Tax Planning | נמרוד ירון ושות׳

Taxation of Income from Solar Panels

Adam Zur — Wed, 08 May 2024 09:03:40 +0000

Regarding the taxation of income from solar panels

The electricity sector is responsible for about 70% of greenhouse gas emissions. Recently, awareness of the tremendous damage to the ecological system caused by electricity production has increased. This awareness has led to the creation of solutions to reduce environmental damage, among them the shift to renewable energy. In this article, we will explain the taxation of income from solar panels; specifically, the taxation of solar electricity by the electric company and the taxation of renewable energy in general.

The increase in environmental awareness has led to more and more privately owned areas in Israel being used for solar energy production. The renewable energy sector is another economic channel gaining momentum, similar to the real estate and securities markets, and is considered (even by banks) a profitable and secure investment.

Solar energy is not a modern invention; in fact, it was pioneered in the 1950s by Dr. Zvi Tabor, an Israeli physicist born in England. Then Prime Minister David Ben-Gurion approached him, and Dr. Zvi Tabor agreed to his request and immigrated to Israel. Dr. Zvi Tabor donated his invention to the state out of Zionist ideology, and the patent was registered in the name of the State of Israel. Even today, about 70 years later, Dr. Tabor”s invention remains a leading solution in the renewable energy sector.

Regulation of solar energy production

Discussions on the use of renewable energy began in Israel in the late 1990s. In 1996, the Israeli government ratified the Kyoto Protocol, and in 2004, it approved the Kyoto Protocol. This was an addition to the United Nations Framework Convention on Climate Change (UNFCCC), under which the Israeli government committed to ensuring that by the end of 2020, 10% of energy production would come from renewable energy sources.

In 2008, in order to achieve this target, a government decision was made that required the Israel Electric Corporation to purchase electricity generated in independent photovoltaic facilities (solar energy production facilities) in Israel (both residential and commercial production). This decision is effective in a contract with the Israel Electric Corporation for 25 years, during which the company is obligated to purchase electricity at a fixed price not indexed to inflation.

This is one of many steps in the national plan to encourage the transition to solar energy (details will follow).

Subsidies, incentives, and tax credits

Many countries around the world encourage the shift to using solar energy, utilizing incentives for investors and manufacturers such as establishment grants, tax benefits, loans, and more. The impact of these incentives on solar energy production was significant in these countries.

In Israel, an incentive program for investors in the solar energy sector was developed; for example, in 2016, the state enacted the “Law to Encourage Investment in Renewable Energies.” This law provides tax benefits for home electricity producers on income from the sale of electricity generated from a renewable energy facility, as well as tax benefits for individuals on income from leasing land on which facilities for generating electricity from renewable energy are located, subject to the conditions and restrictions detailed below. The law applies to two types of renewable energy facilities that can generate electricity:

a photovoltaic (PV) facility – generating electricity through sunlight
a wind turbine – generating electricity through wind.

The full benefits and conditions are detailed in the Income Tax Directive 7/2019.

Another significant benefit among those offered to investors in renewable energy production facilities was first introduced in 2010 and renewed in the period 2018 to 2019; according to the regulation, a depreciation of 25% is imposed on a facility for generating electricity using solar energy, utilizing photovoltaic technology or solar-thermal technology.

Tax benefits for home electricity producers on income from their sale

The income from the sale of electricity by an individual will be considered income in the tax year in which it was accrued. An individual or a condominium association (house committee) generating income from the sale of electricity from photovoltaic facilities (solar panels) or wind turbines are eligible for one of the following:

A full tax exemption track – complete exemption from income tax on the sale of electricity where the total amount in the tax year does not exceed a threshold of 24,000 NIS without VAT (updated for 2021).
Reduced tax track – a final tax rate of 10% up to a ceiling of 99,006 NIS without VAT (updated for 2021).

There are additional exemptions and reliefs concerning the management of accounting books and exemption from filing a lawsuit and accounting. For example, an individual who generates income from electricity will not be considered a “business” according to the VAT law solely for this reason (subject to further conditions as detailed below).

Conditions for tax benefits from the sale of electricity

As stated, the income producer is an individual or a house committee, the electricity produced is sold to a licensed essential service provider, the income is not from a business or an outreach effort, the facility is legally connected, the amount restriction as mentioned above, limitation on deducting expenses, restrictions on offsetting losses, etc.
An individual who wishes to receive the tax benefits mentioned above is required to fill out form 1400.
Those who own more than one facility are required to fill out form 1401.

It is recommended to first consult with a tax lawyer or a specialized accountant to ensure compliance with the required conditions for receiving the benefits for the relevant tax year.

