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]]>Amendment 261 to the Israeli Tax Ordinance (The Ordinance), which was published to the Knesset Records in July 2022, updates the reporting obligations of an Israeli entity that is part of a multinational group starting from the 2022 fiscal year.
In addition, following Amendment 261, the Income Tax Regulations (determining market conditions) (2006) (the Regulations), were also amended.
Under Amendment 261, sections 85B and 85C were added to the Ordinance, creating the requirement to fill out forms 1585 and 1685.
Definitions Added following Amendment 261 to the Ordinance
What is an entity under section 85A?
An entity is “a body of persons including a business unit of a body of persons for which separate financial statements are prepared.”
What is a multinational group?
A multinational group consists of two or more entities, where at least one of them is a foreign resident and one owns, directly or indirectly, the means of control of the other entities.
Therefore, all structures with a parent company and a subsidiary where one is a foreign resident, are considered to be a multinational group. On the other hand, a structure in which an individual holds an entity doesn’t fall under the scope of a multinational group.
What is an ultimate parent entity?
An ultimate parent entity is an entity that holds the majority of the means of control of the other entities within the group and meets the following criteria:
- According to Israeli accounting laws, or if it were publicly traded, a submission of a consolidated report would be required.
- No other entity holds it.
Expansion of Reporting Liability
Local file – Transfer pricing study
As a result of the amendment, transfer pricing studies must also include information on the taxpayer’s organizational structure, its main competitors, and amounts received due to transactions with foreign relations.
Master file
Due to the amendment, a taxpayer who is part of a multinational group with a turnover above 150 million NIS (in the tax year before the reporting year) must prepare a master file according to section 5(A)(10) of the regulations.
The information in the master file must include, among others, an overview of the group’s business, information on intangible assets, details about the group’s funding, and other relevant data.
Form 1685- Ultimate parent entity report (‘Country by Country Reporting’)
The ultimate parent entity report was initially introduced by the OECD Organization as part of the BEPS program. The OECD organization published the required information in the report, including general information on the financial and business data of the group. For example, the residence of the group’s entities, their main field of activity, their income, etc. In Israel, the reporting requirement was introduced as part of Amendment 261 and went into effect in the 2022 fiscal year.
A taxpayer who is part of a multinational group with a consolidated turnover surpassing 3.4 billion NIS, where the ultimate parent entity is Israeli, must submit form 1685. This form needs to be submitted to the Israeli Tax Authority within twelve months of the end of the tax year via a unique portal, the Automatic Exchange of Information (AEOI) Portal.
In the situation that the consolidated turnover surpasses 3.4 billion NIS but the ultimate parent entity is not Israeli, the taxpayer must update the Israeli Tax Authority in which country the form is submitted. In addition, the Israeli Tax Authority allows a taxpayer whose ultimate parent entity is not Israeli to submit the form in Israel.
If the ultimate parent entity is Israeli and the taxpayer is interested in submitting the form outside of Israel, they must request approval from the Israeli Tax Authority.
The information reported by the taxpayer in the form will be transferred, as part of the AEOI, to other countries where the multinational group’s entities operate and are part of an automatic information exchange agreement.
Form 1585-Declaration of being part of a multinational group
Taxpayers part of a multinational group must state this on form 1585. Reporting is required even if the taxpayer didn’t perform international intercompany transactions during the fiscal year.
The form includes information on; the Israeli entities, the multinational group, and the group’s turnover.
Additional Updates in Amendment 261
- A smaller time frame for a taxpayer to submit transfer pricing documentation (both local and master files), from the moment of the assessor’s request, reduced from 60 before the Amendment to 30 days after the Amendment.
- Repeal of Regulation four of the regulations regarding one-time transactions and the addition of Section 85A(E1) in its place. Section 85A(E1) allows the manager of the Tax Authorities to determine the requirements of Section 85A(E) won’t apply to one-time transactions or transactions of a small scope, as well as for transactions where there is a concern that setting a price not according to market conditions, doesn’t justify the application of the section.
Our firm specializes in international taxation and offers comprehensive assistance for transfer pricing needs. Our transfer pricing department guides our clients in implementing the proper legal provisions and assists them in correctly filling out all required forms.
To contact a representative at our firm, click here.
Additional articles on transfer prices:
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]]>The post Realizing an Inheritance from the U.S. for an Israeli Resident appeared first on נמרוד ירון ושות׳.
]]>Inheritance Realization from the U.S. for Israeli Residents – Claim What’s Rightfully Yours, No Surprises
Realizing an inheritance from the United States as an Israeli resident can be a complex process – but with us, it begins simply and clearly: with a one-hour professional consultation.
During this session, we’ll dive into the details of your case, identify the legal and financial challenges, and map out the options available to you. At this early stage, we can already estimate the expected tax liability, outline the costs involved, and provide you with a clear, structured quote for full legal and administrative support – all the way until the money is in your account.
Documents to Bring to the Meeting
- Probate Order / Will Validation Order from the U.S. – A certified copy of the probate or will validation order issued by a U.S. court, if available;
- Death Certificate – A certified copy of the decedent’s death certificate;
- Will – If applicable, a certified copy of the original will;
- Executor Appointment – If an executor was appointed in the U.S., please provide proof of the appointment;
- Asset Inventory – A list of the assets included in the estate (e.g., cash, real estate, securities);
- Tax Clearance Certificates – Documentation of any U.S. estate tax payments (if relevant);
- Contact Information of Involved Professionals:
- S. attorney handling the probate proceedings;
- S. accountant (if applicable);
- Israeli real estate attorney (if the estate includes Israeli real property);
- Investment advisor/banker (if applicable);
- Executor of the estate (if appointed);
- Contact details of additional heirs.
Inheritance Realization Process
S. Probate Proceedings:
It is important to note that all legal proceedings in the U.S. must be handled by a licensed attorney admitted to practice probate law in the relevant state.
We strongly recommend that our office be involved from the outset to ensure full integration of legal and tax advice between the U.S. and Israel, considering the complexity of the applicable laws and tax regimes.
The probate process is the legal procedure through which a U.S. court:
- Validates the will (if one exists);
- Appoints a personal representative (executor);
- Oversees the collection of estate assets;
- Ensures debts and taxes of the deceased are paid;
- Authorizes distribution of the remaining assets to the heirs.
