As part of the list of reportable tax positions published by the Tax Authority, a position has been added on the sale by an individual who immigrated to Israel either for the first time or after a period of 10 years or more (such a “beneficiary individual” has a 10-year exemption from tax and reporting on assets and income from outside of Israel), of shares in a foreign company which holds at the time of the sale an Israeli asset, either directly or indirectly, that constitutes the essential part of its value. Thus, and according to the position, that beneficiary individual is considered to not be selling a foreign asset and will thus not be eligible for the exemption from capital gains tax, based on the rationale of the law that stipulates that sale of a foreign asset that is in essence a right to an asset or property located in Israel, shall be considered as a capital gain produced or accrued in Israel.
The clause referred to by the position asserts that a capital gain shall be viewed as produced or accrued in Israel in the event of the sale of “a right in a foreign resident body of persons, which in essence is the owner of a direct or indirect right to property located in Israel, in respect of that part of the consideration that stems from the property located in Israel“; that is, the remaining portion of the consideration is not taxable in Israel at all. For some reason, the underscored text (not so in the source) was omitted in the Authority’s phrasing of the position, and we believe that it is very significant in its implementation. Take for example the beneficiary individual who holds rights in a foreign company for the first time after immigrating/returning to Israel, where the essence of its value is produced by assets in Israel (and thus is not eligible for exemption in the sale of the securities).
According to the position, when selling the holdings in the company, there will be a tax liability on all the accrued capital gains. But at the same time, the exemption clause does not stipulate any exceptions to the exemption on the sale of shares of a foreign company by a beneficiary individual, because in any event, by the “source rule” of capital gains, only the portion of the consideration that is attributed to the Israeli asset is taxable, and not the entire consideration.
Furthermore, a beneficiary individual could claim a tax exemption by the authority of the provisions of the tax treaty between the State of Israel and the country of residence of the company being sold, because of the rule whereby the provisions of the treaty take precedence over the provisions of internal law.