Israeli tax experts are divided on the effect the U.S. deal averting the "fiscal cliff" - which raised taxes on high earners, capital gains and dividends, as well as large estates - will have on investors here.
"Israeli investors will not be affected by the deal," says chartered accountant Eli Alice, partner and head of the international taxation division at BDO Ziv Haft. However, chartered accountant Eli Kish, who heads the U.S. taxation desk at BDO, says the deal will hurt finances in Israel. The division of taxes paid by individual Israeli investors in the United States and in Israel will tilt towards higher taxation in the United States.
Anat Tenne, from Alter Attorneys at Law, which specializes in taxation, says that "since 2008, many Israelis have invested in U.S. real estate, paying 15% tax there up to the end of 2012. This was complemented by 20% taxes in Israel up to the 2011 tax year. Following the recommendations of the Trajtenberg committee, Israeli taxes rose to 25% in 2012. With the increase in U.S. federal tax kicking in this month, the remainder of taxes on these investments collected by Israel's tax authorities will drop to 5%."
"Since the value of these investments has increased considerably," explains Alice, "losses to Israel are estimated at hundreds of millions of dollars a year, with the U.S. collecting 20% in taxes and Israel only 5%." Tenne stresses, however, that for Israelis who invested in U.S. capital markets, long-term capital gains are less of an issue, since these will be taxed as short-term investments.
The agreement between U.S. President Barack Obama and the Republicans aimed at preventing the United States from sliding back into recession was reached last Wednesday. The two sides stopped at the brink of the fiscal cliff which, had they not reached an agreement, would have involved raising taxes and significantly cutting government spending.
The agreement specified an increase in taxes paid by the highest percentile, including individuals earning over $400,000 a year, or households making over $450,000. These will now pay 39.6% at the top income bracket, instead of 35%. Other taxes paid by high income earners will also go up, including an increase in taxes on capital gains and dividends, going from 15% to 20%. Taxes on estates worth more than $5 million will go up from 35% to 40%.
Alice and Kish also point out that the new tax deal may also mean that foreign investments in Israel will fall. "Many American investors chose to invest in Israeli companies since under tax agreements between the two countries, trading in public companies here was exempt from taxation. Paying an extra 5% in the U.S. will make investing here less attractive."
BDO executives say the Israelis who will be most affected by the new regulations aren't those who invested in U.S. real estate, but those with U.S. citizenship or green cards since they have to file annual returns that include investment income from all sources. "An Israeli with a green card who returned to Israel and is renting out an apartment here is exempted from taxes in Israel and has paid the U.S. authorities 15% on his income up to now. This has now gone up to 20%. Upon selling the apartment he will not have to pay taxes here, but will have to pay a 39.6% capital gains tax in the U.S., assuming he is in the highest tax bracket."