Your Taxes: Budget Bill Progresses

The Knesset Finance Committee is working day and night debating, amending and approving tax measures in the latest budget bill. Below is an overview of what we know so far, according to announcements by the Knesset Finance Committee and the Israeli Tax Authority (ITA). They are not final, unless and until they pass second and third readings in the main Knesset chamber. This is expected to happen in the next week or so. Only when a final law is published will we have full conclusive details. The summary below should be read with this in mind.

Tax rates:

The standard rate of company tax will drop from 25% in 2016 to 24% in 2017 and 23% commencing in 2018. See below for technology companies.

In the case of individuals, income tax rates will continue to range up to 50%, including a 3% surtax for annual income above NIS 640,000. Currently, the surtax is 2% on annual income above NIS 810,720. When the surtax applies, it also applies to passive investment income, capital gains and land appreciation thereby making the passive income rates with surtax 28%-33% in 2017 compared with 27%-32% in 2016.

Multi Homes Tax:

After fast and furious debate, the Knesset Finance Committee passed a contentious new multi homes tax. This followed successive changes to the draft text and claims there was insufficient time for Knesset members to digest it all. A challenge in the Bagatz High Court may yet follow.

Subject to this, if a person owns 2.5 homes or more, the tax will apply to the third home onwards, on the cheapest. The tax will be 1% of the taxable value, up to NIS 18,000 per year. However, the next two homes may be exempt if they are worth no more than NIS 1,150,000.

The floorspace used in the calculation will be the same as the city tax floorspace or home entitlement area (no details given) at the taxpayer’s choice. Upon a sale of a home by someone with three or more homes, a sale gain of up to NIS 2 million may be deposited in a savings fund until age 60, with no tax on the capital gain upon eventual withdrawal – this could be interesting for older investors, but we must wait for details of what the Knesset will finally enact.

Technology companies:

Certain preferred tech companies that derive their profits from intellectual property will be reduced from 9%-16% to 12% in the center of Israel and 6% in the peripheral areas. Dividends will be subject to 4% withholding tax.

Thus the combined Israeli tax burden on distributed profits of tech enterprises should range from 9.76% to 15.52% if applicable conditions are met.

Those conditions are intended to meet OECD recommendations addressing BEPS (base erosion and profit shifting) regarding technology emanating in Israel.

There will be a stability clause regarding continuity for 10 years for groups with revenues over NIS 10 billion – a similar clause caused much controversy when Israel’s gas tax rules were being amended.

Grants for plants in the Negev may be increased from 20% to 30%.

The cities of Jerusalem and Beer Sheva will be empowered to reduce the old company tax rate of 9% to 7.5%.

Wallet companies:

The bill contains measure for taxing the retained profits of companies.

This is intended to stop companies hoarding cash or assets instead of distributing taxable dividends.

First, withdrawals of cash by shareholders may be taxed at the end of the following year. The use of company assets such as homes, planes and boats will also be taxed.

There will apparently be transitional relief for cash returned to the company by the end of 2017 and assets and homes returned to the company by the end of 2018.

Second, the income of “employee companies” formed by executives and de facto employees will be attributed to the shareholders and taxed at margin tax rates.

Third, the Tax Director may seek the approval of a public committee and order the distribution of a dividend of up to 50% of retained profits that were accumulated over 5 years ago. Also, Accumulated profits should exceed NIS 5 million and at least NIS 3 m should remain in the company.

Dividend Tax Reduction:

It is reported that the tax on dividends paid to 10%-or-more shareholders out of profits accumulated up to the end of 2016 will be reduced to 25% instead of 30%-32%, if the dividend is paid between January 1 – September 30, 2017. However, to prevent abuse, dividends paid each year in 2017-2019 should not be less than the annual average other payments – salary, management fees, interest – to those shareholders in 2015 and 2016

Privatized Kibbutzim:

Until now, Kibbutzim were taxed on a communal basis like partnerships. Kibbutz income is split evenly among all Kibbutz members. Now, income will be split among members according to their actual income received and grossed up. This is expected to result in more tax, more like the outside world.

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

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.