Immigrants, Offshore Firms to Face Stiffer Scrutiny Under Tax Reforms

Amendments in the Arrangements Law would end reporting exemption for new immigrants, make it harder for offshore companies to avoid filing.

Finance Minister Moshe Kahlon on July 26, 2016.
Olivier Fitoussi

Israeli tax evaders face tougher times ahead under reforms that will end the exemption new immigrants and returning Israelis enjoyed on reporting foreign income while Israeli-owned offshore companies will face heightened scrutiny.

The shakeup comes as Israel joins a global effort to crack down on international tax shelters and win back revenues long lost to secret bank accounts and offshore tax havens. Last November Israel became the last member of the Organization for Economic Cooperation and Development to sign an international convention designed to combat tax evasion.

Since 2007, new immigrants and Israelis who are returning to the country after an absence of at least a decade are exempt from reporting any income they have earned abroad for their first 10 years in Israel.

Under the amendment proposed by the Income Tax Authority and the treasury contained in the 2017-18 Budget Arrangements Law, the exemption would expire in January 2017 – a move that could spur a wave of tax-evasion immigration in the final months of 2016.

It would also do away with a law that entitles the finance minister to offer new immigrants and returning Israelis a 10-year tax-filing holiday if under certain conditions they make a major strategic investment in Israel.

The exemption, which was made in a bid to encourage immigration, is wide ranging. Immigrants and returning Israelis do not have to report any income from capital gains, interest or work. The rule made Israel a popular destination for Diaspora Jews who wanted to avoid paying tax in their home countries, too, inadvertently turning Israel into a tax shelter.

In explaining why it wants to do away with it, the Tax Authority said among other things that the exemption has created difficulties in making accurate tax assessments, and encourages abuse of the tax code and money laundering by new immigrants.

Officials will undoubtedly have a fight ahead of them. When they tried a year ago to end the exemption, Zeev Elkin, who was then minister of immigration and absorption, successfully quashed it. Earlier attempts similarly failed.

Supporters of the exemption say ending it will create a vast new bureaucracy to monitor immigrant taxpayers and saddle them with the cost of filing tax statements. They say it will deter immigration to Israel by wealthy people.

Meanwhile, Israelis with companies domiciled in overseas tax shelters also face tougher tax treatment.

Under the Income Tax Ordinance, a company is regarded as Israeli and liable for local tax if it’s incorporated in Israel or control and management are mainly in Israel. Tax authorities got a sense of the huge scale of that loophole with the leak of the so-called Panama Papers earlier this year.

Some 11.5 million documents filed away at the Panamanian law firm Mossack Fonseca contained the names of approximately 600 Israeli companies registered in the Central American tax shelter controlled by some 850 Israeli shareholders. The Arrangements Law aims to crack down on the phenomenon.

“We’re talking about a dramatic piece of legislation that will affect many Israelis who control companies in tax shelters,” said Dr. Avi Nov, one of Israel’s leading experts in tax law.

“It’s no secret that tens of thousands of companies registered in tax shelters are controlled by Israelis and until now these companies paid no tax in Israel, so long as, among other things, control and management was outside the country. The people who control these companies took measures to ensure that control and management was outside Israel and relied on legal opinions. Now the Tax Authority wants to set up a rebuttable presumption that will look as if these companies automatically are Israeli under certain conditions.”

By rebuttal presumption, Nov means that under the proposed amendment, the burden of proving that a company is not Israeli now falls on the taxpayer, not the assessor. Israelis will be regarded as having control of the company if they either control it or received at least half the income generated by it, either directly or indirectly.

In a direct strike at tax shelters, a company that is not designated Israeli still has to pay income tax at a rate of at least 15% in whatever country it is domiciled to be exempt from Israeli taxes. The amendment only applies to countries with Israel doesn’t have a double-tax treaty.