The Finance Ministry's planned tax reform that would have brought capital gains taxes on foreign securities in line with taxes imposed on local securities, has been watered down.
According to the bill submitted by the treasury last week, capital gains taxes charged on the four major types of foreign investment - foreign mutual funds, bonds traded overseas, bank deposits and foreign structures - will be reduced from January 2005, but not by as much as originally thought.
Finance Minister Benjamin Netanyahu decided to bring forward some of the changes from 2007 start date to 2005. The tax levied on selling foreign securities will be cut from 35 percent to 15 percent (as on local stocks) but the capital gains taxes on other instruments will remain far higher.
This leaves the international bond market - the largest of the markets - with a discrimination in favor of the Israeli bond. The fear is that once the tax levels are brought into parity, more funds will speed out of the country to invest in foreign bonds. One reason why taxes on bonds will not be brought into line is that most international trading in them is not conducted through an organized trading floor, but between investment houses. They are therefore regarded as nonnegotiable, and taxed at 25 percent. Income from interest is taxed at 50 percent , thereby deterring many Israelis from investing in bonds overseas, both government and corporate, and in structures (a more complex financial debt instrument).
Overseas mutual funds are also categorized as nonnegotiable, taxed at 25 percent ,with no reduction in the near future.
Jackie Mazza, deputy to the Tax Commissioner, said yesterday that there was never any intention to bring capital gains taxes on mutual funds into line with Israeli funds (taxed at 15 percent).
Want to enjoy 'Zen' reading - with no ads and just the article? Subscribe todaySubscribe now