Your Tax in '06: Exemption for foreign investors

In the past, Israel has lost out by seeking to tax foreign investors in full on their capital gains.

taxes good 88 (photo credit: )
taxes good 88
(photo credit: )
Until now, subject to any tax treaty, Israel has generally imposed capital gains tax on sales of Israeli securities by Israeli and foreign resident investors. This is unlike the practice in the US, UK and other countries. Under Amendment 147 to the Income Tax Ordinance, an exemption will now apply from Israeli capital gains tax for individual investors in Israeli securities who have been resident for at least 10 years preceding the date of acquisition of the investment in a country that has a tax treaty with Israel, if they acquire their investment between July 1, 2005 and the end of 2008 and notify the Israeli Tax Authority of their acquisition within 30 days. This exemption will also apply for 10 years to foreign investors who migrate to Israel and to returning Israeli residents after living abroad for three years. This assumes the gains are not attributable to a permanent establishment (generally a fixed place of business) nor shares in companies that principally owned real estate at the time of the investment and in the two years before the sale. If the investor is an entity, at least 75% of all means of control must be held by individuals resident in such a treaty country in the 10 years preceding the date the investment was acquired. However, in the case of an entity that is resident in such a treaty country with securities publicly traded on a stock exchange outside Israel, shareholders holding less than 10% would be presumed to be resident in a treaty country unless the opposite is proven. This capital gains tax exemption for foreign investors is welcome even though it is hedged by conditions. In the past, Israel has lost out by seeking to tax foreign investors in full on their capital gains. It is to be hoped the exemption will be extended beyond 2008 and on more lenient conditions since not everyone resides in the 37 countries that have tax treaties with Israel. The writer is an International Tax Partner at Ernst & Young Israel