on your annual tax returns. The assessing officer may then issue a partial best judgment assessment of your income and tax due, disregarding the act. If the act was considered to be artificial or fictitious, a deficiency fine of 30% of the tax shortfall may be levied, among other things.
The blacklist is not final, as it has to be approved by the Knesset Finance Committee. But it is as well to know which tax planning acts are not to the Tax Authority's liking. There are 13 acts, as follows:
1. Remittance of payments in the sum of at least NIS 2 million per year, as management or advisory fees between related parties where this reduces the tax otherwise payable if the recipient pays reduced tax on such income.
2. Sale of an asset to a related party if the seller derives a loss thereon of at least NIS 2 million.
3. Sale of an asset within 3 years after receiving it by way of an exempt transfer from a related party (e.g. a gift, apparently), where the sale generated a profit or a loss of at least NIS 2 million which was offset (utilized) by the seller.
4. Forgiveness of a debt between related parties that generates a loss or profit of NIS 1 million that was offset against income of the forgiver/forgiven, if the forgiveness leads to a reduction in tax otherwise payable.
5. Repayment of a debt of at least NIS 1 million of a major individual shareholder in the last quarter of the year, if in the following quarter the balance of his debt increases by at least 25% of the amount repaid.
6. Acquisition of means of control in an entity, if the acquirer assumes the right of another against the entity and, in parallel, the acquirer reached an arrangement to pay part of the debt to the third party resulting in a credit balance to the acquirer. (Apparently, this may refer to debt compromise arrangements when acquiring an indebted company. It remains to be seen if a formal clarification will be included in the final checklist).
7. Acquisition of 50% or more of the means of control of a company in any 24- month period, if the company has utilizable losses of at least NIS 3 million.
8. Holding by an Israeli resident of 25% or more of the means of control of an entity resident in any country that does not have a tax treaty with Israel. (Comment: This is a very broad clause aimed not only at offshore companies. Israel currently has tax treaties with only 38 out of the 200 or so countries in the world and a few more treaties are on the way).
9. Holding by an Israeli resident of 25% or more of the means of control of an entity in a treaty country if over 50% of the value of its assets are located or used in Israel, directly or indirectly.
10. The transfer of losses of at least NIS 500,000 from a family company (the intention is a company where the main shareholder elects to be taxed instead of the company on its income - similar to an S-Corporation or LLC in the US) to the representative taxpayer if they derive from payments to him and are claimed as an expense.
11. Real estate: Sale of a finished product such as an office/apartment by way of a sale of the land and a separate transaction to provide building services.
12. Real estate: any act (including loan, providing building services, etc.) where the consideration is calculated according to the consideration from the sale of the real estate.
13. Value Added Tax: Holding of 75% or more of a business "dealer" by a not-for-profit body or financial institution holds
The Tax Authority regards the new legislation as assisting the struggle against "illegitimate" tax planning that is thought to cost the treasury hundreds of millions of shekels. Nevertheless, the Tax Authority claims that not every act on the draft blacklist is illegitimate, but the Tax Authority would like to know about such tax planning and check it out.
Once the blacklist is approved by the Knesset Finance Committee and included in regulations, it, apparently, only will affect annual tax returns due after the regulations are issued. The Tax Authority indicate that the reporting deadline and who is required to report will be clarified.
Other countries such as the US and the UK already have similar rules. The aim should be to provide clear rules that do not impede legitimate business and investment.
The writer is an International Tax Partner at Ernst & Young Israel.