POSTPONEMENT OF IMPLEMENTATION OF THE

PROVISIONS OF THE DOMESTIC MINIMUM TAX REGIME

The Ministry of Finance recently published a notice stating that it has been decided to postpone the date for implementation of the provisions of the domestic minimum tax regime (QDMTT—Qualified Minimum Domestic Tax) until the beginning of 2026, in order to preserve the status of Israel as an attractive destination for the global high-tech industry and enable multi-national corporations to which the regime is anticipated to have application, to prepare accordingly.

 

The domestic QDMTT regime is expected to apply to multi-national corporations with a group turnover exceeding €750 million.  Based on the provisions of this regime, which constitutes the second layer (Pillar 2) in the international tax reform promoted by the OECD, said multi-national corporations will be subject to an effective minimum tax rate of 15% on all global revenue generated by them.

 

The key purpose of the QDMTT regime is to put an end to the “race to the bottom” which has increased substantively in recent years, and within the context of which many countries grant exaggerated tax benefits to multi-national corporations, primarily by the imposition of reduced tax rates aimed at coaxing those corporations to broaden their activities in their regions.

 

In Israel, the QDMTT regime is expected to primarily impact multi-national corporations carrying out business in Israel and which enjoy a reduced tax rate by virtue of the Encouragement of Capital Investments Law, with all other companies generally being charged companies tax in the rate of 23%.

 

EARLY WITHDRAWAL OF MONEYS FROM AN ADVANCED

STUDY FUND (KEREN HISHTALMUT) AT A REDUCED TAX RATE

On 4 August 2024 the Government approved a temporary tax relief, intended to enable salaried workers and self-employed persons who are members of an Advanced Study Fund (Keren Hishtalmut) to withdraw moneys therefrom at a reduced tax rate, instead of the marginal tax rate, even though the statutory period facilitating such withdrawal will not have yet passed.  This relief, which requires the approval of the Knesset Finance Committee and the Knesset plenum, is expected to apply until the end of 2024.

 

The scope of Advanced Study Fund-related assets in Israel currently totals more than NIS 370 billion.  Under the current legal situation, the withdrawal of moneys accumulated in Advanced Study Funds is exempt from tax provided that at least 6 years shall have passed since the date of making the first deposit, and with regard to a person who attains the age of retirement – provided that at least 3 years shall have passed since the date of making such first deposit.  Early withdrawal from the said fund will result in marginal tax being imposed on the person making the withdrawal, that could reach 47% (pre-tax threshold).  According to the proposed bill, instead of the marginal tax, a reduced tax rate of 15% at most will be imposed on withdrawal of the moneys.

 

This temporary relief is intended to allow persons who are members of an Advanced Study Fund in Israel to redeem the moneys held in them in order to cover  indebtedness to banks and credit providers, this, against the backdrop of the high interest rate environment and the financial situation encountered by the Israeli market due to the ongoing Swords of Iron war.  It appears that this benefit, to the extent it will be approved, will be particularly attractive in relation to Advanced Study Funds for which the required waiting time until the moneys can be redeemed under the regular (tax-exempt) track is relatively long.

 

BASED ON A SUPREME COURT RULING – A NON-PROFIT ASSOCIATION (AMUTA) WISHING TO BUILD NOT FOR THE PURPOSE OF ADVANCING ITS PUBLIC OBJECTS WILL NOT BE ENTITLED TO ENJOY THE EXEMPTION FROM BETTERMENT TAX

A Supreme Court ruling was recently published in the case 6513/21 Bet Agudat Yisrael in Tel Aviv v. the Tel Aviv Local Planning and Building Commission, in which the Supreme Court rejected the appeal submitted by Beit Agudat Yisrael on a judgment rendered by the Court for Administrative Matters.

 

Bet Agudat Yisrael is a non-profit association (amuta), whose objects, as detailed in its articles of association are: “to purchase, lease, rent and manage, houses and apartments, for religious, cultural, educational, charitable and benevolent purposes”.  The amuta is the owner of land located in Tel Aviv, on which two old buildings are situate and which for many years served as an educational institution for biblical studies (yeshiva).  In 2015, the amuta obtained a building permit in relation to the land, facilitating the construction of a 5-floor residential building.  In April 2016, the Tel Aviv Local Planning and Building Commission issued a betterment tax assessment in the scope of about NIS 2 million following the approval of several improvement plans applicable to the land.

