Your taxes: New tax changes coming your way soon?

In business, advance knowledge of something is everything. But being a prophet doesn’t always mean you will make a profit.

Proposed Israeli tax changes have recently been formulated which may perhaps be legislated as part of this year’s budget bill in the so-called Economic Arrangements Bill. Here’s a brief glimpse of a few points the Knesset may accept, reject, or modify.
First, as recently discussed in this column, there is a proposal to upgrade Israeli tax incentives. In particular, it is proposed that a low rate of company tax would apply to the income of industrial export companies (over 25 percent of revenues from exports). In 2011-2012, the rate would come down to be 10% in Development Area A and to 15% elsewhere in Israel on revenues from business activity in Israel. Starting in 2013, the proposed rates of company tax would decrease to 8% in Development Area A and 12% elsewhere in Israel. Certain “special industrial enterprises” may be granted a further reduced company tax rate of 5% in Development Area A and 8% elsewhere in Israel.
Second, it is proposed to let individual investors, who have allotted shares of Israeli R&D intensive companies, deduct their investment from taxable income. This would apply to investments made in the years 2011-2015 totaling no more than NIS 5 million, provided improper tax avoidance is not the main motive. The target company must not be publicly traded, must apply most of the money to R&D in Israel on its own intellectual property, and must not have substantial income relative to expenses (a start up). The amount deducted would reduce the future cost for capital gains tax purposes.
Third, a different proposal may enable certain qualifying companies that acquire at least 80% of an unrelated qualifying hi-tech company in the years 2011-2015 to deduct the amount invested over the following five tax years, but not the amount of the target company’s shareholders’ capital. In this way, only the value of knowhow and goodwill would effectively be deductible. Various detailed conditions are also proposed. The amount deducted would reduce the future cost for capital gains tax purposes.
Fourth, a proposal for Olim. It is proposed that people invited by an academic institution or a hospital and who become new Israeli residents by the end of 2015 would be exempt from Israeli tax on royalty income from technology supply transactions for five years, subject to a number of conditions.
The proposed exemption would also be available to returning Israeli residents who resume residence in Israel in the years 2011-2015 after residing abroad at least six consecutive years.
Fifth, it is proposed that the national insurance (social security) income limit of, currently NIS 79,750, would be slightly reduced to NIS 63,800 approximately in 2011 and NIS 55,825 approximately in 2012. It is also proposed that the upper rate of employers’ national insurance would rise from 5.43% to 5.9% commencing April 2011.
Sixth, bad news for foreign journalists and foreign sportspersons – it is proposed to repeal the 25% tax rate they currently enjoy. But they will still get to enjoy certain expense and living deductions.
Seventh, a series of measures are proposed to stop real estate purchasing groups (“Kvutsot Rehisha”) exploiting certain loopholes, commencing January 1, 2011. It is proposed that one-time sales by private real estate owners to purchasing groups with a paid organizer will become liable to value-added-tax, currently 16%. In addition it is proposed that purchasing groups which organize themselves to purchase residential homes will become liable to 5% acquisition tax on the entire price they pay, including construction services.
Finally, other real estate tax measures are proposed. In particular, it is proposed that purchasers will have to withhold 15% tax of cash consideration.
Also, it will no longer be possible in land deals to postpone the 5% acquisition tax so long as the purchaser pays less than 50% of the consideration and doesn’t obtain possession or receive an irrevocable power of attorney.
It is proposed to impose acquisition tax once 30% of the consideration is paid instead of 50%.
All the measures mentioned above are proposals. It remains to be seen what will be legislated. 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.