The Israel Tax Proposals for 2017-2018 budget include major changes with respect to Israeli international taxation. The Israel Tax Proposals for 2017-2018 would be relevant mainly for individuals in Israel, foreign companies operating in Israel, and Israeli companies operating abroad. The Israel Tax Proposals for 2017-2018 budget plan and the related tax measures are pending approval by the Knesset.
It is anticipated that the Israel Tax Proposals for 2017-2018 in the draft legislation will be modified in various ways. The following is a summary of the proposed tax changes included in the Israel Tax Proposals for 2017-2018.
Management and Control
The Israeli Tax Ordinance contains two provisions to determine the Israeli residence of a corporation, one of them is basically the control and management of a “body of persons” incorporated outside of Israel. This is usually referred to as the Management and Control test.
Israeli courts have ruled that a formal examination of management and control through holding of shares or rights in the company is not enough, but rather, a more substantial examination is required to identify the place where the business policy of the company is set, and the actual place of running the business.
An amendment to section 1 of the Israeli Tax Ordinance according to Israel Tax Proposals for 2017-2018 would introduce a rebuttable presumption that the management and control of a company incorporated outside of Israel would be viewed as being located in Israel if: Israeli residents for tax purposes are the controlling persons, the beneficiaries of or are entitled to 50% or more of its income or profits, directly or indirectly, and the effective tax rate for all of its profits, is 15% or less and one of the following applies: (1) the body of persons is a resident of a country with which Israel does not have a tax treaty; or (2) its country of residence, is a country that does not levy tax on income generated outside of the country.
In addition, Israel Tax Proposals for 2017-2018 suggests an amendment to section 131 of the Israeli Tax Ordinance creating and imposing a reporting obligation for a body of persons claiming such provisions do not apply.
New Immigrants and Senior Returning Residents
The draft legislation of Israel Tax Proposals for 2017-2018 included a proposal that would repeal, as of 1 January 2017, the reporting relief of New Immigrants and Senior Returning Residents, as defined in section 14(a) of the Israeli Tax Ordinance.
See also: Taxation of New Immigrants - Updates
Base Erosion and Profit Shifting
The draft legislation of Israel Tax Proposals for 2017-2018 contains registration requirements for multinational corporations. It is suggested to impose reporting obligations with respect to multinational transactions between related parties, pursuant to Action 13 of the OECD’s BEPS, Base Erosion and Profit Shifting plan (Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting).
Following Action 13 of the BEPS report, it is proposed in the Israel Tax Proposals for 2017-2018 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 Israel Tax Proposals for 2017-2018 suggests issuing regulations that shall specify the documents and information that should be submitted to the Israeli tax authorities, including, in certain circumstances, in respect of the foreign activities of the group in other jurisdictions.
Controlled foreign company
Another measure that the draft legislation of Israel Tax Proposals for 2017-2018 comprises is a modified definition of “passive income” relevant to the controlled foreign company (CFC) rules. The current CFC rules order that income derived from interest, linkage differences, royalties and rent will not be considered passive income if they originate from a business. See also: The Israeli CFC Rules
The new amendment would introduce a rebuttable presumption providing that interest income, linkage differences, royalties, and rental income would be considered to be passive income as provided in the law, even if received as business income.
Encouragement of Investments
The encouragement of Capital Law provides various tax benefits to preferred enterprises, including reduced corporate tax rate of 16% and 9% (instead of the official rate of 25%) and reduced withholding tax rate of 20% on dividends (instead of the official rates of between 25% to 30%).
The Israel Tax Proposals for 2017-2018, introduces new incentives intended to encourage foreign investors to invest in the Israeli high-tech sector. These incentives include, among others, a reduced corporate tax rate of 12% and 6%, and 4% withholding tax rate on dividends.
Dr. Avi Nov Law Offices, Israeli & international tax law
*this article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion