The Israeli tax year ends soon, what you take into consideration?

Study funds are very tax efficient if you contribute each year for 6 years at prescribed rates.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)

The Israeli tax year ends soon, on December 31. There may be many things to consider including those outlined briefly below.

The Big Picture

With the pandemic support payments and many other things to pay for, it seems fair to assume Israeli tax rates won’t be falling in the foreseeable future. Layoffs, inflation and rising interest rates may soon depress demand and income.

Businesses

Businesses should consider among other things: considering adjusting monthly income tax installments (mikdamot); income and income timing; expenses and expense timing; inventory (stock) count on December 31; other accruals or provisions. Is long-term project planning possible? What about charitable donations? New industrial equipment may entitle you to temporarily accelerated depreciation.

The tax law allows you to consider writing off bad customer debts and make reasonable provision for proven doubtful debts, e.g. in liquidation or other legal proceedings. Inventory write-offs or destruction require notification to the local Tax Office.

Intercompany transactions between related parties must be on arm’s length terms. Annual transfer pricing studies are necessary and helpful. Related means at least 50% of any means of control or common control.

 Illustrative image of doing taxes. (credit: PXHERE) Illustrative image of doing taxes. (credit: PXHERE)

E-commerce is good but is in for a bumpy tax ride in 2022. Online operators may incur heavier taxes on sales and/or profits in the US, EU and elsewhere thanks to the US Wayfair Case, EU VAT on B2C business, the OECD Multilateral Instrument (MLI), etc. Prime targets are companies that use online marketplaces (e.g. Amazon, Shopify, Ebay, etc), agents, warehouses and fulfillment houses or make digital supplies.

International businesses must therefore check what action is needed now to mitigate all this.

In Israel, so called “wallet companies” (hevrot arnak) face a battery of rules that can turn the 23% company tax rate on profits into income tax at rates ranging up to 50%. This is possible if a closely held company (not a 10% shareholder) provides managerial or officer services OR services of an employment nature especially if 70% of revenues or profits is from one customer for 18 months in any period of four years. Also caught are loans to (not from) major shareholders over NIS 100,000 or personal use of company assets. Check what needs doing. Loans to 10%-or-more shareholders outstanding at the end of 2021 should be repaid before the end of 2022 (and not reinstated).

Are your pension, study funds (kranot hishtalmut) and life insurance enough? Major shareholders of private companies should consider pension funding and severance funding within limits, plus side plan funding under Amendment 190 of the Income Tax Ordinance.

Mandatory pension funding applies to employees and the self-employed

Study funds (kranot hishtalmut) are very tax efficient if you contribute each year for 6 years at prescribed rates.

Consult a pensions/insurance specialist about monthly funding and annual top-ups well before December 31.

Did you travel on business this year? Keep the receipts for flights, accommodation, rental cars and childrens’ education if applicable. And note the dates as generous per diem subsistence deductions may be claimable of $137-$183 per day.

Consider liquidating any dormant Israeli company before the year-end to help avoid annual Companies Registry fees.

On the Personal Side

Before you reach 120, do you and your spouse have up to date wills in each relevant country? If not, consult your lawyer immediately.

Before others reach 120, are you expecting an inheritance from abroad? If so, you should plan against double tax – inheritance/estate tax abroad and capital gains tax in Israel upon a subsequent sale.

Personal investments: check foreign taxes, and any Israeli foreign tax credit or Aliya exemption? Have you filed Israeli half yearly capital gains tax reports regarding foreign securities sold?

As for Aliya tax breaks, are you a new or senior returning resident who lived abroad 10 years? If so, do you optimize the Aliyah 10 year exemption for foreign income and gains?

Most trusts with an Israeli resident settlor or beneficiary are now taxable in Israel, unless an Aliya exemption applies or other exemptions in certain cases. Needs checking,

Are your pension, study funds (Hishtalmut) and life insurance enough? See above.

Israeli real estate briefly: Israeli home rental income over NIS 5,196 per month (in 2022) is taxable. Above that level, there are multiple possibilities, check which suits you.

Charitable donations this year to approved Israeli charities in the year may qualify for a 35% tax credit, within certain limits (minimum NIS 190, maximum NIS 9,517,000 or 30% of income). For example, if you donate NIS 1,000, you may get a NIS 350 reduction in your Israeli tax bill.

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

The writer is a certified public accountant and tax specialist at Harris Horowiz Consulting & Tax Ltd.