YOUR TAXES: Reporting your confessions

They say confession is good for the soul. It seems the Israeli Tax Authority (ITA) wants to purify us all. The ITA published a new batch of “reportable tax positions” on December 26, 2018.

A reportable income-tax position is a position contrary to a position published by the ITA by the end of the year concerned if the tax advantage exceeds NIS 5 million in the tax year or NIS 10m. over four years. So if your tax planning is at odds with an ITA position, you must tell them so they know where to start a tax audit.
There are similar reportable tax-shelter rules in the US, UK and elsewhere.

However, no reporting is needed from certain Israeli charities, nor from individuals or companies with incomes below NIS 3m. or capital gains below NIS 1.5m. in the tax year.

For VAT and customs purposes, the tax advantage threshold is NIS 2m. in the year or NIS 5m. over four years. The income tax positions must be reported within 60 days after filing the main annual income tax return, and the VAT positions must be reported within 60 days after the year-end.

Below are some highlights of the latest batch of reportable positions.

Use of company homes

It used to be possible to save tax by living in a home belonging to your company. That loophole has been closed. Major shareholders must now report as income the value of a home transferred to their private ownership, less any mortgage. But if the mortgage stays on the balance sheet of the company, it is now reportable to the ITA.

Wallet companies

A wallet company is a private, closely held company owned by five or shareholders or their relatives that meets certain alternative criteria. Profits of a wallet company may be taxed at personal rates up to 50% instead of 23% company tax. One alternative applies if the company derives income from the activity of 10%-or-more shareholder individual for another party, if the activity is of a type done by an employee for an employer.
Normally, that would raise a question whether employer-employee relations effectively exist. But the ITA claims this criterion is “not rebuttable,” and if you think otherwise, that is a reportable position.  Comment: The ITA has gone out on a limb here, apparently, and it remains to be seen whether this will reach the courts. And there may be exceptions in subsections not mentioned by the ITA, e.g., no customer accounts for 70% or more of revenue or profit. Wallet companies are a hot new Israeli tax topic.

Foreign residents working in Israel

Foreign residents working in Israel off and on must pay tax on salary and other benefits – vacation pay, sick pay, bonuses, severance pay, share options and so forth – pro rata to the period they work in Israel relative to the total period worked. If you leave out perks or claim the work abroad is worth more, that is a reportable position.

CFC loophole closed

A controlled foreign company is a passive Israeli-owned foreign company in a low-tax country with “unpaid” (i.e. undistributed) profits that are taxed as deemed dividends under detailed rules. Many countries have similar rules.
Suppose Company A in Israel owns company B abroad which owns company C abroad. Company C sells an asset and makes a capital gain. The ITA says Company A cannot offset the cost of its investment in Company B against the capital gain of Company C for CFC tax purposes. If you think otherwise, this is a reportable position.

Liquidation of a foreign company by an Israeli company

The ITA says the Israeli company cannot claim a foreign tax credit for underlying corporate taxes paid by the foreign company. If it does, that is a reportable position: Comment: This is debatable. The ITA recently lost a case involving a sale rather than a liquidation of shares in a foreign company in the Israeli District Court (Delek Hungary Ltd vs. Netanya Assessing Officer, 28212-11-15, 14745-07 of July 9, 2018).

Capital loss of oleh after 10-year tax holiday

New and senior returning residents enjoy a 10-year tax exemption from Israeli tax on foreign source income and gains. If a capital loss is made in year 11-on, the ITA says only the post-10-year portion is recognized as a loss on a time-split basis, because a capital gain would be taxed in a similar way. If you think the whole loss can be offset against other capital gain, this is a reportable position.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

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