International Tax Planning

On June 7^th 2017, 68 states have signed the multi-lateral Treaty (MLI). Among those countries were Israel and Switzerland.

As signatories to the MLI both states have taken on the duty to have the treaty ratified in their parliaments.

On September 13^th, 2018 Israel has deposited to the OECD its instrument of ratification.

Almost two years after signing the MLI Switzerland has ratified the treaty and on the 22^nd of March 2019 submitted its Instrument of ratification document to the OECD.

It is important to remember that the MLI is a tool for a crosswise amendment of double tax treaties (DTT’s).

The MLI aims to change drastically most of the signatories DTT’s by adding among others regulations in such matters as, see through entities, transfer prices between related parties, mutual agreement procedures in tax treaties etc.

From a perception point of view one can say that the main goal of the MLI which began with the BESP project [1]  was to change the mind set which led for the forgetting that the purpose of the double tax treaty was in order to prevent just that and not to lead to events where the treaties are being wrongfully abused for the purpose of tax reduction or even completely avoiding it.

From a technicality point of view any amendment made will be considered as effective upon both sides to the treaty have deposited the ratification document of the MLI and the specific period of time has passed (every article in the MLI has a different period for application).

Every country which has signed the MLI and had it ratified and deposited has the right to deposit alongside with the instrument its reservations.

The first article in the OECD standard document of which the countries are depositing includes the list of all countries to which the depositor wishes to have the MLI apply to. The MLI shall apply only in a case whereby both parties to the treaty have stated that they wish to apply it to themselves.

Israel & Switzerland

On the 2^nd of July 2003 Israel and Switzerland have signed a double tax treaty and had it retroactively applied back to 1^st of January 2002 based on the OECD model treaty. As mentioned above both countries have signed, ratified and submitted their MLI to the OECD and yet although both are signatories to the MLI and are adjoined with a double tax treaty which is applicable for over 17 years both countries have not opted for having their tax treaty to be amended accordingly.

[1] Base Erosion Profit Shifting – An OECD initiative which was adopted by over 125 countries with the hope of changing the perception in regards to the true meaning of double tax treat.
Action 15 spoke in details about the need for a tool such as the MLI.

It should be noted that Israel has submitted a list of 53 countries of which she has a tax treaty with which it would like to amend with accordance to the MLI apart from three countries, United Kingdom, Germany and…. Switzerland.

From the Swiss side, although having a wide range of double tax treaties with around 90 countries Switzerland has submitted its ratified instrument and had it related to the following countries: Argentina, Austria, Chile, the Czech Republic, Iceland, Italy, Lithuania, Luxembourg, Mexico, Portugal, South Africa and Turkey. No Israel.

The fact that both Switzerland and Israel did not wish to apply the MLI on their DTT is due to the fact that a new treaty is under negotiation between the countries and therefore awaits the result of the negotiation.

Reservations:
Every signatory country to the MLI has the right upon submitting of its ratification to have its reservation in regards to the MLI and its application.  It should be noted that whereas Israel does have several reservations, Switzerland has plenty and the fact that it had opted to have the MLI applied to only a small selected amount of countries will prove to have little effect to the MLI on Switzerland and its signatory partners.  

Israel has ratified and submitted its instrument alongside several reservations:

1. The elimination of double taxation in tax treaties:

According to the OECD model treaty which is the base for most of Israel DTT’s there are two systems to avoid double taxation

• Credit – the country which is not the source country[1] shall provide a tax credit towards the tax which was paid in the source country. 
• Exemption – whereby the non-source country shall provide a tax exemption for the income.

The MLI has presented three ways in order to avoid a situation whereby an entity or an individual achieves a double non taxation[2] .

Swiss approach compares to Israel – unlike Switzerland Israel has decided not to apply any of the options given by the MLI due to the fact that under Israel’s internal tax legislation any income which was made by an Israeli resident abroad is taxable in Israel (unless stated otherwise via a double tax treaty), and as part of the double tax treaties Israel is a part to, it applies the credit system. Switzerland on the other hand although as well as Israel decided not to apply the rule given by the MLI did so from a different reason mainly since it applies the exemption system in its internal tax legislation. It should also be noted that Switzerland unlike Israel does not impose CFC [3] regulations.

