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Israel Proposes Modifications to Tax Reporting Obligations for Olim

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Israel Proposes Modifications to Tax Reporting Obligations for Olim

Acting in response to recommendations by the O.E.C.D. Global Forum on Transparency and Exchange of Information for Tax Purposes, legislation has been proposed in Israel to adopt new reporting obligations for Israeli entities, certain trusts, and individuals known as “Residents for the First Time” and “Senior Returning Residents.”  The proposed amendment does not alter tax liabilities in Israel or eliminate preferred tax treatment of Olim. Rather, it revises certain reporting obligations in order to increase transparency. As of April 1, 2024, adoption is imminent. Boaz Feinberg, a partner of Arnon, Tadmor-Levy Law Firm, Tel Aviv, explains all. 

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U.S. Income Tax Treaty Update

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U.S. Income Tax Treaty Update

The past 12 months or so have seen an uptick in matters related to the network of U.S. income tax treaties. Perhaps most interesting is a legislative proposal to amend the Internal Revenue Code so that it adopts rules applicable to qualified residents of Taiwan that mirror income tax treaty benefits. The rules would go into effect when the Administration reports to Congress that Taiwan has adopted equivalent rules applicable to U.S. persons investing or working in Taiwan. Other recent events related to U.S. income tax treaties include (i) Senate approval of an income tax treaty with Chile, subject to certain reservations regarding the taxation of direct investment dividends and the imposition of the B.E.A.T. provisions of Code §59A, (ii) the signing of an income tax treaty with Croatia that will require the addition of similar language to the reservation in the treaty with Chile, (iii) announcements that signed income tax treaties with Poland and Vietnam that await Senate action will need to be revised related to double tax relief and B.E.A.T., (iv) the termination of the income tax treaty with Hungary, (v) the start of negotiations of a new income tax treaty with Israel, and (vi) and the completion of treaty negotiations with Romania and Norway, also subject to reservations regarding double tax relief for direct investment dividends and the B.E.A.T. provisions. Nina Krauthamer and Wooyoung Lee tell all.

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Major International Tax Reform in Israel – Proposal Takes Aim at Tax Residence Rules

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Major International Tax Reform in Israel – Proposal Takes Aim at Tax Residence Rules

In November 2021, the Israel Tax Authority Committee for International Tax Reform published a report proposing substantial reform to international tax rules in Israel. Regarding rules for determining tax residence in Israel, the purported goal was to simplify the rules for determining an individual’s tax residence. To that end, it introduces a day-count rule as a supplement to the existing center-of-vital-interest rule. Boaz Feinberg, a Partner of Arnon, Tadmor-Levy Law Firm in Tel Aviv and Rosa Peled, an associate at the law firm of Arnon, Tadmor-Levy Law Firm in Tel Aviv, explain that for most taxpayers, the center-of-vital-interest rule will continue to apply. However, because assessing officers will no longer address cases at the fringes, where the day-count rule is applied, more assessing offices can free-up to examine the remaining cases based on the center-of-vital interest rule.

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Israeli Start-Up Expansion to the U.S.: Who Should Be On Top?

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Israeli Start-Up Expansion to the U.S.: Who Should Be On Top?

Israeli high-tech companies have been quite successful in the past year in developing new technologies in Med Tech and Fin Tech spaces. Naturally, liquidity events followed. In their article, Anat Shavit and Yuval Peled, partners in the tax practice of FBC & Co., Tel Aviv, and Galia Antebi address the tax planning decision points that must be addressed in Israel and the U.S. Where should the I.P. be owned? What structures are demanded by angel investors? What tax issues are raised by the Israeli tax authorities? Can structures be revised? Is there a taxable presence in the U.S. for an Israeli company? What U.S. anti-deferral regimes could apply with a U.S. company as parent? When should planning take place for Q.S.B.S. tax benefits in the U.S.? Is there a cookie-cutter solution that fits all situations? These and other questions are addressed.

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Israel Tax Authority Proposes Changes for Individuals With Cross-border Connections

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Israel Tax Authority Proposes Changes for Individuals With Cross-border Connections

In an age of spectacular liquidity events for Israeli start-up companies, the Israel Tax Authority has proposed significant revisions to the tax law designed to bring more income and gains into the Israeli tax net. In part, this reflects a global trend among governments and to close a perceived tax gap among the wealthy, especially those having one foot at home and a second foot abroad. In Israel, the proposals directed at individuals include (i) adoption of objective rules for determining tax residence with greater certainty, (ii) tightening of exit tax rules to ensure collection of deferred amounts, (iii) expansion of C.F.C. rules to cover more foreign companies, (iv) elimination of foreign tax credit carryovers for unused foreign tax credits, and (v) changes to basis step-up rules for property inherited from foreign decedents. Daniel Paserman, a partner in the Tel Aviv office of Gornitzky, attorneys, and the head of the firm’s tax practice, and Inbar Barak-Bilu, a partner in the Tel Aviv Office of Gornitzky, attorneys, caution that the proposals are groundbreaking and are likely to have an influence on persons considering a move to or from Israel.

