Israel's tax year is ending. Here's what you need to know

There are many things to consider, including those outlined briefly below.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
With the pandemic and the possibility of elections on our mind, it is easy to forget that the Israeli tax year ends soon, on December 31. There are many things to consider, including those outlined briefly below.
The big picture
The pandemic means the Israeli government is confronted with rising expenditure on coronavirus grant support and falling tax revenues from many businesses and workers laid off. It seems fair to assume Israeli tax rates may soon rise, even if there is less income to tax.
Businesses
Businesses should consider among other things: coronavirus grant claims; adjusting monthly income tax installments (mikdamot); income and income timing; expenses and expense timing; inventory (stock) count on December 31; other accruals or provisions. Is long-term project planning possible? What about charitable donations? Most corona grants are subject to income tax, not VAT. Some are subject to national insurance. New equipment may entitle you to temporarily accelerated depreciation
The tax law allows you to consider writing off bad customer debts and make reasonable provision for proven doubtful debts, e.g. in liquidation or other legal proceedings.
Inventory write-offs or destruction require notification to the local tax office.
Inter-company transactions between related parties must be on arm’s-length terms. Transfer-pricing studies are necessary and helpful.
Related means at least 50% of any means of control or common control.
E-commerce is good but is in for a bumpy tax ride in 2021. Hi-tech companies and online operators might incur heavier taxes on sales and/or profits in the US, EU and elsewhere thanks to OECD and other initiatives. Prime targets are companies that use online marketplaces (e.g. Amazon, Shopify, etc.), agents, warehouses and fulfillment houses, or which make digital supplies.
The Biden administration is expected to raise US federal taxes.
International businesses must therefore check what action is needed now to mitigate all this.
In Israel, so-called “wallet companies” (hevrot arnak) face a battery of rules that can turn the 23% company tax rate on profits into income tax at rates ranging up to 50%.
This is possible if a closely held company provides managerial or officer services, services of an employment nature, or derives 70% of revenues or profits from one customer or group for 18 months in any period of four years. Also caught are loans to – not from – major shareholders over NIS 100,000, or personal use of company assets. Check what needs doing. Loans to 10%-or-more shareholders outstanding at the end of 2019 should be repaid before the end of 2020 (and not reinstated).
Are your pension, study funds (hishtalmut) and life insurance enough? Major shareholders of private companies should consider pension funding and severance funding within limits, plus side plan funding under Amendment 190 of the Income Tax Ordinance.
Mandatory pension funding applies to employees and the self-employed.
Study funds (kranot hishtalmut) are very tax efficient if you contribute each year for six years at prescribed rates.
Consult a pensions/insurance specialist about monthly funding and annual top-ups well before December 31.
On the personal side
Before you reach 120, do you and your spouse have up-to-date wills in each relevant country? If not, consult your lawyer immediately.
Before others reach 120, are you expecting an inheritance from abroad? If so, you should plan against double tax: inheritance/estate tax abroad and capital gains tax in Israel upon a subsequent sale.
Personal investments
Check foreign taxes and any Israeli foreign tax credit or aliyah exemption. Have you filed Israeli half-yearly capital gains tax reports regarding foreign securities sold?
Aliyah tax breaks
Are you a new or senior returning resident who lived abroad 10 years? If so, do you optimize the aliyah 10-year exemption for foreign income and gains?
Most trusts with an Israeli resident settlor or beneficiary are now taxable in Israel, unless an aliyah exemption applies or other exemptions in certain cases.
Are your pension, study funds (hishtalmut) and life insurance enough? See above.
Israeli real estate, briefly
Israeli home rental income over NIS 5,100 per month (in 2020) is taxable. Above that level, there are multiple possibilities. Check which suits you.
Charitable donations to approved Israeli charities in the year may qualify for a 35% tax credit, within certain limits (minimum NIS 190, maximum NIS 9,350,000, or 30% of income). For example, if you donate NIS 1,000, you may get a NIS 350 reduction in your Israeli tax bill.
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 Horowiz Consulting & Tax Ltd. leon@h2cat.com


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