Tax benefits on income from leasing land (whether a building or land) that has a facility for generating electricity

An individual who generates income from leasing land (whether a building or land) on which there is a device for generating electricity from photovoltaic facilities (solar panels) or wind turbines is eligible for one of the following:

A full tax exemption track – complete exemption from income tax on leasing income where the total amount in the tax year does not exceed the threshold set for that tax year (5,000 NIS in 2021). The portion of income exceeding the threshold will be reduced from the exemption threshold (hereinafter: “relative exemption“) and for the amount of income after reducing the relative exemption – tax will be paid at a uniform rate of 31%.
Reduced tax track – a uniform and final tax rate of 10% which will apply to the entire income amount without eligibility for exemption.

Additional exemptions exist as presented above, subject to compliance with the relevant conditions.

Conditions for tax benefits from income from leasing land:

The income is not business income.
There is a written document by which the lessee confirms that the land is used for generating electricity from renewable energy.
A notification has been submitted to the tax assessor.”

Taxation of income from solar panels: The issue of registration and VAT liability.

An individual whose entire business transactions consist of selling electricity and whose total business turnover does not exceed 24,000 NIS will be exempt from registration as a business and from reporting. Anyone whose entire business transactions are rental as specified by law is also exempt. This means there is no need to open a file with the Income Tax and VAT authorities.
An individual who deals in the sale of electricity and is registered as an exempt dealer, and whose total business turnover, including other transactions, does not exceed 99,893 NIS (in 2021), will report, once a year, on his business turnover including from the sale of electricity as part of the reporting as an exempt dealer.
An individual who is involved in leasing land and has another business, is required to register (open a VAT file) and report according to the VAT law. Those registered as exempt dealers whose total business turnover including transactions from the sale of electricity exceeds 99,893 NIS, will change their classification from exempt dealer to authorized dealer and will report on all their transactions.

How to invest in solar energy

Investing in solar energy requires an initial investment that includes the installation of solar panel roofs (infrastructure, inverters, installations, etc.). There is an option to finance the investment through banks or financing companies which offer loans with attractive interest rates. Investing in solar energy is considered a secure investment as the state significantly encourages the use and investment in solar energy. Moreover, there is a significant difference between the return (about 15%) and the interest rate (about 3.5%), making this investment channel particularly profitable.

Manufacturers usually advertise that the return on investment occurs within 7-10 years, with revenues obtained through two methods:

Direct sale to the electric company at sale rates higher than the production costs.
Domestic use of the electricity generated and sale of surplus electricity to the electric company at high and predetermined rates.

In our opinion, the correct economical way to look at the investment is different – one should not consider the time required for the return on investment but alternatively assume that the investment is spread over the period of use of the asset – that is, over 25 years.

If you take, for example, a solar system for an average roof of about 100 square meters. Such a system typically costs about 80,000 NIS and yields about 1,000 NIS per month. With a calculation using an amortization table at an interest rate of 3.5%, we reach a repayment of 400 NIS per month (note – repayment! That is, a combination of principal and interest payments), while the monthly profit (net income after taxes) stands at about 1,000 NIS.

Taxation of income from solar panels – A look to the future

As already mentioned, the State of Israel has consistently set fundamental guidelines and targets for the coming years to implement and improve the handling of environmental impact through renewable energy. At the end of 2020, the Israeli government approved the increase of renewable energy targets from 17% to 30% by 2030. Therefore, it is likely and entirely possible that in the near future, we will see further changes and incentives to encourage investment in solar energy.

To ensure compliance with the conditions required to receive tax relief on income from solar panels and renewable energy, it is advisable to consult with a tax lawyer or a tax expert accountant. For consultation – contact us.

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Taxation and tax benefits for foreign athletes in Israel

Adam Zur — Wed, 08 May 2024 09:00:29 +0000

Tax Laws in Israel - Taxation and Benefits for Foreign Athletes

In Israel, tax laws impose a tax on all income produced and/or accrued in Israel, regardless of the identity of the income recipient. This is effectively a comprehensive provision that extends to various regulations in the general law and in the regulations enacted under its authority. That is, a non-resident who generates income within the territorial jurisdiction of the State of Israel will be liable for tax in Israel on that income. Specifically, a foreign resident athlete who operates and generates income in Israel will be taxed on that income in Israel.

Moreover, to encourage the entry of foreign players and promote Israeli teams, tax benefits have been established for foreign athletes working in Israel. Thus, under the Income Tax Ordinance regulations, “Income Tax Regulations (Foreign Athlete) 1998,” enacted under Section 75A of the Income Tax Ordinance, special tax benefits have been specified for foreign athletes.”