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Private Investment Funds in Israel

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Private Investment Funds in Israel

The State of Israel has encouraged foreign investments in Israel for many years. One of its primary tools is the special tax regime applicable to private investment funds. If listed conditions are met, a range of tax benefit benefits are granted to the fund and its investors. These include exemptions from Israeli tax for non-Israeli limited partners with respect to (i) income derived from non-Israeli investments, (ii) capital gains, dividends, and interest form venture capital investments, and (iii) income derived from the realization of Qualified Investments. Anat Shavit, a partner of FBC & Co., Tel Aviv, and Yuval Peled, a senior associate at FBC & Co., Tel Aviv explain the conditions that must be met.

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Taxation of Real Estate Investment in Israel

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Taxation of Real Estate Investment in Israel

In almost every country, the way real estate investments are taxed depends on a wondrous blend of factors, including the status of the owner of the property (individual or corporation), the nature of the asset (residential property, commercial property, land) and the purpose of investment (producing rental income or entrepreneurial profit). Israel is no different. In their article, Anat Shavit, a partner of Fischer Behar Chen Well Orion & Co. in Tel Aviv, and Ofir Fartuk, a senior associate at the same firm summarize the main factors one should take into consideration when contemplating real estate-related investments in Israel.

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Israeli C.F.C. Rules Apply to Foreign Real Estate Companies Controlled by Israeli Shareholders

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Israeli C.F.C. Rules Apply to Foreign Real Estate Companies Controlled by Israeli Shareholders

Controlled foreign corporation (“C.F.C.”) laws are all the rage with parliaments around the world. Israel is no exception. Israeli shareholders controlling offshore companies that derive low-tax passive income and gains can be taxed in Israel even though no dividend is received. A recent decision by the Israeli Supreme Court addresses a fundamental question in this area. Is passive income determined on a groupwide basis or on a company-by-company basis? The answer affects Israeli residents owning a chain of C.F.C.’s when an intermediary company in the chain sells shares of an operating subsidiary. Daniel Paserman, who leads the tax group at Gornitzky & Co., Tel-Aviv, explains the holding in Tax Assessor for Large Enterprises v. Rosebud. Israeli residents may not like the answer.

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Israeli Court Case First to Interpret Ten-Year Exemption

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Israeli Court Case First to Interpret Ten-Year Exemption

Effective in 2007, Israel’s New Immigrant Benefits rules are intended to promote immigration through the grant of substantial tax benefits: (i) a ten-year tax exemption for foreign-source income produced or accrued outside Israel or income stemming from assets located outside Israel and (ii) an exemption for all tax reporting requirements related to exempt income. Over the years, the Israeli tax authorities applied strict rules in determining (i) whether a specific item of income should be considered to be foreign source income and (ii) the portion that is properly treated as foreign in circumstances of mixed income – part foreign and part domestic. Now, eleven years after the New Immigrant Benefits rules became effective, the first case addressing these open questions has been decided, Talmi v. Kfar Saba Tax Assessor. Daniel Paserman and Inbar Barak-Bilu of Gorntizky & Co., Tel Aviv, report on the holding. In brief, the taxpayer won on principles but lost on the basis of his facts.

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A Year of Guest Features

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A Year of Guest Features

This month, we reminisce on the best of 2016, with articles contributed by guest authors from around the world.

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Insights Vol. 3 No. 10: Updates & Other Tidbits

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Insights Vol. 3 No. 10: Updates & Other Tidbits

This month Sultan Arab, Nina Krauthamer, and Galia Antebi look briefly at several timely issues, including (i) a Swiss court order granting UBS the right to appeal an administrative order to disclose French client information to French tax authorities, (ii) the expansion of I.R.S. offshore tax avoidance investigations to banks in countries other than Switzerland, and (iii) a continuing controversy over the Common Consolidated Tax Base, known as the C.C.T.B., proposed by the E.U. Commission.

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Income Tax Treaties v. Domestic Law: An International Look at the Current Score

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Ask most tax advisers outside the U.S. about the way to resolve a conflict between the provisions of an income tax treaty and domestic law, and the almost universal view is to look to the treaty for resolution.  However, in some countries, an income tax treaty is not the last word in resolving conflicts.  In the U.S., the saving clause of a treaty preserves the supremacy of U.S. domestic tax rules as they affect U.S. citizens and residents, as defined in the treaty.  In Brazil, a presidential decree may govern the outcome.  And in India, a domestic tax provision may be crafted in such a way as to circumvent a treaty by altering the identity of the technical taxpayer.  Elizabeth V. Zanet, Galia Antebi, and Neha Rastogi examine ways in which those three countries directly or indirectly override treaty provisions that are deemed domestically undesirable.