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[1]  The source country is the country where the income was generated.
[2]  Double non taxation is a situation whereby no tax is levied either at source country or at the non-source country, a situation which the MLI is trying to solve.
[3] CFC – Controlled foreign corporation, Israel Introduced the concept in its tax legislation article 75b to the tax ordinance.

2. Mandatory binding arbitration process:
In a nutshell, when a request based on the mutual agreement procedure is submitted and the certified authorities of both countries have not been able to reach any agreement for over two years after the last material has been presented  the applicant has the right to resolve to arbitration, as it stands today both Switzerland and Israel has reserved from this article.

3. Dividend Transfer transactions:
Israel has decided to object to the entirety of article 8 to the MLI in regards to all of its DTT’s.

As abovementioned both Israel and Switzerland are in pre negotiation for a new and amended DTT which most likely be affected by the MLI in all considerations to its warding however its clear it this present that both countries are tending to keep their taxation rights as have been done so until today either by the DTT’s or by the reservations of the MLI which allowed them to maintain control over the tax base as it was. The difference which one could claim between the two countries is that whereas Switzerland is trying to use the MLI as a tool to remain aligned with the rest of the OECD and the signatories the MLI is an important step for Switzerland in its path whereas Israel is using the MLI in order to increase  its abilities to collect true tax from its tax residents individual or corporate which is in line with its joining the previous treaties such as the AOEI and others. 

The Facts:   An Individual has left Israel along with his partner to a foreign state
                      during July 2010.

The individual was employed by a company residing in the foreign state which is a daughter company of an Israeli based company.
After arriving to the foreign state, the individual has received recognition as a resident for tax purposes and has submitted tax reports regularly to the foreign state tax authorities.
Since his departure to the foreign state, the individual continued holding a voluntary position in the service of the state of Israel, requiring him to maintain skills and qualifications. As a result he is forced to stay in Israel up to 90 days per year.
The individual does not qualify under the definition of an Israeli resident individual as stipulated in article 2 to the tax ordinance.
During 2011 the individual has been in Israel for 23 days and during 2012 he has been in Israel for 55 days while his partner remained in Israel for the equivalent amount of time.
The Request:   The Individual requests to set the conditions and the determining date where he will cease to be considered as an Israeli resident and will be considered as a resident of the foreign state for tax treaty purposes.  
The Ruling: the individual and his partner will considered as foreign residents for tax treaty purposes, from the 1^st of January 2011 onwards (hereinafter: ”the date of residency detachment”) – as long as the following conditions are met:
1. The individual shall stay in Israel in every tax year after the date of residency
    detachment no more than 90 days per year including his actual service period. 
2. Should the period of service of the individual be reduced to below 30 day a year,
    the maximum staying period shall be reduced accordingly to up to 60 days per
    year including actual service days.
3. The individual’s partner shall be allowed to stay in Israel for no longer than 75
    days consecutively for every tax year.
3. The individual does obtain a residency certificate from the foreign state
    declaring him as a resident for tax purposes.

Israel tax authority has issued today the 26^th of June 2012 a statement declaring that the temporary order regarding the voluntary disclosure shall be extended for three months until the 27^th of September 2012.

Furthermore the tax authority decided to allow individuals to address the authority anonymously with the intention to have their tax liability examined.

Switzerland’s tax system does not impose inheritance or gift tax on the federal level and the desire to collect such taxes has been left to the decision of each canton.

However a new initiative wishes to end this status queue.

According to the new initiative, which is on its way collecting the necessary 100,000 signatures in order to bring the initiative to the people to vote on, a flat rate tax of 20% will be impose over Inheritances exceeding 2 million CHF or Gifts exceeding 20,000 CHF.

If the initiative will be approve, any donation dating from 1.1.2012 will be added to the individual estate and will be tax retroactively.