Unique Tax Benefits for Foreign Athletes:

Foreign athletes are entitled to deduct certain expenses incurred for the purpose of generating income in Israel, including accommodation expenses, rental of apartments in Israel, and breakfast expenses (up to a certain amount).
A uniform tax rate of 25% is applied to the athlete’s salary after all allowable expenses are deducted as mentioned above.
This benefit is limited to a period of four years.

In addition to these benefits, there are other advantages such as a benefit in the rate of national insurance fees – reduced insurance fees of 2% compared to the 19% imposed on resident athletes in Israel.

In addition to the general law mentioned above, there are provisions of treaties that the State of Israel has signed with over 50 different countries around the world. The role of these treaties is to regulate the taxation rights of the countries that are parties to the treaty and establish rules determining which country and in which situations has the primary right to tax certain incomes, and which has the secondary right.

The provisions of the treaty are an agreement that supersedes the internal law applicable in the treaty-signing countries and therefore, given that the treaty provisions are more lenient than the internal tax laws of the countries, the treaty provisions prevail. Tax treaties address the taxation and tax benefits for athletes on one of two levels: a fixed tax rate which is usually a reduced rate from the normal rate practiced in those countries; and the deduction of certain expenses from the salary paid to the athlete.

Below are the tax benefits provided in other countries around the world:

* Note: Tax benefits are subject to additional conditions and are sometimes limited by further restrictions besides those detailed below.

Last year, a discussion took place in the Knesset Finance Committee, focusing on the tax benefits granted in Israel to foreign athletes, as opposed to the taxation of Israeli athletes in Israel.

It should be noted that tax benefits for foreign athletes are a common practice in many countries worldwide to foster internal competition in the sports sector of that country through the entry of outstanding foreign talent from other countries.

Examples of tax reliefs in other countries:

Spain: Tax rate of 24%. Income cap of 600,000 Euros. The benefit is granted for up to 5 years.
Denmark: Tax rate of 26%. Income cap of 600,000 Euros. The benefit is granted for up to 5 years.
France: Up to 50% of salary is exempt from tax. The benefit is granted for up to 8 years.
Netherlands: Up to 30% of salary is exempt from tax. The benefit is granted for up to 8 years.
Turkey: Tax rates vary between 5%-15% depending on the league level of the athlete.
Cyprus: Up to 50% of salary is exempt from tax. The benefit is granted for up to 10 years.
Finland: Tax rate of 35%. The benefit is granted for up to 4 years.
Russia: Tax rate of 13%. The benefit is granted for up to 3 years and can be renewed.
Sweden: Up to 25% of salary is exempt from tax, as well as certain allowances that are tax-exempt. The benefit is granted for up to 3 years.

As mentioned, Israel provides many tax benefits to foreign athletes. Through optimized tax calculations, many of these benefits can be utilized and planned for tax purposes. For questions on this topic, please contact our office.

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Estate tax, gift tax, and generation-skipping transfer tax in the USA

Adam Zur — Fri, 12 Apr 2024 11:02:43 +0000

Estate tax, gift tax, and generation-skipping transfer tax in the USA – everything you need to know

The tax system in the United States includes a comprehensive system for taxing all asset transfers made by an individual during their lifetime and at their death. This system includes estate tax, gift tax, and tax on generation-skipping transfers. This approach ensures the taxation of wealth transfers, reduces the transfer of inequality from one generation to the next, and prevents tax evasion.

Estate Tax

The United States Internal Revenue Service (IRS) defines estate tax as a tax on the transfer of both tangible and intangible assets located within the United States. Generally, estate taxes are imposed at the federal level, but some states within the United States also levy their own estate tax in addition to the federal estate tax. Inheritance tax, on the other hand, is not imposed at the federal level, but some states impose this tax within their jurisdiction.

The estate tax applies globally to the assets of a United States citizen or a foreign citizen whose residence was in the USA at the time of death. For foreign citizens who do not reside in the United States, the estate tax applies only to their assets located in the United States, whether tangible or intangible.

It’s worth noting that banks in Israel may require an IRS certification of tax payment or exemption as a condition for withdrawing funds from an account or transferring assets to other accounts. This was also clarified in a recent announcement by Bank Leumi to its customers. This announcement comes against the backdrop of the United States’ stricter policy in recent years regarding preventing tax evasion through information sharing between countries.

The estate tax is imposed on the fair market value of all the assets owned by an individual and all the assets in which the individual has certain interests, at the time of death. The total of all these assets is the individual’s “Gross Estate.” From the gross estate, various debts (including estate management expenses, mortgages, property transferred to a surviving spouse, etc.) are deducted, arriving at the individual’s “Taxable Estate.” To this number, the value of taxable gifts given by the individual during their lifetime (starting with gifts made after 1977) is added. Finally, it is examined whether the amount exceeds the exemption amount, as detailed below.

