The Israeli Tax Administration (ITA) has issued more reportable tax positions that are similar to reportable tax accommodations in the US and UK tax systems. The latest batch refers to the 2020 tax year and targets international cases, immigrants and trusts. In Israel, the ITA often uses the reportable tax positions to enforce its interpretation and change accepted tax practice.What are Reportable Tax Positions?A reportable income tax position is a position that contradicts a position published by the ITA if the tax benefit exceeds NIS 5 million in the tax year or NIS 10 million over four years. However, reporting is not required from certain Israeli charities or individuals or companies with income below NIS 3 million or capital gains below NIS 1.5 million in the tax year. Reportable income tax positions must be reported within 60 days of filing the main annual income tax return. If your tax planning is in conflict with an ITA position, you must notify them on Form 146 so they know where to start a tax audit. If you fail to reach an agreement with the ITA on such a position, you must decide whether to accept it or whether to go to court. The latest items complement previous items from 2016. Some of these relate to sales tax and customs and excise taxes.
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What’s newBelow is an overview of the latest reportable tax positions. But they are technically significant.Israeli parent companyWhen an Israel-based company receives a dividend from an affiliate and applies for a tax credit in Israel for underlying corporate tax and withholding tax on dividends from the overseas company, the ITA says that an excess overseas tax credit may not be able to be carried forward. Comment: The tax law appears to allow withholding tax on excess dividends to be carried forward for up to five years. The ITA also says that if the Israeli company paid a lot of corporate tax and the foreign company B paid little or no corporate tax, the Israeli parent company could not use the taxes of the two companies when calculating the tax credit for foreign companies in Israel sum up. Comment: There may be alternative interpretations.Controlled Foreign Companies (CFC)When calculating the taxable dividend of a passively controlled foreign company (CFC), usually an offshore company, the ITA says that foreign corporation taxes that are deferred until a dividend is paid will not help prevent Israeli tax. A CFC pays a maximum of 15% tax. Comment: This is aimed at, among others, passive Estonian companies. You apparently pay 20% tax but will be deferred until a dividend is paid. According to the ITA, when calculating CFC profits and dividends that are considered dividends, no losses may be repaid, even if redemption is permitted under foreign law.Blocker companiesSuppose you invest in the US through a foreign company in a third country (e.g. offshore) that is tax transparent in Israel, not in the third country. According to the ITA, any foreign tax credit is limited to the lower withholding tax that applies in the US or third country. Comment: This is aimed at offshore blocker companies looking to avoid the US estate tax, but there are other options.Trusts for families in Israel and abroadIf the trustee of a fully taxable Israeli Resident Trust (IRT) transfers non-cash assets to a second trust, the ITA will say that the second trust is also a taxable IRT, unless capital gains tax is paid on the transfer or immigration . 10- There is an annual leave of absence. Comment: This is apparently supposed to be an extra-legal concession to allow a split between Israeli and non-Israeli beneficiaries when various conditions are met, but remains silent about what happens afterwards. It could be argued that under certain sections of the tax law there is no tax liability for investment income anyway. Professional advice is recommended. The ITA also says that a reduction in trust assets will trigger a capital gains tax if there are beneficiaries both in Israel and abroad and the trust only reports the proportion of Israeli residents. Comment: This raises questions and professional advice is recommended. Every American should look up the Israeli-American tax treaty.More about new immigrantsAs a reminder, in 2019 the ITA took a position that dividends from immigrants (new and senior returning residents) from Passively Controlled Foreign Corporations (CFCs) and active foreign professional organizations are taxable from January 1 of the 10th year of their Israeli tax vacation foreign income and profits. This can shorten the 10 year tax vacation. In certain cases, as always, contact experienced tax advisors in each country early on. The author is an auditor and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon @ h2cat. com