Guy Katz, Herzog Fox & Neeman, Israel Income Tax

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Lecturer: Guy Katz, Adv. (CPA)
Partner, Tax Department, Herzog, Fox and Neeman, Tel Aviv
Email: [email protected]
Tel: +972 (0)3- 6922035
Table of Contents
Exchange of Information Agreement
And FATCA
How To Be Prepared
Recent cases
Exchange of Information
Exchange of Information Through
Double Taxation Treaties
International Tax Information
Exchange Agreement
Proposed Legislation Regarding
Exchange of Information
FATCA
Exchange of Information
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
• In non-criminal matters, under current Israeli domestic
law, the Israeli Tax Authority is generally allowed to
provide information to foreign tax authorities only
pursuant to the provisions of double taxation treaties.
• The scope of exchange of information depends on the
terms and limitations of each double taxation treaty.
• Israel has an exchange of information provision included in
each of its double taxation treaties (approximately 50
treaties).
Exchange of Information – United States Treaty
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
Models for Exchange of Information
• Automatic Exchange of Information
Double
Taxation
Treaties
- OECD Treaty Model for exchange of Information of February 2014.
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
- On 29 October 2014, 51 jurisdictions signed a multilateral component
authority agreement to automatically exchange information based on
Article 6 of the Multilateral Convention.
- The agreement specifies the details as to what information will be
exchanged and when, as set out in the Standards for Automatic Exchange
of Financial Information in Tax Matters
Exchange of Information – Proposed Legislation
•
On January 29, 2014, the Government of Israel proposed legislation which
would allow for the exchange of information in accordance with international
information exchange agreements.
•
According to the proposed legislation, the Israeli Tax Authority will be able to
exchange information with other tax authorities, subject to the exceptions set
out in the international information exchange agreements and the following
terms:
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
–
–
Proposed
Legislation
FATCA
–
The information is relevant to the enforcement of the foreign domestic tax law of the requesting
party, which the Israel Tax Authority could use for the enforcement of its own domestic tax law.
The other contracting country is required to protect the information under confidentiality
obligations set out in the International Treaty.
The other contracting country will use the information only for the enforcement of its domestic
tax law, and as such, will not provide the information to: (i) another party in the country when
such information is not for the purpose of the enforcement of its tax laws; and (ii) another
country for any purpose.
This new proposed legislation will enable Israel to sign
bilateral conventions for the automatic exchange of
information
Exchange of Information – Proposed Legislation
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
•
The new proposed legislation, in its current form would enable a wide
exchange of information with regard to tax matters .
•
According to the current proposed legislation, the authorized person has the
right to provide and exchange information with other tax authorities even
based on his own initiative.
FATCA 2014- Step By Step
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
March
2014
April
• The draft directive published by the
Supervisor of Banks
• Memorandum for the introduction of
legislation
2014
Proposed
Legislation
June
2014
FATCA
• Signing the Intergovernmental Agreement
FATCA- Supervisor of Banks
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
•
In March 2014, the Supervisor of Banks published a draft directive for
banking corporations.
•
The draft directive instructs the corporations to determine the policy and
procedure in order to implement the legislation commonly known as the
Foreign Account Tax Compliance Act (“FATCA”) .
•
The Supervisor of Banks states that the refusal to provide services to a
consumer who does not cooperate, shall be considered as reasonable
refusal according to the Banking Law (Customer Service) 1981 .
FATCA- Memorandum for the introduction of
legislation
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
•
In April, 2014, the Ministry of Finance published a memorandum of
legislation (one step before proposed legislation) in accordance to the
FATCA.
•
The Memorandum for the introduction of legislation is aimed at authorizing
the Minister of Finance to issue regulations which will facilitate identifying
the owners of accounts in Israeli financial institutions (“FFI”) in order that
Israel will be in a position to implement the Intergovernmental Agreement
(“IGA”).
•
The Minister of Finance has not yet issued the proposed regulations.