Tax Rates and Exemptions

Federal estate tax rates in the United States range from 18% to 40%. However, American law grants an exemption from payment and reporting on inheritance up to a certain amount that is updated annually. As of 2024, the exemption applicable to a US citizen or a foreign citizen whose “residence” was in the United States at the time of death is $13,610,000. In contrast, for foreign citizens who are not residents of the United States and hold assets in the United States, the exemption is $60,000, and any excess value is subject to estate tax. In addition, the United States offers a foreign tax credit to its citizens for inheritance taxes paid in foreign countries on assets located in those countries. The deadline for paying the estate tax is within 9 months from the day of the decedent’s death.

Gift Tax

The gift tax is imposed on donors or gift givers to prevent them from avoiding estate tax payments through asset transfers during their lifetime. US citizens or individuals whose residence is in the United States are subject to gift tax on all types of gifts, regardless of where they are received. Individuals whose residence is not in the United States are subject to gift tax only on transfers of real estate and tangible personal property located in the United States.

Tax Rates and Exemptions

Federal gift tax rates in the United States range from 18% to 40%. However, American law applies two exemptions from the gift tax, an annual exemption and a lifetime exemption.

The annual exemption amount is $18,000 (as of 2024), allowing an individual to give gifts each year up to the annual exemption amount (which is updated annually) without incurring gift tax and without the obligation to file a report. This exemption applies to both US citizens and residents and individuals whose residence is not in the United States.

The additional exemption is, as mentioned, a lifetime exemption allowing a gift giver to give gifts up to a defined amount in their lifetime before imposing tax (the exemption covers both estate tax and gift tax, so any amount of the lifetime exemption used for gifts reduces the estate tax exemption available upon death). As of 2024, the exemption is up to a value of $13,610,000. Foreign residents are subject to gift tax only on gifts of tangible property located in the USA.

Generation-Skipping Transfer Tax

In addition to estate and gift taxes, there is a federal generation-skipping transfer tax in the United States. This tax prevents avoidance of estate taxes over one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren. With the generation-skipping transfer tax, grandchildren receive the same amount as if the inheritance came from their parents. The generation-skipping transfer tax applies to US citizens or those whose residence is in the USA for all property transfers, anywhere. In contrast, the tax applies to those who are not US residents if the generation-skipping transfer is subject to estate or gift tax in the USA.

Tax Rates and Exemptions

The generation-skipping transfer tax rate is 40% (as of 2024). In addition, the exemption amount applicable to estate and gift taxes also applies to the generation-skipping transfer tax ($13,610,000 as of 2024). For further information on the generation-skipping transfer tax click here.

Form 706: An IRS form used by an estate executor of a decedent to calculate the value of the estate subject to estate tax and generation-skipping transfer tax. To determine whether the value of the estate exceeds the exemption amount ($13,610,000 as of 2024), the individual’s gross estate along with taxable gifts (given after 1977) combined with allowable deductions, is considered to examine whether the amount exceeds the exemption.

Form 706-NA: An IRS form used by an estate executor of a decedent to calculate the value of the estate subject to estate tax and generation-skipping transfer tax for those who are not residents of the United States but hold assets located in the United States.

Many are not aware that holding American shares above an amount of $60,000 exposes them to American estate tax, as shown, its rates are not negligible. Additionally, transferring assets during life may also be taxable given an exemption exceedance.

The assistance of a professional from the tax field can enable maximum tax savings during asset transfers in life and posthumously, as well as assist clients in dealing with financial institutions. Our team at Nimrod Yaron & Co. provides consulting, accompaniment, and planning in all relevant tax aspects of asset transfers as mentioned.

Additional articles on Tax Planning:

Taxation of Income from Solar Panels

Taxation and tax benefits for foreign athletes in Israel

Estate tax, gift tax, and generation-skipping transfer tax in the USA

Arbitration process – tax implications

State-Guaranteed Loan

Labor Law – Tax Aspects: Claim against an employer or compensation for sexual harassment

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Arbitration process – tax implications

Adam Zur — Mon, 08 Apr 2024 15:59:04 +0000

Arbitration is used for resolving disputes through judgment by a neutral arbitrator, instead of a judicial proceeding in court.

To bring a dispute between parties before an arbitrator, the parties must agree to do so in writing. Thus, there is an option to stipulate that in the event of a dispute, the parties will transfer the jurisdiction to an arbitrator who will resolve the conflict. At the end of the arbitration process, the arbitrator issues a decision, and the parties have the option to submit it to the court for approval. An arbitration decision that has been approved by the court has the same status as a court judgment. As a result, the remedies specified in it can be enforced through the Execution Office. The legal source is the Arbitration Law, 1968 (hereinafter: “the Law”), which regulates the legal framework for conducting an arbitration process. Section 1 of the Law provides the legal definition of the arbitration process: “A written agreement to refer a dispute that has arisen between the parties to an agreement, or that may arise between them in the future, to arbitration, whether or not the name of the arbitrator is specified in the agreement.”