 

Within the context of the appeal, the amuta argued that it is entitled to enjoy the exemption from betterment tax, pursuant to the provisions of section 19(b)(4) of the Third Addendum to the Planning and Building Law, 5725-1965, since prior to the date of approval of the improvement plans, the land was used for the purpose of advancing its public objects.

 

On the other hand, the position taken by the Tel Aviv Local Planning and Building Commission, which was supported by an opinion submitted to the court as part of the proceedings by the Attorney General of Israel, was that in circumstances where the improvement plan no longer facilitates use entitling the amuta to the exemption from betterment tax, the exemption will not apply, the foregoing subject to the fact that the manner in which the taxpayer elected to exercise rights in the land was by issuance of a building permit.  Thus, in the opinion submitted to the Supreme Court it was asserted that in circumstances where a public institution used land for advancing public objects prior to approval of an improvement plan, a distinction should be made between four possible scenarios: the first, where the improvement plan facilitates continuation of the public use and exercise of the rights is done by issuance of a building permit, such that the public activity in fulfilment of the amuta’s objects in the section pertaining to the exemption continues to exist; the second, where the improvement plan facilitates continuation of the public use and exercise of the rights is done by way of sale, such that the consideration will be used in realization of one of the amuta’s public objects; the third, where the improvement plan does not facilitate continuation of the public use and exercise of the rights is done by way of sale, such that the consideration will be used for the purpose of advancing the public objects; and the fourth, where the improvement plan does not facilitate continuation of the public use and exercise of the rights is done by issuance of a building permit, such that the use to be made of the land does not align with the amuta’s public objects (even if the consideration from such use will be designated for the amuta’s objects).  According to the Attorney General of Israel’s interpretation, while with respect to the first three scenarios the exemption from betterment tax will apply, under the fourth scenario, being that applicable in the case at hand, the exemption will not apply.

 

The Supreme Court rejected the amuta’s arguments, by adopting the stance of the Attorney General of Israel in this case.  It was held that the amuta is not entitled to the exemption from the payment of betterment tax, since in circumstances where the improvement plan no longer facilitates use for which it was eligible to obtain an exemption from betterment tax, the exemption will not apply, the foregoing subject to the fact that the manner for exercising the rights as elected by the taxpayer was by building on the land and not its sale.

 

EXPANSION OF THE PURCHASE TAX  BENEFITS CONFERRED ON NEW IMMIGRANTS

On 12 August 2024, Land Tax Regulations (Betterment and Acquisition) (Purchase Tax), 5784-2024 were published following an amendment to the original regulations, in which the purchase tax benefits as conferred on new immigrants were expanded.

 

Land Tax Regulations (Betterment and Acquisition) (Purchase Tax), 5735-1974, in their form prior to the aforesaid amendment, conferred on new immigrants various reliefs in the form of purchase tax.  Thus, regulation 12 of the regulations sets out reduced rates of purchase tax for new immigrants, and their right to purchase land during the year preceding the date on which they immigrated to Israel until the expiry of seven years thereafter (“the determining period”).

 

In discussions recently conducted by the Knesset Finance Committee, it transpired that in most cases, the power of this provision did not lead to a reduction in the effective purchase tax burden that is imposed on new immigrants, and that in practice very few sought to implement it.

 

Accordingly, within the context of the amendment, regulation 12 was modified, such that it would apply only with respect to the purchase of a business (including an agricultural farm).  Moreover, new regulation 12A was added, directing that the purchase of a single residential apartment by a new immigrants during the determining period will be subject to purchase tax at improved rates, as follows (provided that the value of the purchased apartment does not exceed NIS 20,183,565):

 

• on a portion of the purchase price valued at up to NIS 1,978,745, no purchase tax whatsoever will be payable;

 

• on a portion of the purchase price valued between NIS 1,978,745 and NIS 6,055,070, purchase tax at the rate of 0.5% will be payable;

 

• on a portion of the purchase price valued at more than NIS 6,055,070, the purchase tax payable will be based on the levels applicable to the purchase of a single residential apartment, pursuant to the provisions of the Land Appreciation Tax Law, 5733-1963.

 

* 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.

 

 

Our firm continues to be at your disposal should you have any questions or require additional clarification on the matters reviewed above or generally, and we wish you and your loved ones better and quieter days.