Proposed
Legislation
FATCA
FATCA- Signing the Inter-Governmental Agreement
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
•
On June 30, 2014, the State of Israel and the United States of America signed
an IGA in respect of the FATCA.
•
This IGA is what is referred to as a "Model 1" IGA: compliance with FATCA is
through local government.
•
US FFI will be obligated to identify accounts held by Israeli residents and
submit that information to the US Government, which will then submit that
information to the Israeli Government.
FATCA- Signing the Inter-Governmental
Agreement
Double
Taxation
Treaties
International
Tax
Information
Exchange
Agreements
Proposed
Legislation
FATCA
•
The IGA is also aimed at enabling the Israeli FFI, to which the FATCA
provisions apply, to comply with FATCA by providing information to an
Israeli government agency, instead of to the Internal Revenue Service
("IRS").
•
Israeli FFIs will not need to enter into an agreement with the IRS in order to
avoid the status of "Non-participating FFIs".
•
Israeli FFIs that would have otherwise been subject to FATCA reporting are
defined as "Reporting Israeli FFIs". Reporting Israeli FFIs are not considered
Non-participating FFIs and are therefore not subject to FATCA withholding,
unless they are determined to be in significant non-compliance with their
obligations under the IGA.
How To Be Prepared
Voluntary Disclosure
Program
Settlements for Israeli
Residents Trusts
Settlements for Foreign
Residents Settlors
The Voluntary Disclosure Program
The
Voluntary
Disclosure
Program
• On September 7, 2014, the Israeli Tax Authority ("ITA")
announced a new voluntary disclosure procedure
(“VDP”).
Settlements
for Israeli
Residents
Trusts
• Full payment of tax 2004- 2013
Settlements
for Foreign
Residents
Settlors
• Tax on principal- ?
Tax Settlements for Israeli Residents Trusts
The
Voluntary
Disclosure
Program
Settlements
for Israeli
Residents
Trusts
Settlements
for Foreign
Residents
Settlors
• Full payment of tax 2003 - 2014
• 10% tax on principal.
Tax Settlements for Foreign Residents Settlors
Trust Type
Taxable Income
Tax on Capital
Trusts
The
Voluntary
Disclosure
Program
Settlements
for Israeli
Residents
Trusts
Settlements
for foreign
Residents
Settlors
Aspects
Family Trust, and the settlor
is alive
1/3 of the applicable tax during 3% of the trust
the Determining Period
capital
Family Trust and the settlor is 1/2 of the applicable tax during
no longer alive
the Determining Period
4% of the trust
capital
Trusts in which the
beneficiaries have apparent
potential ability to influence
the trust
2/3 of the applicable tax during
the Determining Period
6% of the trust
capital
The beneficiaries had no
influence on the trust
0% of the applicable tax
0% of the trust
capital
Israeli beneficiary trust with
no family relationship
Subject to the discretion of the assessing officer
Recent Court Cases and Proposed Legislation
Residency (Individual)
Residency
Management and control
Recent Court Cases -Residency
Residency
(Individual)
Management
and Control
* Splitting the Family Unit
Kfar Saba Tax Assessor vs. Michael Sapir, Civil Appeal 4862/13
Factual Background:
- Michael Sapir (“Sapir”), lived with his family in Singapore from 1994 to
1998. They returned to Israel, but in June 2001, Sapir left again for
Singapore by himself.
- Sapir spent the following days:
In 2001: 224, 2002-2005: minimum of 644 days (he met conditions for
the “presence test” terms ).
- Sapir submitted annual reports for 2001-2005, and did not include his
income in Singapore.
- The Kfar Saba tax assessor argued that the income in Singapore shall
be considered as income of an Israeli resident and thus taxable in
Israel.
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* Splitting the Family Unit
Kfar Saba Tax Assessor vs. Michael Sapir, Civil Appeal 4862/13
Tel Aviv District Court:
- Judge Altuvia Magen ruled that Sapir was an Israeli resident during
2001, according to the significant amount of days that he spent in
Israel.