The process length

The arbitration process offers several advantages over a regular legal proceeding. The first of these is a shorter duration than a regular legal process. This is partly because there is no legal requirement to conduct it according to procedural laws or rules of evidence that are mandated by law in courts, but rather according to substantive law. Moreover, a legal proceeding may drag on for many years without a clear decision. In contrast, according to the Arbitration Law, the arbitrator must make a decision within three months, unless the arbitrator has requested to extend this period by an additional three months. It is important to remember that in order for the arbitration decision to attain the status of a court judgment, the parties must submit the arbitration decision for approval by a court.

The costs

Another advantage of arbitration decisions is undoubtedly the lower costs compared to a legal proceeding in court. When a person files a claim in court, the plaintiff must pay the court fee, which is derived from the requested relief and the amount of the claim. In arbitration, there are no court fees, but both parties bear the cost of the arbitrator’s fee. The amount of the arbitrator’s fee is determined according to the number of sessions and the complexity of the dispute.

The efficiency of the arbitration process

In civil law applies the procedural and evidence rules that have been in place for decades, aimed at making the legal process structured and orderly. As a result of this structure, the legal process is very bureaucratic and sometimes it’s difficult to focus solely on the substantive issues of the specific lawsuit. Conversely, in the arbitration process, there is no legal obligation to adhere to the procedural and evidence laws of civil law. Furthermore, the Arbitration Law allows the parties to determine that the arbitrator will not be bound by the civil law’s evidence and procedural rules. This process can be lengthy since one of the parties not satisfied with the arbitrator’s decision may request its annulment before court approval is obtained.

Annulment of an arbitration

This decision is a rare step and is taken only in exceptional cases. The list of cases in which an annulment ground for an arbitration decision exists is set out in section 24 of the Arbitration Law – 1968. This section lists the reasons for which an arbitration decision can be annulled. This is a closed list, and the grounds are as follows:

24(1) – Annuls when there was no valid arbitration agreement. In cases where there is no arbitration agreement as required by law, this procedure is not permissible.

24(2) – Applies in cases where the arbitrator was appointed unlawfully because the conditions for their appointment were not met.

24(3) – The arbitrator acted without authority or exceeded the powers granted to them in the arbitration agreement.

24(4) – The reason for annulment exists when a litigant did not receive a fair opportunity to present their claims or evidence.

24(5) – When the arbitrator did not decide on one of the issues specified in the arbitration agreement.

24(6) – The ground for annulment exists when the arbitration agreement contains a condition instructing the arbitrator to explain their decisions, and they did not do so.

24(7) – Establishes a ground for annulment when the arbitration agreement specifies that the arbitrator must rule according to the law, and they did not do so.

24(8) – A ground arises under this section when the period allocated for issuing the arbitration decision has passed, and it has not been given.

24(9) – This section establishes a ground for annulment when the content of the arbitration decision contradicts public policy.

24(10) – Establishes a ground for annulment when principles of natural justice are violated or when new facts that were not known to the parties or either of them beforehand were discovered.

Tax implications need to be considered in the arbitration process

Parties to an arbitration process tend to forget that alongside the gain or loss in the arbitration process, there are tax implications that need to be considered. These implications could be the difference between a marginal tax on the winnings, sometimes exceeding 60% (plus additional tax, national insurance, etc.), versus proper tax planning that leads to an appropriate division of the winnings among the heads of damage, resulting in lower tax.

The differences between a win where the tax was properly planned and an arbitration process without proper tax planning can sometimes amount to 30% of the winnings.

It is important to consult with a tax expert from the stage of referring to an arbitrator and formulating the statement of claim, as the wording can significantly affect the tax assessment in this case.

Additionally, correctly dividing the claim into heads of damage from the outset is very important. This division sometimes requires economic work to be performed by an expert economist.

Even if a judgment has already been given, it is advisable to consult with a tax expert to examine the tax classification in a way that will save tax before an assessment is given. Our office’s tax experts, including accountants, lawyers, economists, and more, are very experienced in accompanying arbitration processes and assisting lawyers with tax matters.

From the initial consultation to obtaining tax withholding approvals from the tax authority, formulating opinions on the correct taxation method, and managing proceedings against the tax authority to reduce the tax to be paid, our office has extensive experience in accompanying arbitration processes (in terms of tax planning) from the stage of formulating the arbitration clause in the agreement to accompanying the arbitration process and using the arbitration decision to achieve tax relief.