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Exchange of Information: Israel Inches Toward International Norms

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The State of Israel depends on immigration for growth in population and capital. Favorable tax rules and confidentiality rules are key pillars of the policy to promote immigration. In a world that is obsessed with B.E.P.S., Israeli policy towards confidentiality is experiencing change. Boaz Feinberg and Ofir Paz of ZAG-S&W, Tel Aviv discuss the scope of that change.

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Insights Vol. 3 No. 2: Updates & Other Tidbits

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This month, Insights looks at the latest development in the deferred prosecution agreement with Swiss banks, a property tax increase in Jerusalem for “ghost apartments,” Canadian procedures to exempt foreign employers from withholding tax on salaries paid to certain individuals that are resident outside of Canada but work in Canada from time to time, and the adverse effect outside the U.S. of deferred CbC reporting for U.S.-based multinationals.

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What is the Future for New Immigrant Benefits?

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Continuing our series on favorable tax rules for non-domiciled resident individuals, Guy Katz and Danielle Halimi of Herzog Fox and Neeman in Tel Aviv explain the Israeli tax benefits for those individuals who are categorized as “New Immigrants.” Benefits begin with a ten-year exemption for foreign-source income and gains – the exemption applies to both tax and information reporting. Regular returning residents receive generous but scaled back benefits. Remittances from abroad are not penalized with tax.

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Insights Vol. 1 No. 10: Updates & Other Tidbits

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ISRAEL ANNOUNCES ADOPTION OF O.E.C.D.’S COMMON REPORTING STANDARD

Israel has announced that it will adopt the Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard (“C.R.S.”) issued by the O.E.C.D. in February 2013.

The C.R.S. establishes a standardized form that banks and other financial institutions would be required to use in gathering account and transaction information for submission to domestic tax authorities. The information would be provided to domestic authorities on an annual basis for automatic exchange with other participating jurisdictions. The C.R.S. will focus on accounts and transactions of residents of a specific country, regardless of nationality. The C.R.S. also contains the due diligence and reporting procedures to be followed by financial institutions based on a Model 1 F.A.T.C.A. intergovernmental agreement (“I.G.A.”).

At the conclusion of the October 28-29 O.E.C.D. Forum on Transparency and Exchange of Information for Tax Purposes, about 50 jurisdictions had signed the document. The U.S. was notably absent as a signatory to the agreement. In addition to the C.R.S., the signed agreement contains a model competent authority agreement for jurisdictions that would like to participate at a later stage.

Israeli Law Confronts International Tax Treaties and Principles Via New Treatment of Mixed-Beneficiary Trusts

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HISTORY AND OVERVIEW OF ISRAELI TAXING MODELS IN RESPECT OF NON-ISRAELI TRUSTS

Pre-2006 Situation – the Corporate Model

Israel has come a long way in its efforts to tax foreign-established trusts, which historically were assumed to have been used to shelter Israeli-source funds of high net worth Israeli residents and their families. Prior to the adoption of any relevant comprehensive Israeli tax legislation in 2006, the practice consisted mostly of viewing trusts and beneficiaries similarly to corporations and shareholders.

Thus, under customary Israeli international tax rules, if the “management and control” of the non-Israeli trust was effected outside of Israel, the trust was considered to be nonresident because the trust’s assets were situated outside of Israel and the trustees had full discretion over their control. No formal powers were exercised directly or indirectly by Israeli beneficiaries. Hence, the trust was simply not subject to Israeli taxation. Moreover, discretionary distributions were viewed as tax-free gifts. In this way, wealthy Israelis could cause foreign trusts to be funded by Israeli-source wealth and invested outside Israel without subjecting the resulting income to Israeli tax.

Israel has neither an estate/inheritance tax nor a gift tax, which means that bona fide gifts and inheritances are free of tax for both the donor or the decedent and the recipient. Thus, a foreign trust ostensibly became the perfect Israeli tax planning tool. Assets could be donated by an Israeli settlor to a foreign irrevocable discretionary trust for the benefit of family members. Legally, the assets were no longer owned by the Israeli donor but rather by a foreign body managed and controlled by a foreign trustee. Therefore, the trust’s non-Israeli assets and income were outside the scope of Israeli taxation. Distributions by these trusts to Israeli resident beneficiaries that were bona fide discretionary gifts were exempt in the hands of an Israeli recipient.