Israel: “Wallet Companies”- Draft Tax Bill Within The Scope Of The Arrangements Law For 2017 – 2018
Recently, the Finance Committee concluded its deliberations regarding the imposition of tax legislation pertaining to “wallet companies” (companies owned by individuals who provide services through them) within the scope of the Arrangements Law for 2017 – 2018.
The original draft bill was softened and even sweetened for a particular period by the Finance Committee. The Finance Committee decided that wallet company profits will be taxed as if they were business income, occupational income or a salary earned by the controlling shareholder – in other words, at the marginal tax rate of the individual controlling shareholder (up to 48%) instead of at the corporate tax rate (currently 25% and scheduled to be lowered next year to 24%). Provisions were also prescribed with regard to taxation of wallet company assets.
It is important to note that the tax rules applying to those wallet companies which are owned by persons engaging in free professions were narrowed during the Finance Committee deliberations. The Committee also decided that, on the matter of taxation of retained profits in these companies, theoretical dividends (distributions) will not be taxed automatically, but rather, by a public committee, and even then, under the following restrictions:
- profits accumulating up to a total of NIS 5 million will not be subject to the new legislation;
- only up to 50% of the profits accumulating in a company may be distributed, provided that they did not accumulate during the five years preceding that distribution;
- the company’s controlling shareholder will be taxed, as long as the balance of the retained earnings in the company is not under NIS 3 million.
The sweetening of the pill is presented in the form of a temporary order for 2017, whereby a dividend distribution will be allowed at a reduced tax rate of 25% instead of 30%, and without any additional surtax, which is scheduled to be increased to 3% (it is currently 2%).
It is important to note that the legislation in this regard is expected to be passed by year end.
The Multilateral Convention Regarding Mutual Administrative Assistance in Tax Matters
In November 2015, the State of Israel joined the more than 100 countries that signed the multilateral convention regarding mutual administrative assistance in tax matters (“the Convention”). The Convention will come into effect on January 1, 2017. This convention, on behalf of the OECD and the EU Council, is designed as a tool for international cooperation on tax matters and for contending with instances of tax avoidance and evasion.
The Convention includes provisions regarding cooperation on the following issues: information exchanges (specific, automatic and spontaneous), assistance with simultaneous tax audits, the presence of representatives of one country during the tax audits in the other country, assistance with tax collection proceedings, a document transfer service and more.
However, the State of Israel notified that it shall not implement the sections pertaining to assistance with collection proceedings, document transfers and the presence of foreign representatives during tax audits in Israel.
These objections practically empty the Convention of content, particularly in light of the fact that the State of Israel joined the Common Reporting Standard (CRS) – a multinational information exchange standard among countries that will come into effect at the end of 2018 and considering the more than 50 bilateral tax treaties that the State of Israel has signed.