Increased Punishments for Tax Crimes

On March 29, 2016, the general assembly of the "Knesset" – the Israeli parliament ("the Knesset"), have approved dramatic and yet an expected new amendment ("the New Amendment") of the Capital Laundering Prohibition Statute, 2000 ("the Capital Laundering Statute").

According to the New Amendment provisions, severe criminal tax offenses ("Severe Criminal Tax Offences"), including violations of the Income Tax Ordinance (New Version) – 1961 ("the ITO"), the Value Added Tax Law– 1975 ("the VAT Law") and the Real Estate Taxation Law (Appreciation and Purchase) – 1963, will be considered "source crimes" as per the Capital Laundering Statute. In addition, the provisions enacted as part of the New Amendment, enable the free exchange of information between the capital laundering prohibition authority and the Israeli tax authority ("the ITA").

It should be noted that the Severe Criminal Tax Offences include specific tax violations that relate only to minimal amounts of income. For example, a tax violation for the reporting and tax liabilities according to Section 220 of the ITO, will be considered a source crime as per the Capital Laundering Statute only if it relates to an annual income that is above NIS 1 million, or 4-years accumulative income that is above NIS 2.5 million. With regard to a violation of the VAT Law, it is determined that the violation will be considered a source crime only if the relative tax amount is above NIS 170,000 or NIS 480,000 for periods of 12 months and 48 months, respectively.      

The significance of the New Amendment is that the legal punishment for Severe Criminal Tax Offenses was increased, from up to seven years' imprisonment and relatively small financial penalties according to the current law, to up to ten years' imprisonment and significant financial penalties.

In light of the new strict legislation, the ITA has also announced that it is in communication with the government's legal counsel in order to extend the deadline for filing a voluntary disclosure application, which is supposed to terminate at June 30, 2016, and requesting that the criminal immunity granted under this procedure will also cover violations of the Capital Laundering Statute.

It is clear that the ITA and the Israeli legislators are committed to fulfilling the standards of the Financial Action Task Force (FATF) regarding the international struggle against money laundering and undeclared capital and, as such, we believe that enacting the New Amendments is only one additional step towards the ITA goal, and that enacting other future law amendments which will equip the ITA with the required tools to achieve its goals is just a matter of time. It is our recommendation for all taxpayers who have committed tax violations to apply for the voluntary disclosure procedure and to request criminal immunity, before the window of opportunity is closed.

New Reporting Liabilities

On March 30, 2016, the Knesset approved amendment number 223 of the ITO ("Amendment Number 223"), according to which new reporting liabilities were added to the existing liabilities ("New Reporting Liabilities").

The New Reporting Liabilities include a new annual reporting liability on Israeli residents who transferred abroad amounts totaling more than NIS 500,000 from Israel in a twelve-month period. In addition, the New Reporting Liabilities include reporting liabilities on Israeli residents who are beneficiaries of trusts with assets, including cash funds, deposit accounts, securities and real estate in and outside of Israel, totaling more than NIS 500,000. It should be noted that the said liability does not apply to individuals who are not aware of their rights in the trust or individuals who are less than 25 years old.

One of the most important reporting liabilities that was added to the ITO as part of Amendment Number 223 is estimated to impact on several hundred thousand Israeli citizens and foreign individuals who reside in Israel a significant number of days in a tax year. According to the new provisions, each individual, who claims foreign residency status but resides in Israel the minimum number of days under which he is considered an Israeli resident according to the "days presumptions" set in Section 1 of the ITO (183 days in a tax year or more than 30 days in a tax year and 425 days in the tax year and the two previous years), will be required to submit both an annual tax return and a report of the facts and certificates according to which he bases his foreign residency claim. These provisions enable the tax authorities to receive information about Israeli citizens who expatriate from Israel and examine their tax status, already upon their expatriation. In addition, it will enable the same examination of foreign residents who reside in Israel a significant number of days as part of their job requirements.

It is important to examine the applicability of the above reporting liabilities on Israeli and foreign residents, especially in light of the above-mentioned Announcement and the severe penalties that might apply on the non-complying taxpayers.