(photo credit: Thinkstock/Imagebank)
The Israel Tax Authority has just come dangerously close to throwing away a tax
windfall – but, fortunately, it pulled back just in time.
Various Israeli tax rates are due to go up on January 1, 2012,
pursuant to the Law for the Change in the Tax Burden. This is to pay for some of
the reforms demanded by Israeli demonstrators who called from their tents for
social justice. The Trajtenberg Committee duly made its recommendations, which
are now being enacted. In various other countries, it seems they just evict or
shoot the demonstrators.
In particular, the Israeli tax on dividends (and
capital gains) will increase from 25 percent to 30% for major shareholders
owning 10% or more of a company. For other shareholders, the tax on
dividends (and capital gains) will increase from 20% to 25%. Foreign
investors should note that all this is subject to the provisions of any tax
treaty between Israel and their home country.
Other Israeli tax rates
will also increase. The top rate of income tax for earned income will rise from
45% to 48%. But the upper-income limit for National Insurance Institute (social
security) contributions will go down.
In the case of
future asset sales, capital gains will be pro-rated. The higher tax rates
generally will apply to the portion of capital gains that accrue from January 1,
2012, while the old rates will apply to the portion of capital gains that accrue
until the end of 2011.
But in the case of dividends, it appears the new
higher tax rates will apply to all profits distributed on or after January 1,
2012, regardless of when the profits were generated by the company
Consequently, in the closing days of December, many
people are rushing to receive dividends and pay taxes at the old lower rates
(others prefer not to if the company has already reinvested the profits or is
And it seems the Israeli government is in for a windfall tax
intake on January 15, 2012, on all those dividends. Many companies retain
profits in regular years, so the amounts involved could easily run into hundreds
of millions of shekels, or perhaps more.
Timing is everything
point in time is a dividend recognized for tax purposes? This matters if you
want to enjoy the lower 2011 tax rates.
At first, the Israel Tax
Authority “clarified” on December 15 that a dividend that is distributed and
received in practice by the recipient by the end of 2011 will be taxed at the
old rates of 20% or 25%. Unfortunately, receiving a dividend isn’t so
Section 302 of the Company Law requires the directors to check
that there are sufficient distributable profits and that the company will be
able to meet its current and anticipated future obligations.
leave much time to beat the tax hikes that were only enacted on December 5,
Israeli case law suggests that it is enough to credit a dividend to
the account of a shareholder, without actually paying it.
the lack of time is acute for public and private companies alike. So the
government’s windfall tax intake nearly evaporated.
Israel Tax Authority saw fit to issue another “clarification” on December 25
that is rather different. Now a dividend will be deemed to be distributed and
received in practice in 2011 if the following conditions are met: (1) the
dividend is declared and the date of entitlement (the “ex” date) is in 2011, and
(2) a tax payment voucher is obtained in the usual way and the dividend tax is
paid to the relevant tax office by the distributing company by January 15,
This gives a little more time and makes more sense. Let’s hope the
government collects the tax and spends it wisely.As always, consult
experienced tax advisers in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.