Your Taxes: Sderot battle zone compensation

Compensation payments are considered taxable income for Israeli tax purposes.

taxes sderot 88 298 (photo credit: Ariel Jerozolimski)
taxes sderot 88 298
(photo credit: Ariel Jerozolimski)
In Roman times, it was necessary to build Hadrian's wall in Northern England to keep out the marauding Scots. During the second Intifada, it was necessary to build the security barrier on the West Bank to keep out suicide bombers and car thieves. But, down south, Sderot and other places are still on the receiving end of Kassams. This article deals with related emergency financial compensation arrangements recently introduced. On May 30, 2007, the Knesset Finance Committee approved an announcement by the Prime Minister allowing special arrangements for the Sderot/Near Gaza Area - a designated area adjacent to the Gaza Strip from Sderot and Yad Mordechai down to Talmei Yosef and the Egyptian border in the period May 16 to August 31, 2007 (unless renewed). Consequently, on June 6, the Knesset Finance Committee issued special regulations setting out compensation arrangements for "indirect damage" (i.e. financial harm) caused in the period from May 16 to May 31, 2007, in that area when it sustained a broad missile onslaught. According to the regulations, an affected party in the Sderot/Near Gaza Area is entitled to compensation if he can prove a loss of profits, including expenditure on protective measures, due to hostile action, combat or inability to make use of property. In addition, a business located outside the Sderot/Near Gaza Area is entitled to compensation if it has employees living in that area who were unable to reach their work place because of the security situation. The compensation is for salaries paid regarding days of absence. Such compensation is paid to businesses - entities and individuals - in industry, trade, services, agriculture or tourism. To claim the compensation, you must fill out and submit Form 7113-1. The form is available from the Property Tax offices at Sderot and Ashkelon or on the Internet at: Within 14-28 days after submitting a claim, the government will generally pay an advance compensation payment equaling the lower of: (1) 75% of the claim or (2) 50% of the business revenues before VAT in the equivalent period in 2006, excluding asset sale proceeds. The government will review the claim and notify the business of the balance of compensation due, generally within 90 days after paying the advance compensation payment or within 90 days after filing the claim. The compensation will be paid into the bank account designated by the applicant on Form 7113-1. Compensation payments are considered taxable income for Israeli tax purposes. Therefore, compensation payments will be subject to a 20% withholding tax unless the affected party holds a confirmation from his tax office allowing a lower rate of withholding tax. For further details, see the Israeli Tax Authority's Operating Instructions 8/2007 or phone the Sderot Property Tax Office at (08) 689-9952 or information numbers at (03) 763-3500 or (03) 763-4444. As always, consult experienced tax and legal advisers in each country at an early stage in specific cases. The writer is an International Tax Partner at Ernst & Young Israel.