Stages of the Probate Process:
- Filing a petition with the court – submission of the will (if available) and petition to open probate;
- Appointment of executor – the court appoints a personal representative (usually named in the will);
- Asset identification – the executor locates and gathers all estate assets;
- Creditor notification – publication of notice for potential creditors to submit claims;
- Debt settlement – payment of the decedent’s debts, including medical bills and funeral expenses;
- Tax payment – filing of estate tax returns and settlement of any federal or state estate taxes;
- Asset distribution – distribution of remaining assets to the heirs;
- Estate closure – filing of the final report and closing the estate with the court.
The duration of the probate process varies from several months to several years, depending on the estate’s complexity, the number of heirs, and whether disputes arise.
Tax Implications in Israel:
- Inheritance is exempt from tax in Israel under current law;
- However, income generated from inherited assets (such as interest, dividends, rental income) is subject to Israeli income tax;
- Reporting the inheritance to the Israeli Tax Authority is required if its value exceeds the legal reporting threshold;
- If the inheritance includes financial assets, the U.S.-Israel Tax Treaty must be considered to avoid double taxation.
Transferring Assets to Israel:
- Cash – via bank transfer to your Israeli account (subject to reporting requirements for large transfers);
- Real Estate – through registration in your name or sale and transfer of proceeds;
- Securities – via transfer to an Israeli investment account or liquidation and transfer of proceeds;
- Other assets – handled based on their nature.
Required Reporting:
- Annual reporting to the Israeli Tax Authority regarding foreign-held assets and accounts;
- Reporting to the Bank of Israel on foreign-held assets (if applicable);
- Disclosure of large financial transfers in accordance with anti-money laundering regulations.
Benefits of Integrated U.S.-Israeli Advisory Services
- Optimized tax planning – avoiding double taxation and maximizing benefits under the tax treaty;
- Cost and time savings – coordination between advisors prevents duplication and errors;
- Holistic approach – addressing all legal and tax aspects in both jurisdictions;
- Proactive problem-solving – early identification and resolution of potential issues;
- Personalized support – continuous guidance throughout the complex process.
Important Notes
- The process of realizing an inheritance from abroad can take several months to years, depending on the estate’s complexity.
- It is essential to review the specific probate requirements in the U.S. state where the estate is administered.
- In some cases, it is possible to avoid full probate proceedings through simplified procedures, depending on state law and estate value.
- Our firm works in collaboration with leading U.S. law firms specializing in probate and international taxation.
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]]>The post The Holdback Mechanism appeared first on נמרוד ירון ושות׳.
]]>When a company, typically a startup, is acquired, the buyers can implement several mechanisms aimed at strengthening the relationship between founders/key employees among themselves, between them and the companies, or between them and the investors/buyers. One of these mechanisms is the Holdback mechanism, which has become increasingly common in recent years.
The mechanism delays part of the consideration for founders/key employees and conditions it on their continued employment in the acquired company or another company in the group. This is done with the intention of maximizing the value gained from the acquisition.
In June 2017, the Israel Tax Authority published Income Tax Circular 5/2017 – Retention Mechanisms and Restrictions on Founders and Key Employees (Circular 5/2017). Among other things, the circular addresses the Tax Authority’s position regarding the taxation of consideration given under the Holdback mechanism.
What is the Holdback Mechanism?
The Holdback mechanism allows the acquirer of a company to condition part of the consideration on the fulfillment of a certain condition. For our purposes, the relevant condition is the continued employment of the founders or key employees in the acquired company or another company in the group.
The mechanism stipulates that all or part of the consideration for the shares of the founders or key employees is not paid to them immediately. Instead, it is deposited in trust or held by the acquirer for a specific period of time set under the Holdback conditions.
The consideration can be paid in one installment or in several installments, subject to meeting the condition of continued employment. There are cases where the consideration will be paid even if the founders or key employees do not continue their employment – death, disability, dismissal for certain reasons, or resignation for justified reasons.
Let’s look at a numerical example for illustration. Suppose a startup was acquired for 10 million NIS. The founder holds 20% of the shares, meaning they are entitled to a consideration of two million NIS. The Holdback mechanism could stipulate, for example, that half of the amount will be paid immediately, and the rest will be deposited in trust and paid to the founder in two equal installments provided they continue to be employed by the company.
The Haim Lehman v. Tel Aviv 4 Tax Assessor Case
The court case 47255-01-14 Haim Lehman v. Tel Aviv 4 Tax Assessor (hereinafter: the ruling) dealt with the taxation of consideration received by founders (who held key positions in the company) as part of an acquisition transaction. More specifically, the ruling addressed the classification of income (ordinary/capital) received by those key personnel as part of the acquisition of XIV Ltd. by IBM.
The consideration received by the key personnel for their shares can be divided into two parts. First, they received an amount according to the number of shares they held at the share price in the acquisition transaction. Additionally, they received additional consideration, which was given only to key personnel and paid over a period of three years. The additional consideration was subject to their continued employment in the company for the agreed period.
The court’s determination was that regarding the additional consideration, it constitutes employment income under section 2(2) of the Income Tax Ordinance. This is because it is a benefit received by key personnel within the framework of employer-employee relations. The court did not distinguish between the different types of consideration, and from this it can be understood that the entire amount is employment income.
Income Tax Circular 5/2017 – Retention Mechanisms and Restrictions on Founders and Key Employees
Circular 5/2017 was published in June 2017 and addresses two main topics – the Tax Authority’s position on the taxation of two mechanisms, the Reverse Vesting mechanism and the Holdback mechanism. In this article, we will focus on the Tax Authority’s position on the taxation of consideration under the Holdback mechanism.
To read about the Reverse Vesting mechanism and the Tax Authority’s position on the taxation of consideration under it, click here.
According to Circular 5/2017, consideration up to the share price will be taxed as capital gains. This is subject to the condition that the profit from these shares, if they had been sold before the mechanism was established, would have been taxed as capital gains, in which case tax will be paid at a rate of 25% – 30%. This is different from a situation where the consideration is classified as ordinary income, which is subject to marginal tax that can reach 50%.