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State-Guaranteed Loan

Adam Zur — Mon, 08 Apr 2024 15:51:04 +0000

A state-guaranteed loan with favorable terms - Interested in starting a business? Looking to leverage your business? Need credit and struggling to obtain it? The solution might be within your reach.

Who is eligible for a state-guaranteed loan?

A state-guaranteed loan is aimed at providing financial assistance to small and medium-sized businesses. It is managed by the General Accounting Department at the Ministry of Finance and the Small and Medium Enterprises Agency at the Ministry of Economy.

The purpose of the fund is to assist new business owners who wish to establish a new business, as well as existing business owners who aim to develop and grow, especially given the difficulties small and medium-sized businesses face in obtaining credit for operational financing and growth.

The loans are granted from funds financed by entities for which the state provides a guarantee (for the majority of the amount) under favorable and attractive credit terms.

The fund offers loans of up to 500,000 NIS to small and medium-sized businesses with state guarantee and with significantly lower securities than those required by banks.

There is an option for repayment over five years and an option to defer the first payment by six months.

Our office has experience in accompanying and handling clients for the purpose of obtaining a state-guaranteed loan and provides a full range of services for this purpose:

Checking the business owner’s eligibility for a state-guaranteed loan.
An initial and thorough examination of the business situation – matching the business’s financial capabilities to the request.
Preparing a professional business plan required for obtaining the loan – the actual approved credit amount depends on the business plan presented and the repayment capability of the business owner.
Full accompaniment in meetings and negotiations.

It is important to emphasize that every loan requires a logically economic plan for the use of funds in order for it to benefit the company.

The possible tracks for a loan are:

Business in Establishment: Businesses in the establishment phase are eligible for a loan of up to half a million NIS, with the state guaranteeing 85% of the first 300,000 NIS and 70% of the remainder. For this purpose, securities of 10% for the first 300,000 NIS and 25% for the remainder are required.
Business with a turnover of less than 6.25 million NIS is eligible for a loan of up to half a million NIS, with a state guarantee rate of 70% and securities of up to 25% of the loan amount required.
Business with a turnover higher than 6.25 million NIS is required to provide securities of up to 25% for a loan amounting to 8%-12% of the turnover.

What are the chances of receiving a loan?

The chances of obtaining a loan depend on meeting the threshold conditions set for the loan’s approval. The more professional and comprehensive the economic plan presented by the business owner, which outlines a better financial situation, the greater the chance of successfully completing the process and obtaining a loan under attractive terms.

Our office offers financial assistance and accompaniment to companies with the knowledge, experience, and expertise in securing financing and assistance in dealings with banks and financial entities for grants.

Our services include evaluating the company’s financial status, business plans, and finding the most precise and optimal solutions for the client.

For information on additional areas of expertise of the firm.

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Labor Law – Tax Aspects: Claim against an employer or compensation for sexual harassment

Adam Zur — Wed, 03 Apr 2024 13:53:58 +0000

Generally, winning a legal proceeding in a business context or in the context of employment relations constitutes taxable income. The basic rule states that “the nature of the compensation follows the breach it intends to remedy.” This means that when the source of the compensation is employment relations, the compensation is taxable as employment income.

However, in every claim, there are certain components that are either not taxable at all or are subject to reduced taxation, and it’s important to be familiar with them. Involving a tax expert in the early stages of the claim, even before filing the claim, will ensure the correct separation of the claim’s components so as not to affect the legal substance, but to help reduce tax on the compensation amount.

Compensations for emotional distress and sexual harassment

Compensations for emotional distress and sexual harassment do not constitute wages or profit from work, nor any other income listed in the Income Tax Ordinance. Accordingly, they do not constitute taxable income and there is no basis for their taxation.

In the case of Moshe Schach vs. the Tel Aviv District Tax Officer (Central Administrative Petition Tel-Aviv 53681-12-16), it was determined that compensation given to an employee for workplace sexual harassment shall not constitute income for the employee, despite being paid by the employer, and despite being paid within the framework of employment relations. The compensation was essentially intended to compensate the employee for a wrong suffered at their place of work, according to the principle underlying tort compensations, namely, the restoration of the original situation.

Similarly, according to the verdict in the Davidovitz vs. the Netanya District Tax Officer case (Supreme Court Appeal 1146/03), an amount that constitutes compensation for emotional distress is not taxable. In the Davidovitz case, it was established that a sum of 158,000 NIS received by the appellant was not taxable, as it was payment for the appellant’s other damages, not originating from a taxable source. The Tax Officer’s claim that the entire disputed sum derived solely from employer-employee relations was not accepted, as the settlement referred to a comprehensive range of claims the appellant had against the employer, including defamation and emotional distress.

