Tax Alert No. 28 - 

Voluntary disclosure and trusts  19.12.2017

Cancelling the requirement for deduction at source for certain transfers of funds abroad - 19.12.2017

Many Israelis encounter considerable difficulty when transferring funds abroad in order to purchase assets, shares in foreign corporations, etc. This is because the Income Tax Ordinance determines compulsory deduction of tax at source for an Israeli paying a foreign resident, at the companies tax rate (currently 24%); or alternately 25% in the case of a foreign individual resident. The basic idea is to tax the foreign resident already when receiving income taxable in Israel.
However, certain kinds of transfers have no relevance to income taxable in Israel in the hands of the recipient, such as purchase of assets abroad or loans granted to foreign entities; those do not constitute taxable income in Israel. Thus, difficulties generated by the banks when making transfers abroad and the need to receive a certificate from the Tax Authority with regard to exemption from deduction of tax at source, have caused serious delays in making payments abroad and at times even harm to payment commitments.
As of late, the Israel Tax Authority has published a relief on this matter, according to which payments may be transferred to foreign residents with exemption from deduction of tax at source; this, by signing a suitable declaration on the stated application at the bank: The Tax Authority has compiled an application where, with fulfillment of all of the following conditions, the exemption will be given automatically, with no need for approval by the income tax assessing office.

  1. The payment is made to a treaty country resident, and to a bank account in a treaty country (on this matter we note that it has not been determined that the bank account and foreign resident must be in the same treaty country);

  2.  The payment is for one of the following: Investment in shares, real estate or other tangible asset, as well as a loan to a foreign resident (including a shareholder’s loan);

  3.  The application has been filled and kept by the bank, to be submitted to the Tax Authority by its request.

As part of the declaration, the transferor must confirm by signing that he is aware of the fact that the Tax Authority has the authority to determine deduction of tax at source in the case of any discrepancy between application details and actual transfer performed; in addition, the transferor must keep all references in connection with the transfer.
The definition of “treaty country” includes a list of 53 countries with which Israel has tax treaties. Since over the years, further tax treaties will been signed with additional countries, it is expected that this application form will be updated from time to time.
It is not superfluous to note that in transfers such as these, liability for deduction of tax at source should not have been imposed on the banks in the first place, since in Israel these are not defined as taxable income of the recipient; hence, there are no legal grounds for imposing tax or tax at source on it. Nevertheless, we see fit to congratulate the Tax Authority on the courageous change in and reduction of the stated practice. This move will make conducting international business easier, and we hope it continues pursuing this trend. We can only hope it will be improved inversely as well – when receiving funds from abroad in Israel, despite the fact that this falls under jurisdiction of the IMPA – Israel Money Laundering and Terror Financing Authority.

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