Dear Clients, Colleagues and Friends,
Under Israeli law, a taxpayer taking a certain tax position, is required to report it to the Israeli Tax Authority ("ITA") by submitting a special form as part of the annual tax return. The reporting liability arises only if the position results in a tax saving of NIS 5 million in the relevant tax year, or NIS 10 million over a period of 4 tax years. The list of tax positions, which should be reported, is published by the ITA, further to its consultation with the Israeli Bar Association and the Institute of Certified Public Accountants in Israel. This year, as well as in the previous year, Meir Linzen and Guy Katz from our firm’s tax department, participated in these consultations on behalf of the Israeli Bar Association.
The submission of the form is mandatory, and failure to comply with the reporting obligation might result in the rejection of the annual tax return and the issuance of an assessment by the ITA based on its subjective judgment, as though no tax return had been submitted. Accordingly, it is usually recommend to adopt a conservative approach with respect to the submission of the form, even where there is a doubt as to whether or not the submission is required.
The ITA has previously published a list of “reportable positions” with respect to the 2016 tax year and has recently published the list with respect to the 2017 tax year. The new list includes, inter-alia, positions that are relevant to individuals (both Israeli and non-Israeli) taxpayers, as well as to trusts and trustees.
A list of the main positions that are relevant to trustees, new immigrants and foreign individuals, is as follows:
1. Taxation of Virtual Currency ("Cryptocurrency"). The ITA's position is that Cryptocurrency should be regarded as an asset and accordingly, the sale of a Cryptocurrency is subject to capital gains in Israel. In our opinion, certain arguments may be relevant regarding the taxation of Cryptocurrency, and as such, the ITA's position is not undoubted. Accordingly, we recommend examining each case according to its particular circumstances.
2. New Immigrant and a Returning Veteran Resident who sell shares in a foreign company where most of its value derives from an Israeli asset. The ITA is of the view that the sale of such a company by a New Immigrant and Veteran Returning Resident is not entitled to the 10 year exemption. This may also be relevant to trusts which are entitled to the 10 year exemption.
3. Returning Resident who sell shares in a foreign company that owns Israeli assets. The ITA is of the view that an Israeli taxpayer who is entitled to the tax benefits applicable to a Returning Resident, will not be entitled to an exemption from Israeli tax with respect to the sale of such shares, in the case where most of the company's value derives from Israeli assets. Furthermore, where the foreign company's value does not derive mainly from Israeli assets, the Returning Resident will be entitled to a partial exemption, which will be calculated based on the ratio between the value of the foreign company's non-Israeli assets and its Israeli assets.
4. Purchase date and cost base of assets held by trusts that have not settled their tax liabilities based on the transition orders that have been published by the ITA in 2014. The ITA's position is that the purchase date and the cost base of the assets held in such trusts will remain as though the settlor still owned the assets (rather than updated to 31 December 2013 and the value of the asset on such date). Having said this, in the case of assets that have been contributed to Family Trusts prior to 1 January, 2003, the date of the contribution shall be regarded as the purchase date and the value of the asset at the time of the contribution, shall be regarded as the cost base of the asset to the beneficiary.
5. Distributions to Israeli residents of pre-2014 non-Israeli income of Family Trusts that have not reached a settlement with the ITA. The ITA is of the view that such distributions are subject to tax at the rate of 30% (and a possible surcharge of 3%).
6. The taxation of LLCs. The ITA’s position is that the LLC may be disregarded (in certain cases) for Israeli tax purposes, exclusively for foreign tax credit purposes. It should be noted that this position is substantially more stringent than the existing common practice, as it precludes individual taxpayers from the right to benefit from tax exemptions, special tax rates and offsetting of losses. Accordingly, the ITA's position may significantly impair the viability to use LLC structures and as such, we recommend that existing structures should be analyzed on a case by case basis.
We would like to emphasize that taxpayers are permitted to take a position which contradicts the above ITA's positions, subject to making the required reporting.
It should also be emphasized that the above is only a summary of certain relevant positions, and does not include all of the published positions.
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Should you require any further information or clarification regarding the issues discussed in this Circular, please do not hesitate to contact us.
Tax Department
Herzog Fox & Neeman
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