Within the ambit of the Annual Taxation and Business Conference that took place last week, in collaboration with the accounting firm Fahn Kanne Grant Thornton Israel, head of the firm’s Tax Department, Adv. Leor Nouman, presented the expected tax decrees in the Arrangements Law in the realm of corporate taxation, which are designed to bring about the de facto abolition of the two-stage taxation model to which many companies in the Israeli economy are subject.

Below is a summary of the expected tax decrees in the realm of corporation taxation:

– the taxation of “undistributed profits” – it has been proposed to add a provision in section 81 of the Income Tax Ordinance that will result in the imposition of a “fine” on companies  classified as a “small companies” (i.e., a company controlled by a maximum of five persons), in the rate of 2%, annually, for having a balance of accrued profits that were not distributed as a dividend to shareholders;

– the forced conception of “wealthy companies becoming personal” – it has been proposed to broaden the provisions of section 62A of the Income Tax Ordinance, such that a shareholder in a small company holding more than 10% of its share capital will be charged marginal tax for his share of the company’s taxable income (in lieu of corporate tax);

– expansion of the applicability of the taxation provisions that apply to wallet companies;

– forced dividend – expanding the provisions of section 77 of the Income Tax Ordinance, whereby the Israel Tax Authority (ITA) may order for the distribution of a forced dividend in companies that have accrued profits.

In addition, Adv. Nouman described the many inherent disadvantages embodied in the proposed legislation provisions, as well as the number of key legal tools that may be used in order to prepare in advance for their entry into effect (1 January 2025), to the extent they will be adopted into law.

HAVE YOU REMEMBERED TO REPORT ON YOUR HOLDINGS IN US COMPANIES PURSUANT TO THE PROVISIONS OF THE US CORPORATE TRANSPARENCY ACT?

On 1 January 2024 the US Corporate Transparency Act (CTA) entered into force aimed at creating maximum transparency with respect to the structural holding of corporations to combat the growing phenomenon of money laundering.  The law obliges most business that are registered in the U.S. to register with the Financial Crimes Enforcement Network (FinCEN) and disclose information about material shareholders in the corporation.

The law applies to legal entities incorporated in the U.S., including legal entities classified as LPs or LLCs that are used by many Israelis for investment purposes in the U.S., as well as foreign entities incorporated outside the U.S. that are registered for doing business in the U.S.

The CTA provides that companies incorporated prior to 1 January 2024 are required to submit the report as specified in the law by 31 December 2024, while companies incorporated during the course of 2024 are required to submit the report within 90 days from the date of their incorporation.

It is important to note that non-compliance with the law may lead to the imposition of criminal (including imprisonment) and/or civil sanctions (including exceedingly high fines).

BE AWARE – SURTAX IS EXPECTED TO INCREASE BY ALMOST 2%

A Memorandum of Law for Amendment of the Taxation Law, 5785-2024 was recently published, which seeks to raise the rate of surtax [deriving] from capital sources, including: rental income, land betterment dividends, interest income and capital gains.

According to the memorandum, the rate of surtax will increase by an additional 2%, and will thus total 5%.  An additional surtax will apply to annual income that surpasses NIS 721,560 (correct as at 2024).  It should be emphasized that within the context of the memorandum it is proposed to cancel the exemption from surtax currently in effect with respect to betterment from the sale of a residential apartment.

In light of the above, it is recommended that you examine the feasibility of advancing revenues (for example – by withdrawing dividends) in order to benefit from the current rate of surtax.

THE DISTRICT COURT HAS ORDERED COCA COLA TO PAY HUNDREDS OF MILLIONS OF SHEKELS IN TAXES

A ruling of the Tel Aviv District was recently published concerning the payments of tax transferred by the Central Bottling Company Ltd. (the Israeli Company) to the Coca-Cola Company (the International Company) for the purchase of extracts for beverages.

At the centre of the appeal was the ITA’s stance that some of the payments transferred by the Israeli Company to the International Company should be classified as hidden royalties that were paid for the use made by the Israeli Company of the trade marks and goodwill of the International Company.  Accordingly, the ITA imposed on the Israeli Company a withholding tax duty in Israel resulting in an assessment in the scope of roughly NIS 150 million.  The Israeli Company disputed the tax assessing officer’s stance and filed an appeal with the District Court.

The District Court rejected the appeal, holding that the assessing officer rightly classified some of the payments that were transferred by the Israeli Company to the International Company as royalties.  The Israeli Company declared its intention to appeal the said ruling to the Supreme Court.

It should be mentioned that the said ruling may have broad and acute tax ramifications for many multinationals that sell products manufactured in Israel.

AMENDMENT OF THE RULES OF THE TAXATION OF ESOPs: WHAT SHOULD YOU KNOW?

The grant of employee stock options is a common and central compensation mechanism that has been embraced by various companies, primarily in the high-tech sector.

Section 102 of the Income Tax Ordinance regulates the taxation rules that apply for the grant of employee stock options and lays down several taxation tracks, with the optimum track for employees in most cases being the capital gains track.  This track facilitates, under certain conditions, application of a reduced tax rate of 25% on profits deriving from the exercise of options by them.

An amendment to the said rules was recently published, the aim of which is to assist the ITA in supervising the grant of tax benefits.  This amendment includes, among others, the imposition of a demand to submit a request for approval of an allocation plan via a new online system, to which will be attached a detailed questionnaire concerning the plan and so facilitate the ITA to supervise its conditions.

In addition, a company that submits a request for approval will be required to continue to report about the plan on a regular basis.  The said changes will enter into effect on 1 January 2025 and will apply to plans that will be submitted with effect from such date.

* 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.