As part of the approval of Israel's budget for the years 2017-2018, the Israeli Tax Authority ("ITA") published an initial draft of its proposed legislative tax initiatives at the beginning of August. A revised draft was approved by the government cabinet on August 12, 2016, and it is expected that the legislative bill will be published within several weeks and brought to the approval of the Israeli parliament. As always, the proposed new budget includes a number of changes and reforms in the Israeli international tax regime. Below is a brief summary of the main suggested amendments (the "Amendment").
- Tax Residency of Foreign Companies
Under Israeli tax law, a company is considered an "Israeli
resident" for tax purposes if one of the following applies:
(i) the company was incorporated in Israel, or (ii) the
"control and management" of the company was carried out
in Israel. However, there is no definition of the term
"control and management" in the tax legislation and
Israeli courts also tend to interpret it in accordance with the
specific circumstances of each matter, and thus there are no clear
and definitive rules to apply this criteria.
The Amendment offers a rebuttable presumption, according to which a
company that was incorporated outside of Israel shall still be
considered as an Israeli resident for tax purposes if the company
is controlled by Israeli residents and the effective tax rate
imposed on the company is 15% or less, and one of the following
conditions takes place: (i) the company is a resident of a country
that does not have a tax treaty with Israel; or (ii) the company is
a resident of any other country that applies the territorial tax
system, that is, it does not levy tax on income derived outside of
it. In case such a foreign company does not consider itself an
Israeli resident for tax purposes despite the existence of the
presumption, it is still obliged to report its position in
Israel.
- "New Immigrants" and "Veteran Returning Residents"
Since 2007, "New Residents" and "Veteran
Returning Residents" are exempt from Israeli tax and reporting
with respect to foreign source income and assets during a period of
10 years, commencing on the date the individual became an Israeli
tax resident.
In the initial legislative draft of the ITA it was suggested to
abolish the exemption from reporting, starting January 1, 2017. In
addition, it was suggested to cancel the possibility of extending
the exemption period for an additional 10 years. At the end, this
item was not approved by the cabinet and therefore the current
legislation will remain unchanged.
- Reporting Requirements of International Groups
Following Action 13 of the BEPS report (Guidance on the
Implementation of Transfer
Pricing Documentation and Country-by-Country Reporting), it is
proposed in the Amendment to impose an obligation on companies that
are part of an international group and operate in Israel to report
to the Israeli tax authorities. The Amendment suggests issuing
regulations that shall specify the documents and information that
should be submitted, including, in certain circumstances, in
respect of the foreign activities of the group in other
jurisdictions.
- CFC Rules
Controlled Foreign Corporation (CFC) rules, applicable in Israel
today, provide, under certain conditions, that passive income of a
foreign resident entity controlled by Israeli residents is
considered as "deemed dividend" distributed to the
Israeli shareholders. The current rules stipulate that income
derived from interest, linkage differences, royalties and rent will
not be considered passive income if they originate from a
business.
The Amendment suggests setting a rebuttable presumption that income
derived from interest, linkage differences, royalties and rent
shall be regarded as passive income for CFC purposes, even if it
was derived from a business.
- Tax Exemption for Foreign Investors
Under Israeli tax law, the Minister of Finance has the authority
to provide tax reliefs to foreign tax residents in case they cannot
receive a tax credit in their home country. This authority is
usually used in case of venture capital investments.
It is suggested in the Amendment to authorize the Minister of
Finance to provide tax exemptions in these circumstances and thus
simplify the current mechanism.
- Encouragement of Capital Investments
The encouragement of Capital Law grants tax benefits to
preferred enterprises, including reduced corporate tax rate of 16%
and 9% (instead of 25%) and reduced withholding tax rate of 20% on
dividends (instead of 25% or 30%).
The Amendment, which will apply to technology companies, includes
new incentives intended, inter alia, to encourage foreign investors
to invest in the Israeli high-tech industry. These incentives
include, inter alia, a reduced corporate tax rate of 12% and 6%,
and 4% withholding tax rate on dividends.
Originally published on August 24th, 2016
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