- During 2002-2005, according to the test of the “center of life”, Sapir
is considered as a foreign resident.
- Magen Altuvia determined that the family’s place of residence is a
persuasive indicator of the taxpayer's place of residence but not a
conclusive one. In this case, the taxpayer proved that most of his
connections are with Singapore and accordingly, he should be
recognized as a foreign resident.
 The Tax Authority appealed to the Supreme Court
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* Splitting the Family Unit
Kfar Saba Tax Assessor vs. Michael Sapir, Civil Appeal 4862/13
Supreme Court:
- Justices Esther Hayut, Hanan Meltzer and Uzi Fogelman rejected the
Tax Authority’s appeal, and determined that he was not an Israeli
resident.
- Justice Hayut clarified that even though the center of life of a person
is usually where his family lives, there are families that live differently
and accordingly, it is not the only indictor for determining residency.
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* The Presence Test and “Center of Life” test
Avraham Cohen Vs. Tel Aviv 3 Tax Assessor , Civil Appeal 2704/13
Factual Background:
- Avraham Cohen (“A.K”) argued that he was a resident of Romania
during the years 2005-2006. In fact, he had permanent residence in
Israel, his family lived in Israel, and he owned an active company in
Israel. He also had financial interests in Romania.
- The Tax assessor determined that he was an Israeli resident during the
relevant period according to the “presence test” and also according to
the indicators of his center of life.
 The factual background is different from the Sapir Case.
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* The Presence Test and the “Center of Life”
Avraham Cohen Vs. Tel Aviv 3 Tax Assessor , Civil Appeal 2704/13
District Court:
- Judge Yona Atadgi ruled that according to the “presence test” and the
“center of life” examination, AK was an Israeli Resident. AK had failed
to prove differently, and also did not present important witnesses
which could support his subjective intentions .
Supreme court:
- The 3 judges rejected the appeal. They ruled that the dispute revolves
around facts and the reliability of the taxpayer, and in which the
Supreme court cannot interfere.
- Judge Yitzchak Amit clarified that the refusal of AK to cooperate with
the Tax authorities , and the fact that he did not present witnesses are
enough in order to determine that his center of life was not in Israel.
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* Relocation
Zur Vs. Haifa Tax Assessor , Tax Appeal 19466-01-12
Factual background:
- The appellant (“Zur“) relocated to Hong Kong from January 2006 to
August 2008, with her family. Her husband left his position in Israel
and the children went to school in Hong Kong.
-
Her Israeli employer withheld taxes for this period of time, since he
assumed that she was an Israeli resident. Zur requested a tax refund
which the tax assessor refused, and determined that she was an
Israeli resident.
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* Relocation
Zur Vs. Haifa Tax Assessor , Tax Appeal 19466-01-12
District Court:
- Judge Ron Sokol ruled that Zur was a resident of Hong Kong in the
relevant period of time, since she had transferred her center of life.
- Even though Zur met the condition of the second “presence test”
(more than 425 days from 2004 to 2006 ) for 2006, the judge clarified
that when a taxpayer transfers his center of life during the relevant
time period, the examination is different. If it is proved that the center
of life had been transferred during the relevant time period, the days
prior to the date of transfer would not have an influence on
determining the center of life location.
 This is an important ruling in the matter of classification of tax payers who
relocate for a short period of time. This case can support a different position
from the position of the ITA which is presented in circular 1/2012 and
determines that relocation for less than 3 years cannot change a residency
Recent Court Cases- Residency
Residency
(Individual)
Management
and Control
* Relocation
Zur Vs. Haifa Tax Assessor , Tax Appeal 19466-01-12
 The influence of amendment 168 to the Ordinance
Definition of foreign resident:
1
2
183 days 183 days
3
4
center of life center of life
Residency
(Individual)
Management
and Control
Proposed Legislation- reporting obligation
(Residency)
• The Economic Efficiency Law ( Legislative Amendments for
Implementing the Economic Plan for 2015)5774- 2014 :
-
-
Applying the reporting obligation on an individual who meets the
“presence test” conditions, according to the definition in section 1
(a)(2) to the Ordinance (425/183 days) and the presumption, can be
refuted according to his arguments.
