The end of the tax year - December 31 - is fast approaching. Are you in good shape tax-wise? Here are a few examples of the many things that may be worth reviewing with your advisers in Israel and any other country where you have a connection.
The regular rates of company tax are set to decrease from 26 percent in 2009 to 25% in 2010, 24% in 2011, 23% in 2012, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016. Therefore, companies may want to consider whether income can be deferred legitimately to a later year and whether expenses or losses can be accelerated to an earlier year (e.g., by selling slow-moving inventory at bargain loss-making prices before the end of the year). This is also pertinent to capital gains from most assets in Israel and abroad.
Check your international transactions with related parties (50% ownership link among other things) are on arm's-length market terms before you close your books and theirs for the year. New regulations require taxpayers to sign an express declaration to this effect on their annual tax returns. They must also be able to produce a "transfer pricing study" in this regard within 60 days after any demand from the Israel Tax Authority. If in doubt, consider requesting an "advance pricing agreement" from the Israel Tax Authority.
To encourage Israeli multinational groups to repatriate money to Israel, they may elect a 5% rate of company tax (instead of 25%) for dividend income received in 2009 from a foreign source if the income is "used in Israel" in 2009 or within one year after actual receipt of the dividend, whichever is later.
On intercompany loans, consider charging interest. Under special rules, the lender is taxed on the interest he is deemed to have undercharged, but the borrower cannot deduct interest he didn't pay.
The prescribed minimum rate of interest for Israeli tax purposes on loans granted on or after October 1, 2009, is 3.3% per year (unlinked to the rate of inflation). There are a number of exceptions for back-to-back loans, foreign-currency loans and back-to-back foreign-currency loans.
For loans given before October 1, 2009, various transitional rules apply. If the lender was subject to the main anti-inflation tax regime that existed until the end of 2007, the prescribed interest rate for pre-October 2009 loans is the rate of inflation according to the Israeli consumer price index (CPI) until repayment of the loan or the end of 2010, whichever is earlier (even if the loan was given after 2007). Exceptions apply to other lenders and to back-to-back dollar loans.
Detailed rules apply to those that carry out long-term work projects lasting over a year - mainly builders. If the builder is a contractor who does NOT own the building, income must be reported this year if the work is 25% complete this year. If the builder is a developer who owns the building, reporting is needed when the building is fit for use. Detailed rules govern the above as well as expenses, finance expenses and losses. A detailed review is obviously necessary ahead of the year-end.
Timing may be important for many other things including: paying donations to approved public (charitable) institutions of up to NIS 7.5 million (but not more than 30% of taxable profit) to get a tax credit at the company tax rate; prepaid rental income; replacement of depreciable fixed assets to get a tax deferral or loss deduction; adoption of IFRS accounting standards; offsetting loan interest expense against dividends (e.g., PazGaz and Pi Glilot cases); taxpayers with low-taxed controlled foreign companies; taxpayers intending to claim foreign tax credits; businesses allowed to report income on a cash basis; companies required to withhold tax from payments in Israel or abroad in order to deduct the payment as an expense; payments to 10% shareholders; payments to provident/pension funds; payment of tax installments including those for nondeductible expenses (Odfot); payment of National Insurance Institute contributions on nonemployment income to claim a 52% deduction for income-tax purposes; bonus payments; filing lawsuits for bad debts where appropriate; investing in fixed assets within two to three tax years to claim tax exemptions or tax breaks applicable to a privileged enterprise (industrial or hotel); increasing foreign investment this year in companies owning a privileged enterprise or approved enterprise or an approved property, to help achieve a bigger tax break next year.
In the case of individuals, the top income-tax rate will decrease from 46% in 2009 for income over NIS 454,681 per year (index linked) to 45% in 2010-2011, 44% in 2012, 43% in 2013, 42% in 2014, 41% in 2015 and 39% in 2016.
Passive income from dividends, interest and capital gains remain taxable at a rate of 20% in most cases, but various exceptions exist. Consider whether to accelerate business losses into 2009 or defer business income or salary and bonuses until the next year.
There are many other types of year-end tax planning to consider where relevant. Here are a few.
Putting money to one side in pension and savings plans (referred to as provident funds) each year is always important. With regard to tax relief for approved provident-fund contributions, the rules have gotten incredibly complex and are still undergoing modification at the Knesset. Therefore, you should check your situation and needs with your accountant and financial advisors. Here are a few brief highlights that might apply in your case.