Due to the fact that the initiative effects will be retroactive, we recommend that any actions which are planned in respect to individual’s estate & wealth should be made prior to the end of 2011.

On the 1.1.2008 the double taxation treaty between Israel and Croatia was enacted.

The treaty is based on the model treaty of the OECD and set forth source deduction rates as follows:

1. Interest – The tax deduction shall be 10%, however Interest in cases of a Bank loan shall be 5%.
2. Dividend – assuming that rightful receiver of the dividend is a corporation which owns at least 25% of the dividend paying corporate the deduction rate shall be 5%. If the corporate owns at least 10% of the dividend paying corporate and the dividend is paid from profits taxable in Israel and are lower than the corporate tax rate then the deduction rate is 10%. In all other matters the deduction rate shall be 15%.
3. Royalties – deduction rate is 5%.
4. Capital Gains – assuming that the seller of shares held for a duration of one year prior to the selling at least 10% of the voting rights than the deduction rate shall be 25%. Capital gain from selling shares that at least half of their value is in Real Estate in a different country will be taxed in the other country.

Construction projects or installation shall be considered as permanent institution as long as they are located at the same country for over 12 months period.

Corporate residency – In case of a double residency fear the determining will be based upon the actual place of corporate management.

The treaty has several orders which are different from the OECD model Treaty:

• Like the model treaty. A term that has not been defined by the treaty will be interpreted according to the local law. In regards to Israel the law includes, rules, regulations, administrative instruction and cases.
• Regarding price transferring, when a country taxes a project which was taxed also by the other country, the country must (if justifiable) make a tax adjustment in order to prevent double taxation on the project profits.
• The treaty provides an exempt from source tax deduction on Interest regarding interest on the selling of industrial, commercial science or commodity equipment with credit. Also on Interest on state loans or those which were made, approved, insured or guaranteed by an insurance institute or transactions funding by the state.
• Independent service provider – an individual providing professional services will be taxed at his country of residence unless the individual has a fixed base of operations at the other country.

It should be noted, that unlike the UN treaty, the article does not clarify whether or not staying over 183 days a year will be considered as a base of operations. Furthermore the model treaty, this article has been erased and the income is taxed as part of business profits.

• Real Estate profit – the first taxation right is for the country where the real estate resides.
• Regarding athletes and artistes if their visit was funded by the country of residency than the taxation privilege belongs to it.
• Deduction method applies to both countries.
• The treaty does not include articles regarding assistance in tax collection unlike the Model treaty.
• The benefits in the treaty are given only to those who are the rightful receiver of the payments.
• Regarding misuse of the treaty, it is clarify in the Protocol to the treaty that both countries can apply the internal law to prevent avoiding or tax avoidance. (in Israel article 86 to the tax ordinance).

In an effort to increase the number of applicants wishing to disclose their unreported assets, it has been decided by the Israeli tax authority to provide a temporary order which will be added to the original voluntary disclosure procedure (VDP) commenced in 2005.

The temporary order includes the ability to approach the authority anonymously.

 

1. Approaching anonymously – The applicant will approach the ITA with all the relevant information for the tax years i.e. source of funds, source of capital, detailing the amount of income which was neglected and the tax assessment to be paid.

Once it has been approached and reviewed by the ITA the application will be forwarded to the relevant civil tax officer (as opposed to the VP of interrogations & intelligence officer which reviews the application beforehand) in order to determine the tax rate.

The applicant has 90 days from the moment the application was received by the civil tax officer to provide all other details which will include the applicant’s name.

Should the applicant fail to provide his name according to the abovementioned period, the application shall be denied.

 

2. Short procedure (“Green Lane”) – Applicants which their total capital included in the application does not exceed 2M NIS, and that their taxable income does not exceed ½ M NIS (during the relevant tax years), are able to apply using the short procedure:

• The application shall be submitted to the ITA alongside the yearly tax reports or any other relevant documents after those have been amended accordingly.
• Should the ITA decide that the application is eligible to the VDP, it will transfer the application to the civil officer to determine the tax rate.
• Should the applicant pay the tax rate demanded by the ITA within 15 days of the notice, no criminal procedures shall commence.
• Anonymous applications are not possible using this procedure.
  3. loses deduction – Applicants choosing to disclose their assets via the temporary order shall have the opportunity to offset their losses with their income or capital gains (only for the years that the VDP applies to).  

