Your Tax in '06: Half-yearly securities

The latest Israeli tax reform, which took effect at the beginning of 2006, requires Israeli financial institutions to withhold capital gains tax at source when publicly traded securities are sold.

taxes 2 88 (photo credit: )
taxes 2 88
(photo credit: )
Every now and then I am reminded of the words: "We'd like to know a little bit about you for our files" by Simon and Garfunkel in the song "Mrs. Robinson" - the new half-yearly securities reporting requirement is one example. The latest Israeli tax reform, which took effect at the beginning of 2006 (Amendment 147 to the Income Tax Ordinance), requires Israeli financial institutions to withhold capital gains tax at source when publicly traded securities are sold. For Israeli publicly traded securities, the pre-1.1.03 portion of the inflation-adjusted capital gain is exempt and the post 1.1.03 portion is generally taxed at 20% (25% if you hold 10% or more). For foreign publicly traded securities, the pre-1.1.05 portion of the capital gain is taxed at 35% and the post 1.1.05 portion is generally taxed at 20% (25% if you hold 10% or more). However, if you conduct more than 20-30 forward transactions a month, it appears you may be considered a securities trader and taxed in Israel at rates of up to 49%, rather than 20%, on all income and gains from them. In practice, tax will not always be withheld at source - if you sell foreign publicly traded securities via a foreign bank or brokerage account, for example. So the law imposes an obligation on you to file your own reports and pay a tax installment every half year if the full amount of tax was not withheld. Who has to file the half-yearly reports? This requirement will apply to Israeli resident investors on their worldwide dealings in securities traded on a stock exchange in Israel or abroad. However, it seems this requirement should not apply to foreign resident investors as they are generally exempt from Israeli capital gains tax when they sell publicly traded securities. When do the half-yearly reports have to be filed? The filing deadline is July 31 for securities sold in the first half of the tax year and January 31 for securities sold in the second half of the year. Please note that the first such report will be due at the end of this month - July 31, for any publicly traded securities sold January-June 2006 if the full tax was not withheld. How do you file a half-yearly report? On July 3, the Israeli Tax Authority published instructions on its Web site. According to these instructions, you should send a letter ("notice") to your Tax Assessing Office, Collections Department, regarding securities not taxed at source in full. The letter should specify the following: • Total consideration from all sales in the period (one total number) • Total gains from securities sold in the period • Total losses from securities sold in the period • Net total gain or loss after offsetting losses against profits, sorted according to the applicable tax rate • Resulting total tax installment due, which must be paid when submitting the report For these purposes, the instructions allow capital losses to be offset if they haven't already been offset against other gains by the end of the reporting period - no double offset allowed. Note that Amendment 147 generally does not allow business losses carried forward at the end of the 2005 tax year to be offset against gains in the current reporting period. Furthermore, the instructions of the Tax Authority state that in the half-yearly report up to June 30, losses incurred in that period in a different securities account (for example, at an account at a bank in Israel) may not be offset unless this is approved by the assessing officer. Such approval will be subject to reporting the gain/loss and payment of a tax installment relating also to the account which generated the loss, without offsetting the loss if it was offset in an earlier reporting period. In other words, the assessing officer is required to check no double offset of a loss occurs. How do you pay the tax installment? The instructions from the Tax Authority do not say. According to existing practice, it will be necessary to first have an Israeli tax file and to request a tax payment voucher from the tax office. Otherwise, even if you do file the half-yearly tax report and pay the tax installment, you will not be credited for doing so in the Tax Authority's system. The system is not geared up to recording unexpected tax receipts from unknown taxpayers with no tax file. Any other comments? Individuals who hold foreign securities denominated in foreign currency should calculate gains and losses in terms of the foreign currency concerned instead of inflation-adjusted shekels, applying the latest published representative exchange rate of the Bank of Israel on the date of the transaction. [These rules are tucked away in the definition of "index" in Section 88 of the Income Tax Ordinance and Income Tax Rules (Conversion to New Shekels of Amounts Derived Abroad) 2003]. The instructions do not refer to the possibility of foreign taxation, but the tax law does allow you to credit foreign federal and state taxes paid against Israeli tax on the same type of income (capital gains in this case) from sources in the same country. Many countries, such as the US and UK, do not impose capital gains tax on foreign residents if certain conditions are met. What about US citizens or green card holders ("US persons") residing in Israel? These people are taxable in both countries and face complex foreign tax-credit issues. On the one hand, they can credit US tax on US source capital gains under the domestic Israeli tax law. On the other hand, Article 26 of the Israel-US tax treaty allows Israel "first bite of the tax cherry" with no credit for US tax for such persons if they hold under 10% of the US investee concerned - instead they should claim a credit for Israeli tax on their US tax returns. In practice, few are aware of these treaty provisions and the Israeli Tax Authority has not issued written clarification despite requests from various people and bodies over the last few years. Therefore, US persons resident in Israel should adopt a reasonable and consistent position - and claim a foreign tax credit on their Israeli or US tax return for tax in the other country. Finally, if you are in any doubt on any aspect, you should consult experienced professional advisors in each country. [email protected] The writer is an international tax partner at Ernst & Young Israel