International taxation - Taxation of debit balances, owner’s withdrawal and shareholder’s use of company assets
As part of the economic reorganization law for budget year 2017-2018 (“The Law”), a provision has been added to the Income Tax Ordinance for the purpose of preventing substantial shareholders (or their relatives) from withdrawing profits from the Company without taxation, beyond payment of corporate tax. All this while making private withdrawals under the guise of loans which in the final analysis are “rolled over” and are not repaid to the Company or, alternately, enjoying personal use of assets purchased with Company surpluses. On this matter:
COMPANY: Including a foreign company owned by Israeli shareholders, and an Israeli company owned by foreign shareholders.
WITHDRAWAL FROM COMPANY: Withdrawal of funds or putting an “asset” (apartment,works of art or jewelry, boats or aircraft, and other assets determined by the minister of finance with approval of the finance committee) up for the private use of substantial shareholders or their relatives.
WITHDRAWAL OF FUNDS: By substantial shareholders or their relatives, including cash, securities, loans or any guarantee or collateral the company has put up for it, provided that it is in excess of ILS 100,000.
BILLING DATE for withdrawal of funds will be at the end of the year following the withdrawal; for personal use of company assets, at the end of the first year of use and at the end of each following year until the date on which the asset is returned to company use.
On this date, substantial shareholders will be taxed for ‘withdrawal from company, according to the following hierarchy and order:
- If there is profit for distribution in the company, according to the Companies Law, and corresponding to each shareholder’s part in it, as a dividend.
- If there is no profit for distribution:
• If employer-employee relations exist, then as salary.
• If no employer-employee relations exists, then as income from business / occupation.
On the matter of inter-company loans, it has been determined that a loan given by one company to another, which is not a “fiscally transparent entity”, for economic purpose shall not be considered a withdrawal.
Furthermore, anti-planning provisions have been determined with regard to funds/assets returned to the company before the end of the year and re-withdrawn after a certain period of time.
In the amendment to the law, transitional provisions have been determined.