Exceptions:
1. Income Tax Regulations(designation of individuals who shall be
deemed Israeli residents and designation of individuals who shall not
be deemed Israeli residents ) 5766-2006
2. Foreign worker ( as defined in section 48A to the Ordinance)
Recent Court Cases- Management and Control
Residency
(Individual)
Management
and Control
Niago Vs. Kfar Saba Tax Assessor, Civil Appeal 3102/12
Factual Background:
- The Appellants worked in the Textile area and held 2 companies, one in
Israel which worked with Israeli manufacturers and one in the
Bahamas, which provided services to foreign residents.
- The Bahamas company distributed dividends to the appellants.
- On the one hand, the Tax assessor claimed that the dividend is taxable
in Israel since the Bahamas company is an Israeli resident according to
the control and management test.
- On the other hand, the tax assessee claimed that the company had a
foreign business activity, foreign residents directors, and that the
board meetings were held outside of Israel and thus the company was
controlled and managed out of Israel.
Recent Court Cases- Management and Control
Residency
(Individual)
Management
and Control
Niago Vs. Kfar Saba Tax Assessor, Civil Appeal 3102/12
District Court:
- Judge Magen Altuvia rejected the appeal. He ruled that the strategic
decisions were made in Israel by the appellants or by their sons in
Israel and that the platform that they had outside of Israel did not
have a substantive effect on their business activity.
Supreme court:
- The 3 judges rejected the appeal. Judge Miriam Naor ruled that the
ruling of the District Court is based upon “solid ground” and the
conclusion that the management and control of the company were
performed in Israel is well based.
Recent Court Cases- Management and Control
Residency
(Individual)
Management
and Control
Yanko weiss Vs. Holon Tax Assessor, Tax Appeal 1090-06
Factual Background
- The Weiss and the Yanko which are Israeli residents couples, held a
company that was registered in Israel. After a while it was also
registered first in Luxemburg and After in Belgium.
-
This company had a business activity within and outside of Israel. The
company held an Israeli subsidiary.
-
The company sold its subsidiary and did not report on the capital gain
in its tax report. The tax assessor claimed that the company is an
Israeli resident and assessed its capital gain .
Recent Court Cases- Management and Control
Residency
(Individual)
Management
and Control
Yanko weiss Vs. Holon Tax Assessor, Tax Appeal 1090-06
District court:
- Judge Magen Altuvia rejected the appeal.
-
He examined the Management and control test and ruled that even
though the company had a real business activity in Belgium, Mr. Yanko
and Mr. Weiss controlled the company from Israel and they were the
actual managers and accordingly, the company is an Israeli resident.
-
Judge Altuvia also clarified that the electronics abilities which exist in
this decade, and enable contact to be made even at a distance of
thousands of kilometers, increases the burden of proof for Israeli
residents who claim that the management is outside of Israel.
Proposed Legislation (Residency)
Residency
(Individual)
Management
and Control
• The Economic Efficiency Law ( Legislative Amendments for
Implementing the Economic Plan for 2015)5774- 2014 :
-
Applying the reporting obligation on an Israeli resident beneficiary,
from the age of 25, and only if the total of the trust’s assets is not less
than NIS 100,000 .
• Trust’s Assets- including cash, deposits, securities and real estate in
Israel or outside of Israel.
- Cancelation of section 14(d) to the Ordinance
• The possibility to extend the periods of exemptions for an immigrant
or senior resident who has made a significant investment in Israel and
can contribute to the national objectives of the State of Israel.
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