In this brochure, we will review some of the recent changes in the Israeli tax field that may impact on the taxation of both Israeli and non-Israeli individuals and corporations.
Over two years after signing the agreement between the government of the United States of America and the government of the State of Israel to improve international tax compliance and to implement FATCA ("the Agreement"), the Israeli parliament approved, on August 4, 2016, new tax regulations for the regularization and the implementation of the Agreement ("the Regulations").
The Regulations require Israeli financial institutions to transfer to the Israeli Tax Authority ("ITA") details of the accounts owned by U.S. residents or U.S. citizens, which were identified by the financial institutions as such during the years 2014 and 2015 ("Banking Details"). Currently, the financial institutions are required to transfer the Banking Details to the ITA by September 30, 2016, using an online database. The ITA also declared that, shortly after receiving the Banking Details from the financial institutions, the ITA will transfer the information to the IRS.
In light of the aforementioned, it is highly recommended for U.S. taxpayers and Israeli taxpayers with undisclosed bank accounts or undisclosed assets to regularize these accounts or assets with the IRS and/or ITA before the completion of the mutual information transfer.
Management & Control Circular
Recently, the ITA published Addition No. 1 to Circular No. 04/2002 – Guidelines for the Determination of Management and Control ("the Addition" and "the Circular", respectively). The Addition is meant to add guidelines and clarifications to the Circular, pursuant to the court decisions in recent years.
In the Addition, the ITA reviews several court cases that considered the questions of management and control over the last few years, and the rulings in these cases. More importantly, the Addition includes list of clarifications and guidelines that shed light on the ITA's interpretation of the court decisions and its position with regard to the questions of management and control. Mainly, the ITA emphasizes the importance of a fundamental examination of the issues of management and control and the person or body that is the actual decision maker and actual authority in the corporation. The examination should include a thorough review of the protocols of the board of directors in order to determine whether it has the actual authority and experience to make the material decisions of the company, examining the daily decision making process and the functionality of the corporation's managers.
Our recommendation is to examine the management and control issues of current and planned corporations in light of the Addition, while taking into account that it reflects the conservative position of the ITA.
Purchased Companies' Losses
Also, recently, a regional court decision was published, in case no. 42485-03-13 of I-Online Capital (E.O.C) Ltd Vs Assessing Officer of Tel-Aviv 5 ("I-Online Case"), concerning the controversial question of the entitlement to offset the losses incurred by a purchased company ("Purchased Company"), before it was purchase by new shareholders ("the Purchase"), against income derived from a new activity, which was transferred to the Purchased Company following the Purchase ("the Offset").
In I-Online case, I-Online was an inactive traded company, which held accumulated business and capital losses at the amounts of ILS 36 M and ILS 21 M, respectively. During 2003, I-Online was purchased by a third party, who transferred a new activity into I-Online, and demanded the offset of the losses against the income derived from the new activity. The verdict reconfirmed precedents, according to which the purchase of a Purchased Company is deemed artificial transaction if the only purpose behind it is a tax reduction. The court added that the taxpayer must bear the burden to prove, with conclusive and substantial evidence, that there is an essential commercial purpose behind the purchase of the Purchased Company, in order to establish entitlement to the Offset.
In addition, the court ruled in I-Online case, that "public visibility", trading status and trademark advantages are not enough to prove justified commercial purposes behind the Purchase.
In our opinion, any purchase of an Israeli Purchased company with transferred business or capital losses should be carefully examined and accurately executed in order to enhance the position of the purchaser with regard to the transferred losses.