 

The transferring of funds by using a country’s border is one of the well-known ways in the field of money laundering.

Israel has recognized the necessity to fight money laundering as part of its strategy of fighting organized crime, terrorism and drug cartels, by accepting recommendation 9 of the FATF (Financial Action Task Force), which led to the stipulation and legislation of the ways reporting the transferring of money in and out of Israel.

a)	Declaration system: The key characteristics of a declaration system are as follows. All persons making a physical cross-border transportation of currency or bearer negotiable instruments, which are of a value exceeding a pre-set, maximum threshold of EUR/USD 15,000, are required to submit a truthful declaration to the designated competent authorities. Countries that implement a declaration system should ensure that the pre-set threshold is sufficiently low to meet the objectives of Special Recommendation IX.
b)	Disclosure system: The key characteristics of a disclosure system are as follows. All persons making a physical cross-border transportation of currency or bearer negotiable instruments are required to make a truthful disclosure to the designated competent authorities upon request. Countries that implement a disclosure system should ensure that the designated competent authorities can make their inquiries on a targeted basis, based on intelligence or suspicion, or on a random basis.”

“9. Countries may meet their obligations under Special Recommendation IX and this Interpretative Note by implementing one of the following types of systems; however, countries do not have to use the same type of system for incoming and outgoing cross-border transportation of currency or bearer negotiable instrument:

According to the anti money laundering law – 2000 chapter 4, (hereinafter: “the law”), there are strict rules regarding the transferring of funds in and out of Israel. Those restrictions apply to cash; cashier’s check and traveler’s checks whose value exceeds 100,000 NIS. (the duty also applies to anyone transferring that amount via post or any other methods. The body which is in charge of enforcing the law is the costumes administration.

Article 9, sub paragraph 4(1) to the law stipulates that the reporting duty shall not apply to the following:

1. Bank of Israel
2. A Banking Corporation
3. A person which brings money in or out of Israel via banking corporation or via entity that the minister of finance consulting with the minister of public security, has authorized it in a directive.

It should be stated that in case of an individual withdrawing 100,000 NIS from his bank and wishes to carry it with him outside of Israel that action should be reported twice, once by the Bank according to article 7 to the law and once more by the individual who is required to do so according to article 9 to the law.

The penalty for failing to report according to the law will result in imprisonment of 6 months or a fine according to article 61(a)(4) to the penal code or 10 times the unreported amount according to the higher amount.

Ways to report – the way one should report is by using Customs form 84.

Over the last years, the state of Israel has increasingly become a tax heaven in relation to attracting foreign capital and foreign residents and new immigrant’s investments, Due to a sophisticated tax system which enables tax benefits and relief as well as an impressive list of exemptions for foreign residents, new immigrant and returning Israelis.

On top of the above mentioned Israel enjoys a stable economy, a gradual reduction in taxation rates and extensive tax agreements (over 40 agreements) which places Israel as a leader in Investments in technology high tech companies and real estate assets as well as providing an ultimate framework for international taxation planning for companies and individuals.

Some of the tax benefits one may find interesting are as follows:

1. Tax Exemption – On all types of income, earnings and assets (outside of Israel) for 10 years for new immigrants & returning Israelis.
2. There is no estate tax Israel, and no gift tax apart from a gift to a “foreign citizen” of a taxable assets and capital gains in Israel.
3. An exemption from capital gains tax for Foreign Residents on the sale of securities and traded on the TASE by foreign residents.
4. An exemption from Capital Gains tax for Foreign Residents on the sale of shares in an Israeli company.
5. An Exemption from Income tax on Interest on bank’s deposits by foreign resident’s and\or new immigrants.
6. An exemption from tax for foreign residents on income from interest and linkage differentials on bonds traded on the TASE (subject to certain terms and conditions).
7. An exemption from tax on residential rent up to approx. 900 euro per month per individual. Alternatively a reduced tax rate of only 10% on residential rents (without the deduction of expenses, credits or exemptions).
8. Foreign citizen trust – under certain conditions, no tax liability shall apply to trusteeships and Israeli citizen beneficiaries.
9. An exemption from capital gains tax in Israel for foreign investors in hedge funds.