The starting point is to check if you are a "Preferred Member": an individual for whom amounts contributed to an Israeli approved provident pension fund is at least 16% of the average national salary - NIS 15,222 in 2009. If you contributed less than NIS 15,222 in 2009, you are an "Individual Member."
If both the employer and employee contribute to a pension plan, a Preferred Member may enjoy a tax credit of up to NIS 2,293. The tax credit is 35% of contributions of 7% of his annual "entitling income" for these purposes. "Entitling income" is the person's actual income, but not more than NIS 93,600 of income is counted in 2009.
If only the employee contributes to a pension on part of the salary or on other income, and if he is a Preferred Member (he and his employer paid more than NIS 15,222 into a pension plan) with pensionable income less that NIS 374,400 in 2009, he may benefit if his pension contributions are sufficient:
(1) 11% contribution: a deduction from taxable income of 11% of the lower of: (a) the amount he contributed on his own; (2) his annual entitling income of up to NIS 93,600; (c) NIS 374,400 minus his pensionable salary;
(2) 5% contribution: a tax credit of up to NIS 1,638 (a 35% tax credit on payments of 5% of his annual entitling income of up to NIS 93,600) for additional contributions on non-pensionable income.
If the Preferred Member's pensionable income is less than the annual entitling income of NIS 93,600, he may contribute the 16% (11% plus 5%) on the balance of his entitling income of up to NIS 93,600.
A Preferred Member with no pensionable employment income at all, such as a free-lancer, may claim if his pension contributions are sufficient:
(1) 11% contribution: a deduction from taxable income (of up to NIS 10,296) of 11% of the lower of: (a) the amount he paid; (b) the annual entitling income of up to NIS 93,600;
(2) 5% contribution: a tax credit (of NIS 1,638) as a 35% tax credit on additional contributions of 5% of annual entitling income of up to NIS 93,600. If the contribution is to a pure ("risk") life-insurance policy instead, a 25% tax credit applies.
If you are merely an "Individual Member," you still enjoy the 11% deduction and 5% credit but on no more than NIS 122,000 of income per year.
More-restrictive rules apply to provident-fund contributions and further-education contributions by major shareholders holding 10% or more of the company concerned.
STUDY FUND (Keren Hishtalmut)
Israel offers tax-efficient medium-term savings plans. They were originally intended to finance studies, but in practice, generally you can withdraw money for any purpose after six years with no Israeli tax liability.
Employees customarily contribute 2.5% and the employer 7.5% of employment income on salary of up to NIS 15,712 per month or NIS 188,544 per year in 2009.
In the case of self-employed people, consider contributing NIS 16,380 in 2009 to claim a deduction from taxable income of up to NIS 10,530. This is based on maximum income for these purposes of NIS 234,000 in 2009. Payments of 7% are recognized, but 2.5% is not deductible, while 4.5% is deductible.
Contributions should NOT exceed NIS 16,440, otherwise fund income will be taxed and the exemption will not be applicable.
If an employee has a business on the side, he can contribute a similar 7% to a study fund (and deduct 4.5%) out of business income of up to NIS 45,456, resulting in a possible contribution of NIS 3,182 (at 7%). This is based on the difference between the business income limit of NIS 234,000 and the employment income limit of NIS 188,544.
Charitable contributions by individuals to institutions approved under Section 46 of the Income Tax Ordinance qualify for a tax credit of up to 35% if they exceed NIS 300 in 2009, but the contributions will not be recognized if they exceed NIS 7.5 million or 30% of taxable income, whichever is lower.
US citizens residing in Israel should consider contributing to recognized "Friends of Israeli Charity" institutions in the US with a view to qualifying for a deduction for US purposes and a tax credit for Israeli tax purposes on contributions not exceeding 25% of taxable income, under special rules in the US-Israel Tax Treaty.
Anyone with an actual or potential link to a trust (settlor, trustee or beneficiary) in Israel or abroad should immediately review all aspects in light of a new Israeli tax regime that was implemented in 2006. The deadline for reporting for the years 2006-2008 and for claiming a possible amnesty reduced rate is December 31, 2009.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd., in association with Lion Orlitzky & Co. (Moore Stephens Israel).