Recently, the Finance Committee concluded its deliberations
regarding the imposition of tax legislation pertaining to
"wallet companies" (companies owned by individuals who
provide services through them) within the scope of the Arrangements
Law for 2017 – 2018.
The original draft bill was softened and even sweetened for a
particular period by the Finance Committee. The Finance Committee
decided that wallet company profits will be taxed as if they were
business income, occupational income or a salary earned by the
controlling shareholder – in other words, at the marginal tax
rate of the individual controlling shareholder (up to 48%) instead
of at the corporate tax rate (currently 25% and scheduled to be
lowered next year to 24%). Provisions were also prescribed with
regard to taxation of wallet company assets.
It is important to note that the tax rules applying to those
wallet companies which are owned by persons engaging in free
professions were narrowed during the Finance Committee
deliberations. The Committee also decided that, on the matter of
taxation of retained profits in these companies, theoretical
dividends (distributions) will not be taxed automatically, but
rather, by a public committee, and even then, under the following
profits accumulating up to a total of
NIS 5 million will not be subject to the new legislation;
only up to 50% of the profits
accumulating in a company may be distributed, provided that they
did not accumulate during the five years preceding that
the company's controlling
shareholder will be taxed, as long as the balance of the retained
earnings in the company is not under NIS 3 million.
The sweetening of the pill is presented in the form of a
temporary order for 2017, whereby a dividend distribution will be
allowed at a reduced tax rate of 25% instead of 30%, and without
any additional surtax, which is scheduled to be increased to 3% (it
is currently 2%).
It is important to note that the legislation in this regard is
expected to be passed by year end.
The Multilateral Convention Regarding Mutual Administrative
Assistance in Tax Matters
In November 2015, the State of Israel joined the more than 100
countries that signed the multilateral convention regarding mutual
administrative assistance in tax matters ("the
Convention"). The Convention will come into effect on January
1, 2017. This convention, on behalf of the OECD and the EU Council,
is designed as a tool for international cooperation on tax matters
and for contending with instances of tax avoidance and evasion.
The Convention includes provisions regarding cooperation on the
following issues: information exchanges (specific, automatic and
spontaneous), assistance with simultaneous tax audits, the presence
of representatives of one country during the tax audits in the
other country, assistance with tax collection proceedings, a
document transfer service and more.
However, the State of Israel notified that it shall not
implement the sections pertaining to assistance with collection
proceedings, document transfers and the presence of foreign
representatives during tax audits in Israel.
These objections practically empty the Convention of content,
particularly in light of the fact that the State of Israel joined
the Common Reporting Standard (CRS) – a multinational
information exchange standard among countries that will come into
effect at the end of 2018 and considering the more than 50
bilateral tax treaties that the State of Israel has signed.
Originally published on December 11, 2016
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