AFTER A STEADFAST STRUGGLE WITH THE MINISTRY OF FINANCE
AN AGREED UPON COMPROMISE IS APPARENT FOLLOWING WHICH AMENDMENT OF THE LAW FOR THE TAXATION OF “LOCKED IN PROFITS” MAY BE NARROWED DRAMATICALLY
In our previous newsletters, we provided an update on the dramatic tax decrees which the Ministry of Finance has sought to apply on Israeli companies effective as of the 2025 tax year. As noted by us, such decrees included, among other things, the imposition of a “fine” of 2% on the balance of undistributed profits accumulated in small companies and the personal taxation of shareholders in “intensive personal effort companies”.
We wish to update that, after a prolonged struggle between representatives in the business sector and the Ministry of Finance, the parties reached agreement with regard to a majority of the clauses in the proposed legislation. In so doing, the apparent compromise is expected to result in a significant softening of the tax decrees included in the law for the taxation of undistributed profits, on its various levels.
According to the apparent outline [agreed upon], the applicability of the provisions of the proposed legislation regarding the imposition of a “fine” in the rate of 2% of undistributed profits will be noticeably narrowed, so that they will not apply to industrial companies and companies in the construction sector, nor to other small companies that during the tax year distributed 6% or more of the amount of accumulated profits at the end of the previous tax year. It thus follows that the apparent distribution of a relatively limited dividend in the rate of 6% of accumulated profits will suffice in order to fall outside the scope of the provisions of the proposed legislation.
Similarly, also provisions in the legislation designed to impose a personal tax liability on shareholders in intensive personal effort companies are expected to be softened. In general, it was agreed that these provisions would not apply where the accumulated profits of a small company at the end of the tax year will not surpass NIS 750,000. Moreover, it was agreed that the “collapsible ceiling” mechanism would be done away with, so that the accumulated profits of small companies up to the 25% rate of profitability will continue to be taxed at the company level (and not in the hands of its shareholders). It should be noted that, with respect to small companies that are partners in a partnership, it is expected that the attribution of profits between the company and its shareholders will apply based on a different ratio (apparently 45% of the profits will be charged at the company level and 55% at the shareholders’ level).
It is important to mention that this is not yet a final draft of the law and it is certainly possible that additional changes will be implemented to it. We will continue to monitor all developments and update you accordingly.
FINAL DAYS OF PREPARATION FOR THE 2025 TAX YEAR
The twilight days of 2024 entail broad preparation by individuals and companies in the Israeli economy in anticipation of the changes in the Israeli tax legislation, which are expected to enter into force on 1 January 2025.
In this respect, it should be recalled that the rate of surcharge tax applicable on various types of income, including income in the form of dividends, is expected to increase by 2% and will total 5%. Thus, for example, while the distribution of dividends to material shareholders that will be made prior to the end of 2024 will be taxed 33%, an identical distribution in the 2025 tax year will be taxed 35% in the hands of shareholders.
It is therefore recommended that there be considered the possibility of still distributing dividends in 2024. Nevertheless, it should be borne in mind that a distribution made in the 2024 tax year will not be taken into account for the purpose of examining the amount of distributions required in order to be considered as falling outside the scope of the provisions of the legislation that is expected to be enacted with regard to the taxation of locked in profits. It is thus recommended that every case be examined on its merits.
Moreover, as published by us in previous newsletters, on 1 January 2025 VAT will be increased by 1% and will effectively total 18%.
IMPORTANT UPDATE FOR HOLDERS OF HOLDINGS ABROAD –
THE ISRAEL TAX AUTHORITY HAS UPDATED FORM 150
The Israel Tax Authority (ITA) recently updated reporting Form No. 150 concerning the declaration of a holding in a foreign resident company, that constitutes an appendix to the annual report. The new form is more detailed and includes broad reporting requirements of holdings in foreign companies, some of which were not included in the previous reporting form.
Attached is a link to the updated version of Form 150 (in Hebrew) (the ITA’s website).
Following the update to the Form, the ITA notified that the annual reports to be filed by 31 December 2024 can, at the election of the reporting taxpayer, have either the previous or new reporting Form attached thereto. On the other hand, in reports to be filed as of 1 January 2025, it will be mandatory to report and declare on the holding in a foreign resident company only by means of the new and detailed Form 150.
Moreover, it was reported that the ITA is currently acting to develop an online system, aimed at alleviating completion and submission of the Form, electronically. Until establishment of the said system, the Form must continue to be submitted manually as an appendix to the annual report.
* 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.
