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The second Lebanon war is gone, but not forgotten. The Minister of Finance and the Knesset Finance Committee, on September 11, issued new regulations granting compensation for "indirect" damage (salaries and lost profits) suffered between August 1 and 14, when the war ended. These are described at length in Real Estate Operating Instructions Numbers 10/2006 and 11/2006 issued by the Israeli tax Authority on September 18.
This followed compensation arrangements for the first half of the war, in the period July 12 to 31, which were covered in this column on August 7. In today's article, we briefly discuss the compensation for indirect damage suffered during the second half of the war.
The compensation is available for such losses incurred in a long prescribed list of places in the "Area of Restriction" (azor hagbalah). Businesses in commerce, industry and services can choose between two "green" fast tracks, as follows:
1. The Salary Track: Government compensation of 145% of average daily employee salary costs in the quarter April-June 2006 for each day of stoppage due to the security situation in their district (according to a list on the claim form). It was obligatory by law to continue paying employees their salaries. For this purpose, the maximum salary taken into account for each person is 2.5 times the national average salary in June 2006, namely NIS 18,850 and the minimum taken into account is the minimum national salary, currently NIS 3,585 per month. Self-employed persons count as two employees but no more than NIS 18,850 per month. Self- employed persons with no employees could claim compensation based on reported 2005 income for the days of stoppage if they stopped entirely their activity or 50% of reported 2005 income for the days of stoppage if they kept working. The 145% compensation compares with 132.5% for the days of stoppage from July 12 to 31.
2. The Revenue Track: This track did not exist in July. Certain businesses may not apply the revenue track, including various financial institutions, real estate traders, builders and gas stations, including car wash and servicing operations. Where applicable, the Revenue Track allows businesses to claim compensation for August based on a complex formula that includes:
a. Decrease in revenues (sales) in August 2006 compared with August 2005
b. Multiplied by a "reduction factor" due to assumed cost savings - this factor ranges from 45% if 2005 revenues exceeded NIS 30 million to 75% if 2005 revenues were no more than NIS 750,000
c. Multiplied by a prescribed factor reflecting the number of days stoppage in the district concerned, ranging from 41% to 78%
A third "expanded" compensation track is optionally available to "specially affected" businesses if they or their principal supplier suffered a direct hit or if they were ordered by security forces to empty their inventory for safety reasons. Compensation under this track will be based on the decrease in revenues in August-September 2006 compared with August-September 2005, up to a monetary ceiling that ranges from NIS 3 million if business was restored by August 14 to NIS 22,255,655 if business is restored by September 30 or later.
Businesses active in the North and elsewhere can apply the new regulations on a pro rata basis - generally with confirmation this has been done by their professional representative (accountant, etc.)
Businesses in the "bible settlements" (yishuvei hasafer) will continue to be covered by earlier regulations unless affected persons instead claim compensation under the above newer regulations
For businesses in the tourism and agricultural sectors, new compensation rules apply for the entire period of the war and differ from those previously reported. In the tourism sector, the compensation generally will be calculated for monthly, taking into account: Revenues in the comparable month in 2005, multiplied by the change in revenues in the second quarter of 2006 compared with the second quarter of 2005, multiplied by a "reduction factor" due to assumed cost savings, multiplied by prescribed stoppage days for each district in that month. Due to the assumed recovery time needed in the tourism sector, compensation is calculated up to September 4 for inn rooms and tourism attractions and up to October 13 for other tourism businesses. Agricultural compensation varies according to what is grown.
How do businesses in the North claim compensation? Businesses in commerce, industry or services should submit Form 7113/Bet. If they don't, the Revenue Track will be applied automatically by the Tax Authority commencing October 1. This assumes the Tax Authority hold details of the bank account of the business. An affected party may still file a form in which case the Tax Authority's automatic compensation payment will be treated as a payment on account. Businesses with revenues in August 2006 (or July-August for bi-monthly VAT filers) of up to NIS 125,000 were permitted to file their return due September 15 without attaching payment of the VAT due, as an offset against the upcoming compensation.
Compensation received is taxable like other income, and the Tax Authority will withhold 20% tax unless the recipient holds a withholding tax exemption confirmation from the Tax Authority.
For further information, affected businesses in the North should refer to their professional advisors as well the Israeli Tax Authority Claims Department (03-763-3500).
The writer is an International Tax Partner at Ernst & Young Israel
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