The importance of proving facts

Often, the major challenge is to prove the facts of the case to the Tax Officer, since such settlements often conclude with the relinquishment of all claims raised in the lawsuit and a commitment to confidentiality. Therefore, the way claims or settlement agreements are worded may affect the tax rate – an explicit split of components for emotional distress or, where appropriate, for sexual harassment, will allow avoidance of tax liability for this component. As for additional components of the claim – wording that aligns more with capital income as opposed to income from yields, which have different tax rates, interest, and linkage differences (interest is subject to lower tax and linkage differences are exempt), may be advantageous.

Our office advises on the correct wording and separation of components in a manner that leads to maximum tax savings. If possible, it is advisable to consult before reaching a court decision to ensure the correct wording and attribution already in the claim documents / settlement agreement. Our office has extensive experience in managing such cases against the Income Tax Authority, and the opinions and settlements we have reached with the tax authorities have saved our clients hundreds of thousands of shekels in taxes, reducing the tax paid in certain cases from 50% to an average rate of about 17%.

In one case, it involved a senior employee at one of Israel’s largest companies who received millions of shekels in compensation for “silence money” due to sexual harassment she suffered. The Income Tax Authority claimed that this constituted employment income and should be taxed at the maximum marginal rate plus additional tax (over 50% tax).

In our opinion, we split the claim amounts into components that, in our view, reflect the correct factual situation, significantly saving on taxes. In this case, we conducted prolonged discussions, ultimately saving more than two-thirds of the tax initially demanded by the Tax Authority.

Almost every case involving labor law has implications related to income tax. Consulting as early as possible can save a lot of money. Our office maintains regular cooperation with labor law firms, providing them with initial consultation free of charge regarding the tax aspects of the cases they handle.

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How to withdraw money from a company

Adam Zur — Wed, 13 Mar 2024 17:54:21 +0000

How to withdraw money from a company

Money from the company

The purpose of a limited liability company’s existence is to increase the profits of its shareholders. However, the question arises of how a shareholder can actually withdraw money from their own company. This article reviews the various ways a shareholder can withdraw money from the company. A separate article on wallet companies can be found at the link – Wallet Company.

Dividend distribution

It should be noted that a dividend is a payment the company transfers to its shareholders. It is derived from the company’s surplus (profits) and is distributed proportionally to the holding ratio (pro-rata). Additionally, dividends are usually in the form of cash but can also be in other assets (in-kind dividends).

Dividend distribution must pass two tests:

The Profit Test – The company must have a positive balance after distribution (if it is negative, profits from the last two years can be distributed if profits have accumulated). However, if this test is not met, one can petition the District Court for approval of the distribution.
The Solvency Test – The purpose of this test is to ensure that the dividend distribution does not affect the company’s ability to meet its obligations.

It’s important to note that when it comes to a public company, the distribution of dividends requires the approval of the board of directors and the general assembly. Additionally, the distribution of dividends usually reduces the stock’s value on the stock market at the time of distribution by the value of the amount distributed. The distribution of dividends in a public company typically depends on the company’s declared dividend distribution policy.

Owner Withdrawals from the Company – Section 3(9) of the Ordinance:

In the past, to avoid paying tax on dividend withdrawals, company owners would create a shareholder debt surplus by receiving a “loan” from their owned company without any genuine intention of repaying it. This action was the basis for many assessments made by the Tax Authority, which reclassified the loan as a dividend.

Amendment 235 to the Income Tax Ordinance addressed three main topics: one of them deals with withdrawing money by creating a significant shareholder debt surplus. Section 3(9), legislated in this amendment, determined that the withdrawal would be classified as either a dividend, employment income, or a benefit depending on the circumstances of the withdrawal. Therefore, tax will be imposed according to its classification if the shareholder does not repay the withdrawal funds by the end of the following year.

To clarify issues related to the implementation of the section, the Tax Authority published Income Tax Circular 07/2017 on the taxation of significant shareholders due to withdrawals from a company.

Withdrawal is defined as any debt to the company created by a significant shareholder or their relative. Withdrawing money from the company is any withdrawal for the benefit of one of its shareholders.

Generally, any debt or withdrawal by a shareholder from the company will be considered a loan and requires documentation, a loan agreement, and more. This rule applies to cash, debt, loan agreements, securities, and any other guarantee the company provides for the benefit of the shareholder. Also, any asset provided by the company for the shareholder’s benefit will be considered a withdrawal from the company. This is only if the shareholder is an individual and if the asset’s primary use is for the private benefit of the shareholder. The included assets are apartments, art objects, jewelry, aircraft, and vessels. Additionally, an indirect withdrawal will also be considered a withdrawal (withdrawal of money from a subsidiary company and not from the parent company).