Type of Consideration | Taxation According to Circular 5/2017 | Taxation Without Meeting the Circular’s Conditions |
Consideration up to the share price | Capital gains tax (25%-30%) | Marginal tax (up to 50%) |
Consideration above the share price | Marginal tax (up to 50%) | Marginal tax (up to 50%) |
Let’s return to the previous example. Recall that the consideration due to the founder for holding 20% of the company’s shares is 2 million NIS. In this case, all the consideration is at the share price and therefore all of it will be taxed as capital gains. Given that the founder is a substantial shareholder (holds over 10% in each of the means of control), the tax rate they are subject to is 30%. The amount of tax the founder will pay is 600,000 NIS, and the amount that will remain in their pocket is 1.4 million NIS.
Let’s assume a slightly different situation. The consideration due to the founder is still 2 million NIS. However, the value according to the share price is only 1.5 million NIS, meaning 500,000 NIS is considered consideration above the share price. Let’s assume that the founder’s marginal tax rate is 50%.
Now we can calculate the amount of tax and the amount that will remain in their pocket. We will distinguish between the consideration up to the share price and the consideration above the share price.
For the consideration up to the share price, tax will be paid at a rate of 30% – that is, 450,000 NIS.
For the consideration above the share price, tax will be paid at a rate of 50% – that is, 250,000 NIS.
The total tax to be paid amounts to 700,000 NIS, and the amount that will remain in the founder’s pocket is 1.3 million NIS.
If all of the founder’s consideration does not meet the conditions of the circular, tax will be paid at a rate of 50% on all of it, meaning 1 million NIS, and the amount that will remain in the founder’s pocket is only 1 million NIS.
These examples illustrate the gaps resulting from the classification of income, whether ordinary or capital.
Circular 5/2017 details several conditions that, if all are met, the consideration in part of the Holdback mechanism will be classified for the shares and taxed as capital gains, and they are:
- Type of shares – The shares of the founders or key employees are ordinary shares, classified as an equity instrument and not as a liability. And they are not preferred shares, deferred shares, management shares, or redeemable shares. The rights that these shares confer are identical to the rights conferred by the rest of the shares of the same type. The rights include the right to dividends, voting rights, and the right to participate in the company’s assets in the event of the company’s liquidation. And the profit under these shares, if they had been sold before the Holdback mechanism was established, would have been subject to capital gains tax.
- Duration of share ownership – At the time of signing the transaction agreement, the shares were held by the founders or key employees for a period of not less than 12 months.
- These shares were sold as part of a transaction for the sale of all rights in the company.
- As part of the transaction, the percentage of rights of the founders and key employees subject to the Holdback mechanism does not exceed 50% of all the rights they hold.
- The additional consideration does not constitute additional compensation, but is part of the consideration for the shares of the acquired company derived from the company value agreed upon by the parties.
- Continued employment – The founders or key employees sign a new employment agreement, continue under the same employment agreement or a revised employment agreement, and continue to work in the acquired company or another company in the group. The salary they will receive under the agreement is a reasonable salary that is not less than the salary they received before the transaction.
- The consideration under the Holdback mechanism is recorded in the tax reports of the acquiring company as payment for the shares and not as salary payment. And it does not claim an expense in Israel for the consideration.
If the consideration paid to the founders or key employees exceeds the share price to which the other shareholders are entitled, the difference will be classified as employment income that will be subject to tax according to section 2(2) of the Income Tax Ordinance.
The provisions in Circular 5/2017 refer to situations where none of the following apply:
- The acquiring company and the acquired company or its shareholders meet the definition of a relative in section 88 of the Income Tax Ordinance.
- The acquired company was tax transparent at any stage since its establishment.
- At the time of the transaction, the majority of the allocated capital in the company is held by relatives as defined in section 88 of the Income Tax Ordinance.
- The Tax Authority has previously granted any of the company, founders, or key employees a tax ruling related to the shares discussed under the circular.
The Nimrod Yaron & Co. firm has extensive experience in accompanying merger and acquisition transactions, optimal tax planning, and implementation of Holdback mechanisms. When buying or selling shares, it is important to consult with a tax expert to ensure optimal tax payment considering the circumstances of the case. To contact a representative from our firm, click here.
Questions and Answers
What is the Holdback mechanism?
When a company acquires another company, it can place restrictions on the consideration of the founders/key employees, thereby “forcing” them to continue working for the company/group. These restrictions are made under the Holdback mechanism.
How will the consideration under the Holdback mechanism be taxed?
Subject to meeting the conditions of Circular 5/2017, the part of the consideration up to the share price will be taxed as capital gains at a rate of 25% – 30%. Consideration beyond the share price will be taxed as employment income.
Will every Holdback agreement be taxed according to Circular 5/2017?
No! Only an agreement that meets the conditions detailed in Circular 5/2017. Such as, these are ordinary shares that were held by the founders or key employees for at least 12 months before signing the agreement, etc.
Who is considered a relative according to section 88 of the Ordinance?
According to section 88, a relative is any of the following: spouse, siblings, parents, grandparents, children, stepchildren and their spouses, nephews and uncles. Also, a body of persons held by a person or their relative, the holder of it, and a body of persons held by the holder of it (holding of at least 25% of the means of control).
מאמרים נוספים בנושא תכנון מס לחברות סטארטאפ והייטק:
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]]>The post Redefining Transaction Terms: A Landmark Tax Authority Ruling on Coca-Cola’s Royalty Payments appeared first on נמרוד ירון ושות׳.
]]>Overview of Coca-Cola Ruling: Central Company vs. Gush Dan Tax Officer
The Tel Aviv District Court recently mandated that the central company for soft drink production Ltd. (“Coca-Cola Israel”), the official distributor and seller of Coca-Cola in Israel, is liable for an additional tax in the hundreds of millions of shekels. This ruling has significant implications for the field of transfer pricing.
Background to the Decision
Coca-Cola Israel operates in the marketing and sales of Coca-Cola products within the country. The business model involves Coca-Cola Israel purchasing concentrates from the global Coca-Cola company, producing the beverages, and subsequently selling them within Israel. The agreement between Coca-Cola Israel and the global Coca-Cola company relates to the payment for concentrates and does not explicitly cover payment for the use of intangible assets.
This decision follows the Tax Authority’s policy shift after nearly two decades. This shift pertains to the royalties for using Coca-Cola’s intellectual property. Previously, the Tax Authority did not view Coca-Cola Israel’s payments to the global company as inclusive of a royalties component, seeing them instead as merely for the beverage concentrate.
