Pre-Ruling – Advance Tax Rulings

An advance tax ruling allows a taxpayer to plan and carry out a significant transaction when the main tax implications are known in advance.

What Is an Advance Tax Ruling?

A tax ruling is a decision by the Israel Tax Authority regarding the tax liability, tax results, or tax implications of a specific action, income, gain, expense, or loss.

The tax ruling mechanism was regulated by legislation under Amendment 147 to the Income Tax Ordinance, which came into effect on 1 January 2006. The amendment created an organized legal framework through which the facts relating to a particular transaction or process, the requested tax position, and the supporting arguments can be presented to the Israel Tax Authority, and the Authority’s position regarding the tax results can be obtained.

As a rule, the application is submitted before the action is carried out. However, the law also allows a tax ruling to be obtained after the action has been carried out, in appropriate cases. Tax rulings are issued by the Tax Rulings Institution within the Professional Division of the Israel Tax Authority.

A tax ruling may address, among other things, questions such as:

• How the transaction will be classified for tax purposes.
• Whether the conditions for receiving a tax benefit are met.
• When the tax event occurs.
• How the taxable income will be calculated.
• How withholding tax will apply.
• What conditions must be met for the transaction to receive the requested tax treatment.
• How the tax provisions will apply to a restructuring, transfer of assets, or allocation of rights.

The ruling relates to the facts and circumstances presented in the application. Therefore, the way in which the transaction is analyzed and described, and the documents attached to the application, are of great importance.

Certainty That Supports Business Decision-Making

The central purpose of a pre-ruling is to create tax certainty. When a company is considering a transaction, tax may be one of the most significant components in calculating the net consideration. If it is unclear whether a certain amount will be classified as a capital gain, business income, salary, or a dividend, it is difficult to assess the true economic outcome of the transaction.

Obtaining an advance tax ruling may allow the parties to:

• Price the transaction more accurately.
• Determine how the tax liability will be allocated.
• Present a clear picture to the board of directors, investors, or financing parties.
• Adjust the transaction documents to the conditions set out in the ruling.
• Reduce the risk of a future dispute with the Israel Tax Authority.
• Move forward with the transaction when the key tax aspects are known.

The need for certainty is especially clear when the transaction involves significant amounts, several interested parties, complex tax provisions, or activity carried out in more than one country.

When Can a Pre-Ruling Be Requested?

The law allows tax rulings to be obtained in a wide range of areas, including income tax, Value Added Tax (VAT), real estate taxation, the Law for the Encouragement of Capital Investments, and other tax provisions related to these laws.

Below are some of the main areas in which advance tax rulings are commonly used.

Restructurings, Mergers, and Transfers of Assets

A restructuring may include the transfer of activity from one company to another, a merger of companies, a split of activity, the transfer of assets to a company, or an exchange of shares. In some cases, a restructuring may be carried out while deferring the tax event, subject to compliance with the conditions set out in the Income Tax Ordinance [New Version]. A tax ruling can regulate in advance how the provisions will apply to the planned structure and the conditions required in order to receive the applicable tax treatment.

Options, Shares, and Equity-Based Compensation for Employees

Equity-based compensation plans sometimes include mechanisms that are not expressly regulated in every detail under the Income Tax Ordinance [New Version]. Questions may arise regarding the allocation of share units, net exercise, repricing of options, replacement of options in a sale transaction, or transition between tax tracks. The Israel Tax Authority operates dedicated tracks for various actions relating to employee options and shares, including plans under Section 102 of the Income Tax Ordinance.

Obtaining prior approval can be important for both the company and the employees. It helps preserve the intended tax treatment and regulate the manner of taxation and withholding tax upon the exercise of the rights or the sale of the company.

The Law for the Encouragement of Capital Investments

Technology companies and industrial companies may be entitled to reduced tax rates under the Law for the Encouragement of Capital Investments, but eligibility depends on compliance with a series of factual and legal conditions.

