A decision was recently rendered in the Tel Aviv District Court by Judge Yardena Seroussi in the case of Hexa Solutions Ltd. Within the framework of the decision, the appellant’s motion for reversal of the burden of proof in the proceeding was accepted, such that the tax assessor is to begin with presenting his evidence and only afterwards will the appellant be required to bring its evidence.
The aforesaid decision was rendered as part of a tax appeal submitted by the appellant in respect of an order issued to it by the tax assessor, in which it was determined that the valuation of a loss-making transaction for the sale of cryptographic assets by the appellant to a related party cannot be accepted, for the reason that he was not presented with a valuation for the price of the transaction. The tax assessor claimed that he was not convinced that the price of the reported transaction reflects its market price.
It should be recalled that the starting point in tax appeals is that the burden of bringing evidence in a proceeding is imposed at the outset on the taxpayer (save where an artificial transaction is being claimed). Thus, within the ambit of the proceeding at hand, the court was requested to order for a reversal of the burden of proof, since the respondent’s determination in the assessment that the sales price does not reflect its market value, was laconic and not reasoned.
The court accepted the appellant’s request and ordered for a reversal of the burden of proof, while clarifying that the assessment issued to the appellant was not reasoned, and because it cannot be understood from it why the respondent decided that the reporting is not compliant with market conditions. Moreover, the court emphasized that the respondent should have presented the “correct” market value for the transaction as deemed by him, but he refrained from doing so. In the given circumstances, the respondent’s claims cannot be ascertained and it was thus determined that he should open with the bringing of evidence.
In our view, the decision in the Hexa Solutions Ltd. case is important and provides taxpayers with additional legal tools when confronted with general and unreasoned assessments—a phenomenon that has become more prevalent in recent years. Needless to say, reversal of the burden of proof may prove to be of crucial importance when determining the outcome of legal proceedings in that it obliges the tax assessor to disclose both his claims and stance in a manner that may assist and alleviate dealing with them.
A ruling rendered by the Supreme Court in the Conduit Ltd. case was recently published, in which it accepted an appeal filed by the tax assessor on a judgment handed down by the District Court–Central Lod. At the heart of the dispute between the parties lay the question of the relationship between the provisions of section 102(b)(2) of the Income Tax Ordinance [New Version], 5721-1961 (ITO) and the provisions of sections 51B(c) and 51R of the Encouragement of Capital Investments Law, 5719-1959 (Capital Investments Law). Let us explain.
The provisions of section 102 of the ITO constitute a unique tax arrangement that applies in respect of an allotment of shares or options to employees through a trustee. Thus, in fulfilment of the terms as specified in the section, the employee’s income generated from the allotment will be perceived as a capital gain and the applicable tax rate to be imposed thereon will be 25%. Similarly, a distribution of dividends in respect of shares that are held through a trustee will generally also be taxed at the rate of 25%. On the other hand, the provisions of the Capital Investments Law specify reduced tax rates that apply to dividends sourced from the profits of a “beneficiary enterprise” or “preferred enterprise”—15% or 20%, as applicable.
The question therefore arising is whether dividends that are distributed to employees by virtue of shares held on their behalf by a trustee, pursuant to the provisions of section 102 of the ITO, would be taxed in accordance with the provisions of the Capital Investments Law and thus enjoy reduced tax rates, or should rather be viewed as a “realization” of shares, such that the tax rate to be imposed will be 25% in accordance with the provisions of section 102 of the ITO?
While the District Court held that the tax rate should be reduced, by applying the arrangement as specified in the Capital Investments Law, the Supreme Court overturned its decision, accepted the appeal, and held that in the given circumstances tax in the rate of 25% will apply.
The Supreme Court reasoned its holding by stating that the dividends distributed to employees in the case before him were not transferred to the trustee holding their shares pursuant to the provisions of section 102 of the ITO, but rather to the employees themselves, and that the direct transfer to the employees constitutes a “realization” of the shares that is subject to tax in accordance with the rate specified in section 102 of the ITO, namely, 25%. In so holding, it was clarified that even if the shareholder does not become rich as a result of distribution of the dividend, from a material point of view transfer of the value is equivalent to transfer of a piece of the share to the employee’s pocket, and thus speaks of “realization” of the share, as such term is defined in section 102 of the ITO. Moreover, the Supreme Court held that the provisions of section 102 of the ITO, being an individual, unique and complete arrangement pertaining to taxation of the allotment of shares to employees, including a distribution of dividends, constitutes a specific arrangement that overrides other provisions of the law dealing with a distribution of dividends, including the provisions set forth in this regard in the Capital Investments Law.
The Supreme Court’s ruling in the Conduit case may have far-reaching tax ramifications with regard to a distribution of dividends from profits sourced from beneficiary or preferred enterprises, the foregoing to the extent concerning a distribution to employees whose shares are held through a trustee, in accordance with the provisions of section 102 of the ITO. It is thus clear that, in the given circumstances, it is recommended to plan in advance the dates for the distribution of dividends, in a way that will facilitate, to the extent possible, application of the beneficiary tax rates as stipulated in the Capital Investments Law.
* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.