As mentioned, a withdrawal is considered a loan and accumulates interest that is subject to tax on the amounts. A withdrawal without an agreement or not repaid on time will be taxed according to the income classification.

The Tax Authority also published a specific form for reporting such a withdrawal – Form 1350, which is an appendix to the annual report.

Salary expenses and management fees

There are two additional ways in which the company can classify the transfer of money to a controlling owner as a business expense.

In cases where the company grants a loan to the controlling owner, the income tax will not recognize the loan as a loss resulting from business activity. However, the company can argue that it is a matter of salary expenses. This is because instead of increasing the salary of the controlling owner, it provided a loan. Since the controlling owner wears two hats in the company (controlling owner and employee), the company will need to convince the income tax that the loan was given to the controlling owner under his hat as an employee. Also, that the terms of the transaction are not different from the terms of transactions of other employees.

Additionally, in cases where the controlling owner of the company provides services to the company, the company can declare the money transferred to the controlling owner as management fee expenses, provided that several conditions are met.

The management transaction stems from a genuine need.
There is documentation of the transaction.
The compensation is reasonable in relation to the service.

Buyback of shares

This refers to the company purchasing its shares from the shareholders. The methods for buyback are defined in the corporate law and include several conditions to execute the buyback. In light of a recent ruling in this area, the Tax Authority is divided on the matter of how to classify a buyback – whether it is considered a dividend or alternatively not considered a taxable event at all.

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Wallet Company

Adam Zur — Wed, 13 Mar 2024 17:37:25 +0000

What is a Wallet Company

In the past, it was beneficial for many individuals to provide services through a company (known as a wallet company), thereby paying corporate tax on its profits without withdrawing the profits, and thus avoiding the immediate payment of high marginal personal income tax. In January 2017, an amendment to Section 62A of the Income Tax Ordinance came into effect.

The amendment was designed to personally tax significant shareholders on the incomes of a closely held company under their ownership, when the company falls under the definition of a “wallet company.” The term wallet company is attributed to companies held by up to five individuals, which, according to the tax authority, may be established with the purpose of avoiding the payment of taxes at the high marginal tax rate.

Wallet Company in legal terms

In June 2021, the Tax Authority filed its first criminal indictment dealing with this issue (and at least one more known to our office subsequently). The indictment was filed against a lawyer operating as a law firm, and an additional indictment was filed against the accountant who assisted that lawyer in preparing and submitting reports to the Tax Authority.

In this case, the lawyer owned the company together with his ex-wife, through which he received his income as a lawyer. The accused withdrew money from the company and used its bank account as his own. After withdrawing over 1.8 million NIS, the lawyer sought to close the company without having paid the legal tax on his withdrawals. The accountant is accused of assisting the lawyer in incorrectly reporting his income. It is too early to know how this case will be decided, but it can be understood as a change in the Tax Authority’s stance regarding owner withdrawals from their controlled companies and wallet companies.

The second indictment filed was also against a lawyer, under similar circumstances, where the lawyer was arrested and charged with concealing income.

The income of a closely held company, which includes up to 5 shareholders (indirectly or directly) and is not a foreign-controlled company, is divided into two cases:

In the case where the income of the closely held company is derived from the activities of an individual who is a significant shareholder in it, including a related party to that individual, such as holding an office or providing management services – the company’s income is considered as the individual’s personal income. This section does not apply to an individual who is a significant shareholder directly or indirectly in the other closely held company.
In the case where 70% of the income of the closely held company is derived from the activities of the individual who is a significant shareholder in it for another person and it is of the type of activities conducted by an employee for their employer – the company’s income is considered as salary income.

This section does not apply to a closely held company that employs at least four employees.

A dividend distributed from taxable income, which was taxed, will not be subject to additional tax.

The question of whether the owners of a wallet company are also liable for National Insurance remained open and will have a significant impact on the liability of the controlling owner in a wallet company.

The essentials of Section 62A of the Income Tax Ordinance

Income Tax Circular 10/2017, deal with the taxation of shareholders in closely held companies (wallet companies). It clarifies the issue and the tax authority’s stance and determines, among other things, that identifying who the client receiving the services is depends on a variety of circumstances. For example, it could be determined that in the case of doctors, the health fund is the client, or it might be determined that the doctor’s patients are the clients, and therefore, it does not involve a wallet company.

Our office accompanies company owners and examines legal possibilities and tax planning which, as a result, would not classify the company as a wallet company, especially when it comes to companies owned by doctors, insurance agents, or artists, etc.

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