However, the Tax Authority now contends that these payments also encompass a royalties component, arguing that the concentrates themselves incorporate the value of Coca-Cola’s intangible assets beyond just the cost of the material (since these concentrates are not available from competitors, and it is evident that the cost of the physical material alone is not substantial). This shift has substantial tax implications for Coca-Cola, potentially increasing its tax burden by hundreds of millions of shekels, and affects other companies in the industry as well.
Court’s Determination
The court ruled that while the payment agreement between Coca-Cola Israel and the global Coca-Cola company does not explicitly include royalties, there exists an exception in Section 85A of the Income Tax Ordinance. According to this, if there are special relationships between the companies, the tax officer is empowered to intervene in the agreement and adjust the pricing. Therefore, if special relationships exist between Coca-Cola Israel and the global Coca-Cola company, the tax officer can modify the transaction in such a way that it incurs additional tax payment.
Understanding ‘Special Relationships’ in Tax Law
The framework of the term ‘special relationships’ as outlined in Section 85A of the Income Tax Ordinance is an “open weave” requiring an examination of the entirety of circumstances and relationships between the parties to determine if ‘special relationships’ indeed exist between them. This definition of special relationships includes relationships between relatives, control of one party over another in the transaction, or control by one person over the parties involved, directly or indirectly, alone or together with others, and is not a closed definition. An analysis of the relationships between the parties can lead to a determination that they indeed share special relationships.
Indeed, the court analyzed the nature of the relationships between the parties and determined that special relationships exist, noting the transactional arrangement that has been woven between the appellant and Coca-Cola, which creates ‘special relationships’ of connection and mutual involvement between the two companies in the production and marketing of Coca-Cola beverages in Israel, akin to a ‘joint venture.’
Consequently, the judge established that since there are special relationships between the companies, Coca-Cola Israel is obliged to pay additional tax for the royalties to the global Coca-Cola company. This determination leads to additional tax payments amounting to hundreds of millions of shekels.
Conclusions from the Legal Decision – Defining Special Relationships in Section 85A
Key Insights from the Ruling
The main conclusions include attention to an exception in the law that allows the tax officer to intervene in the nature of the transaction and reclassify it. Generally, the tax officer must respect the agreement forged between two parties. However, as stated in the judgment, there are exceptions in the law. The relevant exception for our matter specifies that the tax officer is authorized to disregard the provisions of the existing agreement between the involved parties and establish new provisions in their place. For the tax officer to employ this exception, the international transaction must occur between parties that maintain “special relationships,” and the terms of the transaction must be less profitable compared to a deal that would occur between parties without such relationships.
Application of the Exception
To activate this exception, special relationships must exist between the parties tied to the agreement. The classic interpretation of ‘special relationships’ is aimed at relationships between companies related in a corporate structure, such as subsidiary and parent companies or sister companies.
Despite the fact that there is no corporate structure relationship between Coca-Cola Israel and the global Coca-Cola company, the judge determined that special relationships exist between them. The judge based his ruling on the terms of the agreement negotiated between the parties and the mutual involvement forged between them, which, among other things, relied on the method of accounting.
Implications of the Broad Definition of Special Relationships
This determination highlights that the definition of ‘special relationships’ in Section 85A of the Ordinance is not a closed one, but a broad definition that can also include transactions between parties not linked in the simple sense. It is important to consider such issues when conducting international transactions with parties that might be claimed by the Tax Authority as related, potentially altering the transaction.
Global Judicial Decisions on Similar Tax Issues
It’s important to note that the Israeli Tax Authority is not the only tax body worldwide that has deliberated on this matter. Similar issues have been discussed in both Australia and Spain. Moreover, the debate is not exclusive to Coca-Cola; the Australian court also addressed a similar claim by the Tax Authority against Coca-Cola’s main competitor, PepsiCo.
The Israeli Tax Authority even utilized the Australian court decision to strengthen its case. According to the Israeli authority, the Australian judgment concerned a company performing similar operations to Coca-Cola Israel, and it was determined in the decision that the payments made by this company for beverage concentrates included a component of royalties. The judge noted that while this foreign ruling could be used, he saw no necessity to rely on it for his determination, which was analogous to the Australian court’s decision.
However, after the proceedings in Israel, the Australian judgment reached the Federal Court, where the ruling was reversed. The Federal Court in Australia ruled that the payments received by the company did not include a royalties component. This reversal could significantly assist the central company in altering the decision of the district court.
A similar case also occurred in Spain, where the court made a decision similar to the one in Israel. Thus, it appears that other legal systems around the world have not yet settled the issue, which could potentially cost international companies hundreds of millions in tax payments.
These cases illustrate the significant power that tax officers have in intervening and reclassifying the nature of a transaction when dealing with related parties, even if they are not connected in the straightforward sense of the definition. Therefore, it is necessary to consult with relevant experts in the field to regulate the relationships between parties as precisely as possible. Our firm specializes in Israeli and international taxation and offers our clients a professional package in the field of transfer pricing. For an initial consultation with a representative from our firm, click here.
Additional articles on transfer prices:
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]]>The post Voluntary Disclosure 2025 – All Relevant Information appeared first on נמרוד ירון ושות׳.
]]>Voluntary Disclosure 2025 – Everything You Need to Know: A new voluntary disclosure procedure has been published for the regularization of unreported income and tax liabilities
Previous voluntary disclosure procedures
In 2005, the first voluntary disclosure procedure was introduced. Under this initial procedure, taxpayers who had not reported their income could regularize their reporting and tax obligations in exchange for criminal immunity. Over time, from 2011 to 2019, the Tax Authority issued three additional temporary orders that allowed for the voluntary disclosure of unreported income. From experience and practice, it is evident that there was a gradual tightening of the conditions for voluntary disclosure from one procedure to the next. The most recent voluntary disclosure procedure was highly successful; in the last two procedures alone, approximately five billion NIS was collected, and assets worth about 30 billion NIS were brought into the reporting cycle, generating estimated annual revenues of about half a billion NIS.
While the primary goal of the Tax Authority in the initial procedures was to “catch in the tax net” taxpayers who had not reported their income and to regularize their tax liabilities, the latest procedures mark a step up by the Tax Authority.
