Dear Clients, Colleagues and Friends,

Further to our circular of December 12, 2017 regarding the new Voluntary Disclosure Procedure of the Israeli Tax Authority (the “ITA”) (the "VDP"), the ITA recently published (February 15, 2018) guidelines for the implementation of the VDP (the "Guidelines"). For the first time, the Guidelines shed some light on the way the ITA is expected to implement the VDP.


By way of reminder, the new procedure enables taxpayers to apply for the VDP via three main routes:

  • Regular Route. Under this route, the taxpayer should submit an application to the Investigations Department of the ITA. The application should include the taxpayer's details, as well as full information regarding any undeclared income. This route will remain in force until December 31, 2019.
  • The Anonymous Route. This route enables the submission of applications without disclosing the details of the taxpayer to the ITA. After the conclusion of the negotiations regarding the tax liability, the name and details of the taxpayer are provided to the ITA. This route will be in force until December 31, 2018.
  • The Expedited Route. In cases where the capital included in the voluntary disclosure application does not exceed NIS 2,000,000 and the taxable income arising from such capital does not exceed NIS 500,000 in the relevant tax years, the voluntary disclosure application can be submitted by way of an expedited route. This route permits the submission of amended tax returns for the relevant years. This route is in force until December 31, 2019.

Under certain conditions, the VDP procedure provides the taxpayer with immunity from criminal proceedings. The main condition is that at the time of submitting the application, no investigation or examination of any kind is pending with regard to the taxpayer. In addition, at the time of the submission of the application, the ITA is not in possession of any information concerning the undeclared income of the taxpayer or such taxpayer's spouse, companies or partnerships. The VDP does not provide any reduction in the liability to tax, and taxpayer is required to pay the applicable tax liability on the declared income.

The Guidelines

The Guidelines which the ITA has now published provide as follows:

1. Appendices. The taxpayer must include relevant attachments to the application, including information regarding the source of the funds and the time when the income and gains were generated. It is emphasized in the Guidelines that if all of the relevant documents are not included, the application will be rejected.

2. Fines. In a case where the VDP involves the taxpayer amending his tax returns for previous years, and the amendment is material, the taxpayer will be deemed to have submitted his tax return only at the time of the application for VDP. Accordingly, the tax liability will be subject to a fine or "financial sanction" under Israeli tax law (fines which are imposed upon failure or delay in submitting a tax return). This new submission date may also have the effect of extending the statute of limitation with respect to other types of income in the taxpayer's tax return.

In a case where the VDP ends with an assessment agreement, the ITA has the authority to impose a "tax deficiency fine" at the rate of 15%-30% under Israeli tax laws. Only one of the sanctions (the "financial sanction" or the "tax deficiency fine") can be imposed in respect of each application.

The Guidelines state that the assessing officer has the authority to reduce or cancel any sanctions, taking into account the following considerations: (i) whether the total taxable income resulting from the VDP is material in comparison to the capital of the taxpayer and his declared income; (ii) whether the involvement of the taxpayer in the failure to report on such income is regarded as being insignificant; (iii) the “complacency” of the taxpayer in general; and (iv) the taxpayer’s personal and health status.

3. Timeline. The Investigations Department of the ITA will conduct a preliminary examination of the application, and forward the application to the assessing officer for further examination of the tax due from the taxpayer. According to the Guidelines, the assessing officer should finalize the process within 90 days (or 180 days under the Anonymous Route) from the date of referral from the Investigations Department. This period can be extended by an additional period of 90 days, subject to notice from the assessing officer to the Investigations Department (and to the taxpayer under the Anonymous Route). Under the Expedited Route, the Investigations Department of the ITA itself will examine the application, and will provide the taxpayer with a confirmation (or rejection). The taxpayer will then need to pay any tax due within 15 days from the receipt of a payment notice from the ITA.

4. Taxation of capital. In addition to the taxation of income for the relevant years covered by the VDP, the assessing officers can also impose tax on the opening balance of the capital which is covered by the VDP (usually the balance of the accounts on December 31, 2006 or 2007). According to the Guidelines, when the assessing officer is convinced by the taxpayer that the source of the capital was not subject to tax in Israel, the assessing officer should refrain from imposing tax on the capital. The Guidelines set out examples for such "clean capital" – undeclared capital which was generated by a non-Israeli resident outside of Israel; gifts and inheritance, and so on.

5. Carryforward losses and tax credit. According to the VDP and the Guidelines, losses or foreign tax credits which were accumulated during the VDP period can be used in this period only against the undeclared income. Losses and foreign tax credits which were not used in the VDP period cannot be carried forward to the following years or be offset against income other than the undeclared income under the VDP.