US tax form (illustrative).
(photo credit: INGIMAGE)
Thousands of Americans living in Israel are likely to get ensnared by a onetime corporate repatriation tax that the US Congress had intended to apply to Apple and Google, not individuals.
Tax experts contacted by The Jerusalem Post warned that Israeli Americans who self-incorporated – setting up Israeli corporations to avoid paying taxes on the self-employed such as US Social Security – would be subject to a onetime tax on 30 years of profits accumulated in their Israeli corporations – from January 1, 1986, to December 31, 2017.
American citizens and American green card holders residing in Israel would be taxed at 15.5% for profits held in cash and at 8% tax for profits held in non-cash form.
It is called the “deemed repatriation tax,” and can be paid over the course of eight years. Those affected have until April 15 to make the first payment.
“Take all your accumulated earnings and profits of your Israeli corporation, and put it on your individual tax return in America and pay 15.5%,” said Monte Silver, a US tax attorney and senior counsel at Eitan Mehulal Sadot in Herzliya Pituah.
“The tax treaty said that if you’re an Israeli corporation and you have no US-source income, America can’t tax you. And now, [to get around that], the US government is saying, we’re not taxing you as a corporation. We’re taxing you as an individual US citizen.”
It is unclear how those affected by the deemed repatriation tax could calculate what constitutes 15.5% of profits. And many of the affected taxpayers may not have enough cash on hand to pay the bill.
“Most individuals do not have a clue as to how to run that number and develop a number for their accumulated earnings and profits and doing the calculation for the tax,” said Charles Bruce, a US tax lawyer who is affiliated with the American Citizens Abroad advocacy group. “To figure it out is a nightmare. And you can’t get a run-of-the-mill accountant to prepare it; you’re going to have to find a genius just to prepare it.”
The onetime tax is part of US President Donald Trump’s tax reforms, which became law on December 22.
The deemed repatriation tax is intended to persuade US corporations
– which were sitting on trillions of dollars in their foreign subsidiaries – to repatriate the cash to the United States, by imposing a relatively modest 15.5% tax.
“This was supposed to be a provision for US corporations who had all this money offshore in foreign subsidiaries in low-tax jurisdictions,” said Philip Stein, an Israeli-American tax accountant. “Nobody anticipated that this provision would be imposed on US citizens, individuals, who own active foreign corporations.”
As part of the tax reform, any US citizen or green card holder who owns more than 10% of a “controlled foreign corporation” could be subject to this tax. An Israeli corporation is “foreign” by definition, and it is a controlled foreign corporation if US citizens or green card holders control more than 50% of its shares.
Many expatriate Americans set up corporations in order to avoid American tax rules that could result in double taxation. Unlike the vast majority of countries that tax based on residency, the United States taxes individuals on the basis of citizenship, regardless of residency abroad.
“If I’m self-employed and I don’t have a corporation, I pay 15% Social Security in America even though I live in Israel and I’m getting National Insurance here,” said Silver. “The first thing I did after moving to Israel and starting my own law practice was to set up a corporation to avoid paying Social Security in America.”
That has led to thousands of Israeli Americans who are doctors, dentists, accountants and lawyers deciding to self-incorporate.
Approximately 170,000 Americans live in Israel. In 2016, the US State Department estimated that nine million US citizens live abroad.
Silver is sounding the alarm, with pledges to reach out to Democrats Abroad and Republicans Overseas, along with personal appeals to the US ambassador and a push for a congressional hearing.
“This is going to be the Boston Tea Party, only in reverse,” Silver said. “There is no way there’s going to be taxation without representation. We will not allow these types of shenanigans.... A US-based attorney with a corporation does not face this tax. I’m being discriminated against because I’m an expat. And because I’m here in Israel, they’re treating me like Google.”