Although criminal immunity is granted under each iteration of the voluntary disclosure procedure, it is noticeable that in the latest procedures, the Tax Authority does not merely focus on capturing the taxpayer and bringing them into the tax net but also examines aspects of money laundering. This follows Amendment 14 to the Prohibition of Money Laundering Law, which took effect on October 7, 2016, establishing that tax evasion offenses would constitute predicate offenses for the purposes of the said law.
In practice, this is reflected in the Tax Authority’s request for an explanation of the origin of the funds that generated the income. In cases where it is not satisfied that the source of the funds is “legitimate and legal,” taxation (in addition to the tax on the ongoing income over the last ten years) is imposed at a rate of 10%/15%, and in exceptional cases, even 50% on the principal of the funds.
Voluntary Disclosure 2025 – Expected Changes
During the last year, discussions have taken place between the Tax Authority and the Legal Advisor to the Government regarding the publication of a new voluntary disclosure procedure. This procedure is expected to be made public soon. It will provide an opportunity for taxpayers who have not reported their incomes over the years to regularize their reporting and tax liabilities (including interest and indexation adjustments for each unreported year up to the date of tax payment) and to obtain criminal immunity.
The application for voluntary disclosure must be submitted with a brief background and calculations to the Tax Authority’s Investigations Department. After receiving the application, the Investigations Department will review the background of the taxpayer submitting the application to determine whether the case is already under tax assessment, whether there is an ongoing overt/covert investigation against the taxpayer, and whether there is any reason not to approve the voluntary disclosure. Following the review, if all findings are satisfactory, the taxpayer will receive approval to commence the voluntary disclosure process and obtain criminal immunity.
Two tracks are expected:
- Green Track – For cases meeting specific conditions, a simplified procedure will be implemented within the Green Track. Cases likely to enter the Green Track include:
- Disclosure of foreign bank accounts where the accumulated capital is less than four million NIS;
- Disclosure of undeclared income in Israel and abroad, where the income does not exceed 250,000 NIS per year;
- Income from virtual currencies (crypto), where the accumulated income is up to 500,000 NIS over the period (11 years) and the capital held by the taxpayer does not exceed 1.5 million NIS.
- Regular Track – If the conditions for the Green Track are not met, the taxpayer will receive a response from the Investigations Department that they are eligible to begin voluntary disclosure. This means initiating tax assessment discussions with the tax officer.
While in previous procedures the unreported income typically involved freelance income from properties in Israel or abroad, and passive income (interest, dividends, and capital gains) from foreign banks, this year a new player has entered the scene – the crypto market, with most of the disclosure now focusing on this area.
At the beginning of 2024, a “Temporary Instruction Procedure for the Acceptance of Tax Revenues from Profits Realized from Distributed Ledger Technology” was introduced. This procedure was designed to facilitate tax payments for crypto investors in light of the difficulties posed by banks in accepting these funds. It seems that the Tax Authority has prepared the groundwork for the 2025 Voluntary Disclosure Procedure, which includes, as mentioned, the regulation of tax liabilities and reporting of crypto income. Our firm participated in a panel at the Bar Association regarding the upcoming 2025 Voluntary Disclosure Procedure set to be published: Click here to read about the conference.
Important Points:
- Increased Stringency in 2025: Examining the history and evolution of voluntary disclosures, the 2025 Voluntary Disclosure Procedure is expected to be more stringent. Among other things, the scrutiny of the funds, as well as the tax rates that will apply in cases where the tax officer is not satisfied, are expected to be higher. This is especially true when it involves income from virtual currencies (such as Bitcoin and Ethereum).
- Previous Strategies: Traditionally, the Tax Authority operates on a “carrot and stick” basis. Previous voluntary disclosure procedures provided a window of opportunity to regularize unreported income before enforcement actions began. For example, the 2014 voluntary disclosure procedure was published about a year and a half before the Tax Authority announced it had received information about numerous Israelis holding accounts in Switzerland, which quickly led to criminal proceedings for all non-disclosers.
- Transition from Anonymity: In previous procedures, it was possible to begin a voluntary disclosure anonymously without disclosing the taxpayer’s details until agreements on the tax framework with the tax authorities were reached. However, in the new procedure, the initial approach to the Tax Authority must include the disclosure of the taxpayer’s name at the beginning of the process.
- Final Procedure: One of the conditions set by the Legal Advisor to the Government for approving the publication of the 2025 Voluntary Disclosure Procedure is that it should be the last such procedure. The Tax Authority’s management has stated their determination to adhere to this directive. Accordingly, legislation expected to be enacted after the expiration of the 2025 Voluntary Disclosure Procedure will include clear rules regarding the tax framework and penalties for those who wish to disclose their incomes late (in such cases, of course, they will not have criminal immunity).
It should be noted that it is also possible to regulate undeclared profits and incomes, especially in the crypto sector, without a voluntary disclosure procedure, through tax assessment discussions with the Tax Authority and signing a tax agreement at the end of the process. Given that the process may involve significant tax discussions with the Tax Authority, it is crucial that the application for voluntary disclosure be submitted by a lawyer/accountant who is an expert in taxes and has the knowledge and practice to handle such a complex process that may have significant implications for the taxpayer.
Our firm includes former senior officials from the Tax Authority who have handled many voluntary disclosures during their service, are familiar with the practices, and know how the Tax Authority operates in voluntary disclosures from the inside. Additionally, our firm includes lawyers, accountants, tax advisors, and economists with extensive experience in voluntary disclosures and tax liability regulation for undeclared incomes, especially in the crypto sector.
This year, our firm published the Hebrew entry on voluntary disclosure on Wikipedia. To view the entry, click here.
Additional articles Voluntary Disclosure:
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]]>The post Israeli Income Tax Circular 01/2025 – Country-by-Country Report (CBCr) appeared first on נמרוד ירון ושות׳.
]]>In February 2025, the Israeli Tax Authority published Circular 01/2025 on transfer pricing – Amendment 261 to the Income Tax Ordinance – Country-by-Country Report (hereinafter: CBCr). The purpose of this circular is to detail the obligations and requirements associated with the CBCr.
This article reviews the features of the CBCr and the obligations of Israeli companies in this context.
What is a CBCr report?
The Country-by-Country Report (or CBCr) was introduced as part of Action 13 of the OECD’s BEPS Project. In May 2016, an agreement was signed for the automatic exchange of information pertaining to the implementation of reporting by multinational groups through the submission of CBCr.
