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Put your questions to Leon Harris, International Tax Partner at Ernst & Young Israel:
Q: In Q&A Corner of February 1, you indicated that US citizens residing in Israel are exempt from tax in both the US and Israel on US social security pensions. But the IRS say this does not apply to US citizens and wants me to pay tax on my social security pension. Who is right?
A: You are expressly exempted from tax in both countries under Articles 6(4) and 21 of the US-Israel tax treaty. But you should attach Form 8833 to your tax return and write the words "Treaty Position" on the face of your US tax return.
Special Note: The IRS has now confirmed the treaty exemption in writing and invited the reader concerned to claim a refund for any past tax overpaid in the US on his US social security pension. Consult your US CPA for more details.
Q: Our Israeli company is about to start selling products abroad. What are the main tax issues to check out?
A: You need to get legal and tax advice in each country. Here are some of the things to check out:
- When is your company considered to be doing taxable business in a foreign country ?
- Is a subsidiary company better than a branch of your company?
- What should our business/sales model look like?
- Which company should own the technology, trade name and other intellectual property ?
- If the parent company is American, will the IRS tax intercompany transactions under Subpart F of the US Internal Revenue Code?
- Will long outstanding intercompany balances trigger tax or withholding tax issues and double taxation?
- Is the transfer pricing of intercompany transactions reasonable and adequately documented?
- Will tax be withheld from interest, royalties and other cross-border payments without regard to profits?
- Will past losses be forfeited after a change in company ownership?
- How high are sales taxes, value added taxes, import taxes and can they be mitigated?
- Will tax anti-avoidance legislation affect our structure?
The above is only a general introduction - other aspects will need checking in specific instances.
Q: We are a non-Israeli corporation thinking of acquiring an Israeli company. What are the main tax issues to check out?
A: You need to get legal and tax advice in each country and to conduct accounting, tax, legal and economic due diligence. Here are some of the things to check out in Israel:
- Review financial statements and tax returns for the last few years.
- Will you acquire the share capital (stock) or the assets of the Israeli target company? The tax and legal effect will be different in each case for each side.
- If you are acquiring the share capital, will the consideration be cash or shares of the acquirer or a combination? If part of the consideration is not cash or is cash paid in installments, the sellers will generally need to request an advance tax ruling from the Israeli Tax Authority in order to defer their Israeli capital gains tax liability until they receive cash - this takes time.
- The acquirer will need to check how best to finance cash consideration.
- Did the selling company ever receive research grants from the Office of the Chief Scientist (OCS) at the Ministry of Industry, Trade and Labor? If so, special permission is needed for the deal.
- Any transfer abroad of the ownership of technology by an Israeli company will trigger Israeli capital gains tax (in addition to tax paid by the sellers), generally at a rate of 25%. In addition, if the technology research was partly financed by the OCS, fees proportionate to the deal price may need to be paid to the OCS.
- Did the Israeli company receive tax breaks as an "approved enterprise" or a "privileged enterprise" under the Law For The Encouragement of Capital Investments 1959? If so, permission is generally needed for the deal. In addition, payment of future dividends may be costly if the company enjoyed tax exemption on retained profits under the "alternative package" of tax breaks - check out the implications of repatriating dividends and other payments within the group.
The above is only a general introduction - other aspects will need to be checked in specific instances.