The following is a decision made by the tax authorities in Israel in regards to a      joint venture between an Israel corporation and a foreign corporation.
The foreign corporation resides in a country sharing a double taxation agreement with Israel.

Facts:

1. An Israeli resident company (hereinafter “the company“) is involved in import, marketing and distribution of telecommunication products and employs employees in Israel.
2. The company is examining the possibility to engage in a joint venture with a company incorporated in a double taxation agreement country (hereinafter: “the foreign company“), which is owned by individuals residing in that country (hereinafter the “foreign company shareholders“).
3. The project will be operated using a non registered partnership (hereinafter: “the partnership“), and main activity shall be the development and global selling of telecommunication products.
4. The project main goal is to develop the products using advanced technology, while using the developing methods in the foreign company country, so that most of the development will be conducted in the treaty country by residents of that country.
5. The activity of the project shall be worldwide, and in fact the activities of planning, marketing and consulting to the clients shall be done from Israel and the development activity shall be done in the treaty country.
6. The holding structure of the partnership shall be 50% by the company using a new daughter company fully owned which will be registered in Israel (hereinafter: “the Israeli company“) and 50% by the foreign company.
7. The share of both the Israeli company and the foreign company in the income and expanses of the project shall be divided equally.
8. The foreign company is fully owned by the shareholders residing in the treaty country and they have never resided in Israel nor do they have any activity in Israel apart this project.
9. It is expected that the partnership shall pay labor fee to all of its employees including the ones residing outside of Israel.
10. It is expected that the products marketing which will be developed can and might be done using the partnership directly or using agents and local distributors.
11. It should be noted that no assets shall be transferred to the partnership by the Israeli company and\or its shareholders directly or indirectly after its incorporation.

The request:

1. The joint venture which is expected to operate partly from Israel and partly from the treaty country, and that the sides have divided the activity between Israel and the treaty country equally, shall not have a permanent residency of the foreign company in Israel. 50% out of the taxable income of the joint venture (50% of the Israeli company income) shall be taxed in Israel. The rest of the income 50% of the foreign company shall be taxed in the treaty country.
2. Since the entire development of the products shall be made outside of Israel by non Israeli residents, the request is to make sure that payments which will be made to the foreign company and\or employees which are not Israel residents will not be taxed in Israel and will not be considered as royalties.
3. Selling the holdings in the joint venture when if such will occur or when selling the rights of the joint venture in new companies including in Israel which if and when will be incorporated in Israel – the capital gain tax from selling 50% of the rights in the venture owned by the new company in Israel will be taxed in Israel. However, the capital gain from selling the rights in the venture owned by the foreign company will not be taxed in Israel including when the sell is of a company being held by the joint venture even if it is an Israeli resident since it is a foreign resident investment.

The tax decision and conditions:

1. The partnership shall be partly a permanent residency of the foreign company in Israel, according to the double tax treaty between Israel and the foreign country.
2. Thus, the foreign company shall open a file at the assessing office, of which she will report income related to the permanent residency.
3. The Israeli company shall be used as “assessed” and as “taxable” for the foreign company according to article 108 to the tax ordinance, and shall be empowered for the foreign company to report to the tax assessing officer and to pay for the foreign company the tax for any taxable income.
4. The income of individuals providing personal services – residents of the foreign country and individuals providing services of employees residents of the foreign country will be taxed according to the treaty.
5. It is clear that part of the capital gain made by the foreign company which is made in Israel will be taxed according to the treaty and to the tax ordinance.