The report includes information on the distribution of income, taxes, and activities among the companies within a multinational group. The reporting obligation in most OECD countries began in the 2016 tax year. The threshold for reporting in most countries is similar – the group’s consolidated turnover exceeds €750 million (or its equivalent in local currency) and the Ultimate Parent Entity is a resident of that same country.
Israeli Regulations and CBCr Reporting Obligations
Under Israeli regulations, the obligation to submit a CBCr was introduced as part of Amendment 261 to the Income Tax Ordinance. In light of this amendment, certain entities are required to submit the CBCr in Israel.
Reporting Obligation – Who is Required to Submit the Report?
The obligation to submit the CBCr is detailed in Section 85C of the Ordinance and includes two cumulative conditions: the entity is part of a multinational group whose consolidated turnover in the year preceding the tax year was ₪3.4 billion (the NIS equivalent of €750 million) or more and the Ultimate Parent Entity is an Israeli resident.
The report can be submitted directly to the Israeli Tax Authority or through automatic information exchanges. The report must be submitted within 12 months of the end of the tax year of the Ultimate Parent Entity.
It is important to note that the threshold for submitting the report is stated in NIS. If the Ultimate Parent Entity reports in a currency other than NIS, the value of the turnover in NIS must be examined. The conversion to the NIS value can be done either by using the average exchange rate for the tax year or the average rate for the quarter. This means that the turnover might exceed €750 million but be less than ₪3.4 billion, and the company would not be obligated to submit the CBCr in Israel.
CBCr Submission in Israel
A multinational group that meets the conditions outlined above needs to submit the CBCr in Israel. However, the group can submit the report to another country if the Israeli Tax Authority approves that it meets three cumulative conditions:
- As of the date of submitting the application, there is a valid Competent Authority Agreement between Israel and the country where the report will be submitted.
- The group has notified the Israeli Tax Authority by the end of the tax year, via the Automatic Exchange of Information portal, about the reporting in another country.
- Proof must be provided within a year from the end of the tax year that the report has been submitted in the other country. This will be done via the Automatic Exchange of Information portal.
The report submitted in another country must reach the tax authority within 15 months from the end of the tax year. If the report has not arrived by this date, the final parent entity must submit the CBCr report in Israel.
Likewise, a group whose Ultimate Parent Entity is not a resident of Israel can submit the report in Israel. Of course, it is necessary to check the guidelines in the country of residence of the Ultimate Parent Entity to ensure compliance with the reporting requirements in that country.
There are several scenarios in which, even if the multinational group is not obligated to submit the report in Israel, the tax authority can require it to be submitted in Israel:
- In the country of residence of the final parent entity of the group, there is no obligation to submit a CBCr.
- As of the date of submitting the report, there is no Competent Authority Agreement between Israel and the country where the report was submitted, but there is an international agreement (as defined in the regulations).
- There is an agreement, but Israel knows there is a systematic issue with the country of residence of the Ultimate Parent Entity.
If one of the above conditions is met but the group has submitted the report in another country within the group, it will be exempt from submitting the report in Israel.
Our firm provides comprehensive support to our clients regarding transfer pricing. To contact a representative from our office, click here.
FAQs
What is a final parent entity?
According to Section 85C(a), an entity that directly or indirectly holds the majority of control instruments of the group entities and no other entity holds such control.
How is a CBCr report submitted in Israel?
The report is submitted online via the Automatic Exchange of Information portal.
If the final parent entity of the group is Israeli and the transaction turnover is reported in dollars amounting to $800,000, is a CBCr report required to be submitted in Israel?
Not necessarily. The obligation to submit depends on the shekel value of the group’s transaction turnover. If the transaction turnover exceeds ₪3.4 billion – a CBCr report needs to be submitted in Israel. If the transaction turnover is below ₪3.4 billion – there is no obligation to submit a CBCr report in Israel.
Additional articles on transfer prices:
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]]>The post Tax Consequences of a Foreign Resident Returning to Israel for Reserves appeared first on נמרוד ירון ושות׳.
]]>On October 7, 2023, the “Operation Iron Swords” war broke out. The war is currently still going on without an end date, according to the IDF and home front command. As a result of the war, many Israeli citizens residing abroad have returned to Israel under emergency orders such as ” Tzav 8″ (emergency summons) or for regular mandatory military service.
The Israeli Tax Authority has enacted special regulations allowing individuals to maintain their non-resident tax status, even if they exceed the usual time spent in Israel or don’t meet all standard criteria. Furthermore, all those who have returned under “Tzav 8”, will receive an extension for their declaration, allowing them to declare at a later date that these days should not be counted towards residency for Israeli tax purposes.
How is an Individuals Tax Residency Determined?
To determine whether an individual is a resident of Israel or to terminate one’s residency, the location of their “center of life” must be examined. In accordance with section 1(2) of the Israeli Income Tax Ordinance (referred to as ‘the Ordinance’), various tests are applied. A detailed explanation of these tests can be found here.
In some cases, when a resident relocates to a country with lower tax rates than those in Israel or where specific tax benefits are offered, they may prefer to terminate their residency in Israel and be classified as a non-resident for tax purposes.
How Can an Individual Maintain a Non-Residency Status Despite Extended Stays in Israel?
As mentioned, the tests for determining the “center of life” are outlined in the Ordinance and case law (previous precedents). However, in addition to these tests, there are Income Tax Regulations (determination of individuals considered as residents of Israel and determination of individuals not considered residents of Israel) that expand on the criteria for determining individuals as foreign residents.
Included in these regulations is section 3(3) which states that an individual who came to Israel for military service in the IDF may be considered a non-resident, provided they request not to be classified as an Israeli resident.
An explanation of full regulations can be found here.
An individual who came to Israel for military service in the IDF will be considered a non-resident until the end of their military service, provided the following three conditions are met:
- The individual is not a new immigrant (oleh chadash).
- The individual was a non-resident during the five years preceding the tax year.
- The individual requested not to be classified as an Israeli resident.
These conditions are considered definitive, however, due to the war, the Israeli Tax Authority recently announced a relief on this matter under section 8 of the Reserve Service Law (Tzav 8). Among other measures, the relief allows for a more lenient interpretation of the conditions, granting an individual to be classified as a non-resident even if they previously immigrated to Israel less than five years ago. In addition, individuals wishing to apply to this regulation may submit their request to the Tax Authority at a later date.
