Pesach is coming, otherwise known as the season of our freedom. We celebrate the headlong rush by the children of Israel out of slavery, through the Red Sea and into the desert for 40 years. This prompts us to ask and answer 4.0 questions about the process. In this article, we will pose a few more frequently asked questions about the tax system facing today‘s children of Israel and their parents.
Q1: We live in Israel and my wife is a US citizen. How can we avoid Israeli and US estate and gift taxes?
A1: The first part is easy there are no estate or gift taxes in Israel, although gifts of assets to foreign residents are subject to Israeli capital gains tax if there is any gain. As for the US, check whether with US advisors you should put assets into a dynasty trust. In this way you may beat US estate and gift taxes currently 35% (federal rate), expected to rise to 45% or 55% in 2013.
Q2: I live in Israel and expect to inherit a building in Manhattan from my Dad which cost him $10,000 in 1962 and is now worth $20 million. Most of that was subject to around 40% in federal and state estate taxes. If I sell it, will I also have to pay Israeli capital gains tax?
A2: Yes, Israeli capital gains tax will be due at rates of up to 48%. But to avoid severe double tax indigestion, consider: (1) applying to the Israeli tax authority (ITA) to step-up the historical cost to the probate value, or (2) a special trust arrangement. Professional Israeli advice is needed.
Q3: Should I establish my start-up business offshore?
A3: Perhaps, but check the alternative of low Israeli tax rates ‘‘preferred enterprise‘‘ in industry or tech. If 25% of revenues are from export markets and other conditions are met, company tax rates are currently 5%-10% in development area A, and 8%-15% elsewhere in Israel. R&D expenditure is deductible over 1 , 3 years. Various grants are available.
Q4: Fine, but what about a deduction for my investment as an angel in an Israeli start up?
A4: Foreign and Israeli resident Individuals may deduct from total taxable income for Israaeli tax purposes a qualifying investment of up to NIS 5 million in shares of target companies over a benefit period of three tax years commencing with the tax year in which the investment is made. The investment must be made in the years 2011-2015. At least 75% of the amount invested by the individual must be used for R&D expenditure approved by the Chief Scientist’s Office by the end of the benefit period.
And two extra frequently asked questions, to help celebrate the Maimuna ..
Q5: What about capital gains tax upon an exit from an Israeli start-up?
Q5: foreign investors may enjoy an exemption from Israeli capital gains tax when they sell Israeli securities acquired on or after 1 January 2009. This does not apply to Israeli real estate related investments or to securities attributable to an Israeli permanent establishment. Investors should check the tax situation in their home country. Israeli resident investors currently pay capital gains tax at a rate of 30% if they hold 10% or more of the company, or at a rate of 25% in other cases.
Q6: I set up an offshore discretionary trust for the benefit of my wife and kids. We all live in Israel. Will Israel try to tax it?
A6: Yes. Since 2006, Israel imposes tax on worldwide income of trusts set up by Israeli residents for the benefit of Israeli residents. The trustees are responsible for reporting paying the tax, regardless of any foreign law. Exemptions are available for Olim settlors (=grantors), foreign resident settlors, foreign resident beneficiaries, etc.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.