In certain cases, it is possible to obtain an advance decision regarding the company’s compliance with the relevant conditions. Under the Israel Tax Authority’s green track, for example, there is a dedicated form for obtaining approval on matters relating to a Technology Enterprise and Technology Income. Such a ruling may affect the company’s tax forecasts, financial statements, dividend distributions, and the way the company presents its activity to investors and potential buyers.

Immigration to Israel, Residency, and Relocation

Determining the date on which Israeli residency begins may affect the scope of reporting and tax obligations, as well as eligibility for benefits granted to new immigrants and veteran returning residents. In situations where the move to Israel takes place gradually, there may be a gap between the date on which formal status is received and the date on which the person’s center of life actually moved to Israel. The continued existence of a home, business, family, or economic activity outside Israel may also affect the analysis.

The Israel Tax Authority operates a green track for applications relating to compliance with the conditions for obtaining the status of a first-time Israeli resident or a veteran returning resident.

International Transactions and Activity

Cross-border activity raises questions relating to residency, the place where income is generated, permanent establishment, transfer pricing, withholding tax, foreign tax credits, and the application of tax treaties.

For example, an international group may transfer intellectual property, establish a development center in Israel, change the allocation of functions between related companies, or provide services between group companies. Each of these steps may have tax implications in Israel and in other countries.

A pre-ruling can regulate the Israeli tax aspects of the transaction or process and create a clearer basis for its implementation. It may be especially significant when the Israel Tax Authority’s position is required as part of the completion of the transaction or as a condition imposed by investors, buyers, or financing parties.

Value Added Tax

Value Added Tax (VAT) questions directly affect the transaction price and cash flow. An advance ruling can regulate the manner in which VAT applies before the parties determine the transaction price and issue invoices. The green track also includes dedicated VAT forms, including applications relating to services provided to investment funds and classification as a non-profit organization for the purpose of participating in a tender.

Tax Ruling Under the Regular Track or the Green Track

Alongside the individual procedure, the Israel Tax Authority operates green tracks in areas where the structures and conditions are relatively fixed. The green track is usually based on a dedicated form that includes the facts, declarations, and conditions that the applicant must confirm. These tracks exist, among other areas, in relation to employee options, restructurings, capital markets, VAT, residency, and benefits under the Law for the Encouragement of Capital Investments.

When the case does not fit a fixed track, or when it includes special circumstances, an individual application may be submitted. In such an application, the details of the transaction, the legal analysis, the requested tax position, and the supporting documents are presented. Choosing the appropriate track requires an understanding of whether the circumstances of the case match the conditions set out in the green track, or whether an individual application is required in order to present the unique complexity of the transaction.

Why Preparing the Application Is Not Just “Filling Out a Form”

The outcome of the procedure depends to a large extent on how the case is presented. In a complex transaction, the same set of facts may raise several different tax questions. Sometimes there is more than one way to structure the transaction, and each alternative may lead to a different tax outcome.

The Israel Tax Authority publishes summaries of selected rulings for the public, but these summaries do not necessarily include all of the conditions, limitations, and circumstances included in the original ruling. Therefore, it cannot be assumed that a published ruling will automatically apply to another case that appears similar.

In summary, an advance tax ruling is a tool that connects tax planning with business execution. It allows companies, entrepreneurs, and individuals to make decisions when the main tax aspects of the transaction are clearer. The more complex the transaction, the greater the importance of examining the tax implications already at the planning stage. Early handling makes it possible to examine the transaction structure, adjust the documents, formulate the position to be presented to the Israel Tax Authority, and manage the procedure in a way that aligns with the client’s business objectives.

Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law offices, bringing together legal and economic perspectives. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and accessible language. We also work with a professional network of accounting firms and law firms around the world in order to provide a comprehensive solution in cross-border matters.

In relation to advance tax rulings, we advise clients from the initial review of the transaction and its tax implications, through the formulation of the structure and professional position, to the preparation of the application and management of discussions with the Israel Tax Authority. The purpose of our guidance is to create tax certainty and allow the client to advance the business transaction when the key conditions and tax implications are known in advance.