In other words, the unique circumstances of the wartime situation will be considered if the number of days spent in Israel exceeds the limit allowed for a foreign resident.
Our firm specializes in tax laws and tax reporting for returning residents, including tax regulation changes due to the current security situation. To speak to a representative from our office, click here.
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]]>The post Purchasing Real Estate Abroad appeared first on נמרוד ירון ושות׳.
]]>Tax Implications of Buying Apartments and Properties Abroad
Real estate transactions, particularly purchasing properties abroad, are often seen as highly attractive investment opportunities for Israelis, especially due to the current security and political situation in the country. This has heightened the motivation for Israelis to buy apartments and invest in real estate outside of Israel, exploring new and diverse options.
Such real estate investments can include direct investments in real estate – such as buying a private apartment, a private house, or commercial properties. Alternatively, there are indirect investments, such as, real estate investment trusts (REITs), shares in real estate companies, and more.
However, it is important to consider the tax implications in Israel as well as the target country, and all other relevant factors in order to ensure the investment is as informed and profitable as possible.
Ways to Hold Property Abroad
Deciding how to hold the property should be done according to the country and type of property being purchased. This decision could involve holding the property through direct ownership in the buyer’s name or ownership through a company. If through a company, which type of company should be established? The choice of how to the hold the property is very important as there are various goals which buyers may wish to achieve, for example:
- Protecting property owners from lawsuits (in some countries, such lawsuits can result in astronomical sums.) This protection is typically achieved by holding property through a company that is considered a separate legal entity.
- Protection against inheritance tax- it is important to verify whether the target country imposes inheritance tax. Inheritance tax can be relatively high, increasing the cost of transferring property through inheritance within the country. There are various ways to mitigate inheritance tax, each way with its advantages and disadvantages.
- Reporting costs over the years.
- Utilization of profits in an Israeli company owned by the investors.
- What is the purpose of the investment? Is it passive rental income or active resale following the purchase, renovation, and improvement of the property?
- Is the primary goal of purchasing the property capital gains or preserving the value of the purchase in line with the local currency index?
Based on responses to the previous questions, one of the available options in the target country will be selected, and a professional should be consultedto determine the best approach for registering the property in the purchase transaction.
To read more about the process of establishing a company abroad, click here.
Key Points to Clarify before Purchasing Abroad
- Currency conversion prior to transferring funds to the target country- The costs of transferring and converting money into foreign currency can be high, therefore, it is important to work with reliable non-banking companies approved by the Ministry of Finance to minimize conversion fees.
- Approval from the Tax Authority for the transfer- If the target country has a tax treaty to prevent double taxation, there is no need for an approval from the Tax Authority to preform the transfer. However, if the target country does not have a tax treaty with Israel, it is necessary to coordinate with the Tax Authority.
- Opening a bank account abroad- it is important to check what is required in the bureaucratic process to open a bank account in the target country before making the investment. In some cases, it is possible to open an online bank account instead of a physical one. Our firm collaborates with entities in both Israel and abroad to facilitate swift and efficient openings of foreign bank accounts.
- Tax rates- It is important to examine the applicable tax rates in the both target country and Israel regarding the whole process of purchasing real estate.
- Reporting to the Israeli Tax Authority- Israeli law requires the submission of an annual tax report to the Tax Authority for transfers abroad exceeding 500 000 NIS and for purchased property exceeding the value of approximately 2.1 million NIS.
Buying Real Estate Abroad- How to Maximize your Profits
If you are considering purchasing a property abroad and want to maximize your profits to ensure a worthwhile investment, it is recommended to consult with an international tax expert before making the purchase. Our firm specializes in international taxation and consultation services to help you get started. As part of this process, we hold an initial meeting with clients to understand their needs.
Then, following this meeting, you will receive a detailed document explaining the relevant options, advantages and disadvantages of each option, with recommendations on how to proceed. You will then be referred to the appropriate professional(s) who will accompany you throughout the entire process.
If you’re interested in maximizing your profits through investments in real estate abroad, you can contact us and schedule an introductory call.
Additional articles on International Taxation:
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]]>The post Taxation of REITs appeared first on נמרוד ירון ושות׳.
]]>What is a Real Estate Investment Trust/Fund (REIT)?
A REIT (Real Estate Investment Trust) is an entity designed to provide investors with the opportunity to profit from income-generating real estate investments. The acronym REIT stands for ‘Real Estate Investment Trust’ or, as referred to in the Income Tax Ordinance, ‘Real Estate Investment Fund.’ In other words, an investment fund focused on real estate.
The legislation permitting the establishment of REIT’s was enacted in 2005 (Amendment 147), introducing the REIT investment vehicle to the Income Tax Ordinance.
According to Income Tax Circular No. 2018/4, the purpose of the REIT instrument is to enable both experienced and inexperienced investors to invest in a trust dedicated entirely to income-generating real estate assets. The trust is obligated to regularly distribute all its profits to shareholders, ensuring a steady flow of returns for investors.
The financial instrument allows for the public to indirectly participate in large-scale income-generating real estate projects and enjoy the benefits of the investment. Real estate assets eligible for investments may include, industrial buildings, offices, residential buildings, commercial centers, shopping centers, and more. Additionally, investments can be diversified in terms of the amount invested, and the composition of the investment portfolios (changing risk distribution).
REITs are subject to a single-tier taxation model aligned with the principle that shareholders should be treated as though they directly invested in the income-generating real estate asset. The profits generated and distributed by the trust are taxed solely at shareholder level, and not according to the standard corporate model of double taxation- which is taxed at both corporate and shareholder levels.
Subsequently, amendment 222 to the Income Tax Ordinance, was enacted to amend and clarify the chapters provisions that govern the taxation of REITs. This has allowed for the simplification of its application and encourages establishment of additional real estate trusts.
Advantages to the Country
Low taxation on REITs could encourage the establishment of more trusts in Israel, resulting in more institutionalized and organized investment opportunities. With the right incentives for private investors, it is possible to transform the Israeli real estate market to have a preference for investing in REITs, rather than directly in real estate. Such transformation can be more efficient, economic-wise for both experienced and inexperienced investors and diminish initial intimidation for potential investors.
