Your Taxes: New rules for olim hedge-fund managers

What happens when a manager of an international investment fund or hedge fund makes aliya to Israel? Will the fund and all its investors get swept into the Israeli tax net lock stock and barrel?

By LEON HARRIS
October 30, 2012 23:13
4 minute read.
New olim arrive in Israel.

New Olim Israeli flags celebration zionist 390. (photo credit: Elle Yahalom)

What happens when a manager of an international investment fund or hedge fund makes aliya to Israel? Will the fund and all its investors get swept into the Israeli tax net lock stock and barrel? This would cause a tax tsunami and deter people worldwide from investing in such funds. It would also deter immigration.

Over the years, the problem has arisen frequently and the Israel Tax Authority (ITA) has issued tax rulings protecting foreign investors of overseas funds from Israeli tax because of the huge amounts involved.

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But Israeli tax law is unclear in this area and doubts remain. How much fund income is allocable to Israel? Are foreign investors and foreign managers in the fund protected from Israeli taxation? What about immigrants’ tax breaks? What about success fees? The ITA has just published a topical new tax ruling on “The Allocation of Income To New Immigrants Who Are Partners and Investment Managers In a Hedge Fund” (Ruling 4589/12). But deciphering the ruling requires special insights as discussed below.

The facts of the ruling

The ruling applicants were a group of non-Israeli resident partners in an international hedge-fund group who wanted to immigrate to Israel. They are said to be senior investment managers with broad experience and goodwill. They are going to work for an existing Israeli company in the group, which pays Israeli tax on its activities of “research and development and managing and executing investments on behalf of the group.”

They hold shares in a foreign company, the subject of the tax ruling, which derives a share of management fees and success fees from other entities and partnerships in the hedge-fund group around the world. The foreign company does not market or seek clients in Israel, nor provide services to clients in Israel, nor represent the group in Israel.

What the ruling decided

The ruling decided that a portion of the foreign company’s profits should be assessed to Israeli company tax (currently 25 percent). That portion, to be determined by reference to ITA Circular number 1/2011, is multiplied by the share of profits actually distributed by the foreign company to the immigrants concerned.

Other distributed profits qualify for the 10-year Israeli tax exemption for foreign-source income of new Israeli residents and “senior returning residents” (who lived abroad over 10 years). In addition, the immigrants concerned must draw a salary not less than a prescribed amount from the Israeli company.

Foreign-resident partners will not be taxed in Israel on their share of income from the foreign partnerships in the group, including dividends from the above-mentioned foreign company and its subsidiaries.

The ruling is valid for up to 10 years, so long as the immigrants hold no more than 9.9% of the rights in the foreign company. Now we know. Or do we?

What does the ruling mean?

The olim hedge-fund managers will apparently generate a 25% Israeli company tax liability on profits distributed to them multiplied by the pro rata portion of days they work in Israel (per Circular 1/2011). And they will pay Israeli tax (at rates of up to 50% plus National Insurance Institute payments in 2013) on their prescribed salary from the Israeli company.

Foreign-resident partners will not be taxed in Israel on their share of income from the foreign partnerships in the group, including dividends from the above-mentioned foreign company and its subsidiaries.

Pertinent comments


This ruling seems worthy of Sir Humphrey in the BBC series Yes Minister; it means whatever it means. Numerous comments arise from the ruling, including the following: First, it is good to know that foreign-resident partners will not be taxed in Israel – but does this cover all foreign investors? Second, why is the foreign company taxable in Israel? Does it have a permanent establishment in Israel according to a tax treaty? If no tax treaty with Israel applies, is the foreign company doing business in Israel? These are serious omissions.

Third, will the profits distributed to the immigrants also attract Israeli dividend withholding tax – presumably 25% in this case? Fourth, will the Israeli taxes be put postponed indefinitely by not distributing the profits? Or by distributing after the 10-year ruling term is over? Fifth, the pro rata formula regarding days worked in Israel is open to many interpretations. It also falls short of OECD guidance on allocating income between countries. Israel joined the OECD in 2010.

Some concluding remarks

For tax practitioners in the funds field, the ruling leaves too much unsaid. The ITA wants to tax fund managers in Israel even if they are immigrants but leaves vague the grounds and the amounts. Therefore, anyone in this situation should take appropriate advice on how to reduce any Israeli tax with greater certainty.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd. leon@hcat.co


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