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Year-End Tax Planning Checklist

With coronavirus and possible elections on our mind, it is easy to forget that the Israeli tax year ends soon, on December 31. There may be many things to consider including those outlined briefly below.

The Big Picture:

The pandemic means the Israeli government is confronted with rising expenditure on corona grant support and falling tax revenues from many businesses and personnel laid off. It seems fair to assume Israeli tax rates may soon rise even if there is less income to tax.

 Businesses:

Businesses should consider among other thing: corona grant claims; considering adjusting monthly income tax installments (Mikdamot);  income and income timing; expenses and expense timing; inventory (stock) count on December 31; other accruals or provisions.  Is long term project planning possible? What about charitable donations? Most corona grants are subject to income tax, not VAT. Some are subject to national insurance. New equipment may entitle you to temporarily accelerated depreciation

The tax law allows you to consider writing off bad customer debts and make reasonable provision for proven doubtful debts e.g. in liquidation or other legal proceedings. Inventory write-offs or destruction require notification to the local Tax Office.

Intercompany transactions between related parties must be on arm’s length terms. Transfer pricing studies are necessary and helpful. Related means at least 50% of any means of control or common control.

E-commerce can be good for making money but is in for a bumpy tax ride in 2021. Hitech companies and online operators may incur heavier taxes on sales and/or profits in the US, EU and elsewhere thanks to OECD and other initiatives.  Prime targets are companies that use online marketplaces (e.g. Amazon, Shopify, etc), agents, warehouses and fulfillment houses or make digital supplies.

The Biden administration is expected to raise US federal taxes.

International businesses and investors must therefore review what action is needed now to mitigate all this.

In Israel, so called “wallet companies” (Hevrot Arnak) face a battery of rules that can turn the 23% company tax rate on profits into income tax at rates ranging up to 50%. This is possible if a closely held company provides managerial or officer services, services of an employment nature, or derives 70% of revenues or profits from one customer/group for 18 months in any period of 4 years. Also caught are loans to (not from) major shareholders over NIS 100,000 or personal use of company assets. Check what needs doing. Loans to 10%-or-more shareholders outstanding at the end of 2019 should be repaid before the end of 2020 (and not reinstated).

Are your pension, study funds (Hishtalmut) and life insurance enough?  Major shareholders of private companies should consider pension funding and severance funding within limits, plus side plan funding under Amendment 190 of the Income Tax Ordinance.

Mandatory pension funding applies to employees and the self-employed.

Study funds (Kranot Hishtalmut) are very tax efficient if you contribute each year for 6 years at prescribed rates.

Consult a pensions/insurance specialist about monthly funding and annual top-ups before December 31.

On the Personal Side:

Before you reach 120, do you and your spouse have up to date wills in each relevant country? If not, consult your lawyer immediately.

Before others reach 120, are you expecting an inheritance from abroad? If so, you should plan against double tax – inheritance/estate tax abroad and capital gains tax in Israel upon a subsequent sale.

Personal investments:  check foreign taxes, and any Israeli foreign tax credit or Aliya exemption? Have you filed Israeli half yearly capital gains tax reports regarding foreign securities sold?

Aliya tax breaks. Are you a new or senior returning resident who lived abroad 10 years? If so, do you optimize the Aliyah 10 year exemption for foreign income and gains?

Most trusts with an Israeli resident settlor or beneficiary are now taxable in Israel, unless an Aliya exemption applies or other exemptions in certain cases. Needs checking,

Are your pension, study funds (Hishtalmut) and life insurance enough? See above.

Israeli real estate briefly: Israeli home rental income over NIS 5,100 per month (in 2020) is taxable. Above that level, there are multiple possibilities, check which suits you.

Charitable donations this year to approved Israeli charities in the year may qualify for a 35% tax credit, within certain limits (minimum NIS 190, maximum NIS 9,350,000 or 30% of income). For example, if you donate NIS 1,000, you may get a NIS 350 reduction in your Israeli tax bill.

Further information:

Please contact [email protected] and [email protected] to discuss any of thee above items in further detail. Please contact advisors in other countries too where potentially relevant – we’ll be happy to hold a three way discussion with you and them to help optimize things at the international level.

Happy Chanukah and keep well! 

H2CAT Harris Horoviz Consulting & Tax Ltd
ACCOUNTANTS & ADVISORS
Tel: +972-3-6123153
Mob: + 972-54-6449398
[email protected], [email protected]

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