Types of REIT’s
There are two types of REIT’s:
Type one- REITs traded on the stock exchange.
In the framework of this type of REIT, an individual can invest in real estate projects, worth various amounts (not necessarily large ones). This trust allows the investor to manage risks in a way that suits them, as the investment is divided into a variety of projects.
Type two- REITs specializing in real estate financial funding.
This type of REIT purchases real estate through loans and mortgages from various entities. The purchased real estate serves as a collateral for the repayment of the loan.
General Overview of the Conditions a Company Must Meet to be Considered a REIT:
- The trust must be established as a new company created specifically for the purpose of a real estate trust, with no prior rights or obligations. This ensures that, after public offering, the public holding shares in the trust will not bear any past liabilities.
- The value of its income-generating assets must not fall below 200 million NIS.
- The trust must be listed for trading on the Tel Aviv Stock Exchange (TSE) in Israel. Additionally, the trust may be listed on a stock exchange abroad.
- At least 95% of the assets are income-generating real estate properties.
- The trust’s leverage ratio must not exceed 60% of the value of the income-generating real estate, and 20% of the value of the other assets.
- Development activity in the trust can not exceed 5% of the total asset value.
- At least 75% of the company’s assets must be located in Israel, based on the total value of all income-generating real estate.
- No more than five investors directly or indirectly, may hold 50% or more of the equity or voting rights in the trust.
- The trust will distribute profits as dividends amounting to at least 90% of the taxable income.
Taxation of REITs
As mentioned earlier, the investor in the REIT is treated as directly holding the funds assets (instead of the two-tier taxation model). Therefore, for tax purpose; capital gains tax, tax rates and loss offsets, taxable income, including, real estate capital gains of the trust distributed to shareholders under the conditions of section 64a9 of the Income Tax Ordinance, will be treated as if it were taxable income or real estate capital gains of the shareholders.
The idea behind this policy is “transparency”, defined in the section as ‘the taxable income of the shareholders.’ This transparency essentially replaces the two-tier tax model.
In contrast to this, losses accumulated by the trust won’t be distributed to the shareholders, rather will be carried forward to future years and will be offset solely at the trust level, in accordance to the offset provisions outlined in 64a4(h) of the Tax Income Ordinance.
The tax liability for the trust’s income occurs at the time of receiving the profits or other distributions from the trust. The tax liability for the sale of the trust’s shares will occur at the time of selling the shares.
There is a variety of tax aspects and benefits as a result of amendment 222 to the Income Tax Ordinance. For example, profits gained from the sale of real estate (capital gains tax) differs from the tax imposed on rental income. Through tax planning and professional services, like those provided in our firm, it is possible to reduce tax’s and optimize REIT investments according to the applicable conditions.
Advantages of REITs
- Risk management through amounts and investment distribution.
- REITs are required to report on assets and expected dividends.
- High profit potential in income-generating real estate.
- No extensive experience or knowledge required to invest in REITs.
Disadvantages of REITs
- Dependence on the trusts management company, not every company will yield profits.
- Dependence on the capital market, REITs involve stock investments which can be volatile.
- Limited investment scope, due to not being able to invest in non-income generating real estate assets.
Currently, there is a small number of REITs available in Israel, however, due to the state’s incentives, there may be a significant growth in the coming years. When done with the proper management and professional consultation, investing in REITs can be profitable, convenient, and safer than other market investments.
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]]>The post Income Tax Regulations (Determining Individuals Considered as Residents of Israel and Determining Individuals Not Considered as Residents of Israel) appeared first on נמרוד ירון ושות׳.
]]>An individual will be considered an Israeli resident or foreign resident as defined in section 1(2) of the Income Tax Ordinance (hereinafter the Ordinance), which is determined through various conditions that decide the individuals center of life. The regulations detailed below expand on the guidelines for establishing foreign residency or classifying an individual as a resident of Israel for tax purposes.
Definitions
- The definitions of “foreign athlete” and “foreign journalist” are found in section 75a of the Ordinance.
- The definition of “new immigrant” can be found in section 35(d) of the Ordinance.
- The term “military service” refers to any type of military service, including soldiers in military career service (‘Kevah’ in Hebrew) (i.e. active mandatory service or reserve service).
Cases in which an Individual is Considered a Resident of Israel
Even someone who is not defined as a resident by the terms in section 1(2) of the Ordinance, can be considered as one if the following conditions apply:
- The individual is a government employee, provided they began their employment as a government employee while being a resident of Israel; (it is important to note that the regulation does not address residency status of the spouse of a government employee.)
- The individual is employed by one of in one of the following, listed in section 19(a)(4) of the Ordinance:
- A local authority in Israel
- The Jewish Agency in Israel
- The Jewish National Fund (JNF)
- Karen Hayesod (United Israel Appeal)
- A government owned company
- A state authority or corporation established by law
This applies only if the individual began their employment at one of the employers listed above while still a resident in Israel, and no more than five years has passed since the start of their employment. Therefore, in certain cases we help ensure that an individual terminates their residency status before the start of their employment!
Cases in Which an Individual Will Be Considered a Foreign Resident
An individual deemed a resident under sections 1(a)(1) and 1(a)(2) of the Ordinance, will be considered a foreign resident if they meet one of the following criteria:
- A diplomat or consul of a foreign military, along with their spouse and children residing with them.
- A soldier in a foreign army or someone servicing in a UN mission.
- An individual who came to Israel for military service in the IDF (mandatory service or reserve service, excluding military career service), until the end of their service, provided they have submitted a request to be considered a foreign resident.
- A student that comes for their studies, provided they submit a request to be considered a foreign resident, this status is only granted for the first three years of their stay in Israel.
- An individual who comes to Israel as a teacher, lecturer, or researcher at an educational institution, this status is only granted for the first three years of their stay in Israel.
- A religious leader coming to Israel to serve in a religious role, this status is only granted for the first three years of their stay in Israel.
- An individual hospitalized in a hospital or rehabilitation institution, where the hospitalization period results in a prolonged stay in Israel.
- A foreign journalist or foreign athlete, as defined above, this status is only granted for the first three years of their stay in Israel.
As can be seen, there are few cases where, despite the relatively straight-forward definitions in the Ordinance, it is necessary to further asses if an individual is a resident of Israel or a foreign resident.
For an assessment of specific cases, you can contact our firm here.
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