Immigrants to Israel under fire from reportable tax positions

A reportable income tax position is a position contrary to a position published by the ITA if the tax advantage exceeds NIS 5 million in the tax year or NIS 10 million over four years.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The Israel Tax Authority (ITA) has issued more reportable tax positions, which are similar to reportable tax shelters in the US and UK tax systems. The latest batch relates to the 2020 tax year onward and takes aim at international cases, immigrants and trusts. In Israel, the ITA often use the reportable tax positions to impose their interpretation and change accepted tax practice.
What are reportable tax positions?
A reportable income tax position is a position contrary to a position published by the ITA if the tax advantage exceeds NIS 5 million in the tax year or NIS 10 million over four years.
However, no reporting is needed from certain Israeli charities, nor from individuals or companies with income below NIS 3 million or capital gains below NIS 1.5 million in the tax year.
Reportable income tax positions must be reported within 60 days after filing the main annual income tax return.
If your tax planning is at odds with an ITA position, you must tell them on Form 146, so they know where to start a tax audit. If you don’t manage to reach agreement with the ITA regarding such a position, you must decide whether to accept theirs or go to court.
The latest positions supplement earlier positions going back to 2016. Some of them relate to VAT and customs & excise taxes.
What’s new?
Below is an overview of the latest crop of reportable tax positions. They are technical but significant.
Israeli parent companies
If an Israeli resident company receives a dividend from a subsidiary and claims a foreign tax credit in Israel for the foreign company’s underlying corporation tax and dividend withholding tax, the ITA says any excess foreign tax credit may not be carried forward. Comment: The tax law arguably seems to allow excess dividend withholding tax to be carried forward up to five years.
The ITA also says that if foreign company A paid a lot of corporation tax and foreign company B paid little or no corporation tax, the Israeli parent company cannot pool the two companies’ taxes when calculating the foreign tax credit in Israel. Comment: Alternative interpretations may exist.
Controlled foreign companies (CFCs)
When calculating the taxable deemed dividend from a passive controlled foreign company (CFC), usually an offshore company, the ITA says that foreign corporation tax deferred until a dividend is paid does not count in preventing Israeli tax. A CFC pays 15% tax or less. Comment: This targets passive Estonian companies among others. They apparently pay 20% tax, but deferred until any dividend distribution.
The ITA also says no losses may be carried back when calculating CFC profits and deemed dividend, even if a carryback is allowed under foreign law.
Blocker companies
Suppose you invest in the US via a foreign company in a third country (e.g. offshore) that is fiscally transparent in Israel, not the third country. The ITA says that any foreign tax credit is limited to the lower of withholding tax applicable in the US or the third country. Comment: This targets offshore blocker companies that aim to avoid US estate tax, but other possibilities exist.
Trusts for families in Israel and abroad
If the trustee of a fully taxable Israeli residents’ trust (IRT) transfers non-cash assets to a second trust, the ITA says the second trust will also be a taxable IRT unless capital gains tax is paid on the transfer or an immigration 10-year exemption applies. Comment: This is apparently meant to be an extra-statutory concession to facilitate a split between Israeli and non-Israeli beneficiaries if various conditions are met, but is silent on what happens thereafter. It might be argued that no capital gains tax liability arises anyway under certain sections of the tax law. Specialist advice is recommended.
The ITA also says that a reduction in trust assets triggers capital gains tax if there are Israeli and foreign resident beneficiaries and the trust only reports the Israeli resident beneficiaries’ portion. Comment: This raises questions and specialist advice is recommended. Any Americans should look up the Israel-US tax treaty.
More on new immigrants
As a reminder, in 2019 the ITA adopted a position that deemed dividends of immigrants (new and senior returning residents) from passive controlled foreign companies (CFCs) and active foreign professional corporations are taxable from January 1 of the 10th year of their Israeli tax holiday for foreign income and gains. This may shrink their 10-year tax holiday.
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 Horoviz Consulting & Tax Ltd. [email protected]