The Arison precedent
Exit the dream of tax-free bubble gains
The Income Tax Authority is chuffed to the nines about its victory over billionaire heiress Shari Arison, though it tactfully prefers to define it "an arrangement that the tax authority feels comfortable with".
After two years of battle, Arison will be paying almost a half-billion shekels worth of tax on her gains from selling shares in Carnival Cruise. The company is registered abroad and she carried out the transactions via a foreign trust, but because she is (also) an Israeli citizen, the Income Tax Authority claimed it was due a bite. A big one, apparently.
In 2003 the parties were close to agreeing on $20 million tax. But the ITA refused - mainly in response to public outrage - and two years later the upshot is a tremendous coup for the treasury.
Arison had sold about a billion dollars worth of Carnival Cruise shares. Her tax bill amounts to about $80-100 million.
Tax commissioner Jacky Matza believes the agreement with Arison will create a comfortable precedent regarding taxation of capital gains posted via overseas-registered trusts, which until recently had been outside the grasp of the Israeli taxman. It could bring the treasury hundreds of millions of shekels worth of tax a year, Matza projects.
Based on the Arison precedent, Matza revealed, the ITA is already gearing up to claim tax from many more trusts - including ones that Israel's "hi-tech millionaires" set up overseas during the bubble years at the turn of the millennium.
"Anybody who pulled off a major hi-tech exit in 2000 was advised to deposit the exit money in an overseas trust in order to avoid gains," Matza explains. "We are already negotiating with the owners of trusts like that and now, based on the Arison precedent, I believe that many will have to compromise with us on tax payments."
In these trusts, the Israelis handed over their money to the management of somebody else, outside Israel. Usually the trustee in question was a lawyer. Technically, what they did was to create a virtual wall between themselves and their wealth, behind which they hid and claimed they did not own the money at all, and therefore, they owed no tax on it.
These foreign trusts were considered the most egregious of tax loopholes, until a law regulated the issue from the start of 2006.