The Israeli Tax Authority has recently published a new green path, the subject matter of which is an application in advance for the transfer of all of the rights in a company that is resident in Israel to a company that is not resident in Israel with which the State of Israel has a tax treaty, in consideration for the allocation of shares – a process that is generally called – “Corporate inversion“.
The green path is an abbreviated, expedited path for the making of tax decisions on applications in advance that have been submitted. This is not an automatic approval of a tax arrangement – in any event the application has to be passed to the Professional Department which is supposed to decide positively to approve the proposed tax arrangement within a short period of time, which is predefined in the Ordinance.
Corporate inversion is a name for the arrangement of activity that causes a change in the structure of the holdings in companies, such as in this case, in which the shareholders of a company that is resident in Israel sets up a new foreign company (hereinafter: “The absorbing company” or “The foreign company“) transfer all of their rights in the company resident in Israel to it (hereinafter: “the transferred company” or “The company“) in consideration for the allocation of shares in the absorbing company. The main reasons for such a process are: entry into new markets, the recruitment of foreign investors, issuance considerations and etcetera. A corporate inversion is deemed to be a tax event at the level of the shareholders of the transferred company as a result of the sale of their rights in it. However, insofar as the condition is met, it will be possible to receive a deferral of the tax event until the time of the sale of the rights in the absorbing company and in this special case, even if the absorbing company is a foreign company. However, we will mention that transfers of assets (including shares in an Israeli company) to such a foreign company are only possible with the approval of the Director of the Israeli Tax Authority.
In the distant past, the Tax Authority published a tax ruling under agreement, which dealt with a similar case. Furthermore, changes have occurred in the legislation in the event of a structural change and ancillary reliefs. The new green path, which were we are discussion in this bulletin, has been published within the spirit of these matters.
:The main conditions
A number of conditions have been published within the context of the green path, which if met, such an application is to be submitted on the green path for the making of a tax decision. Inter alia, the following conditions have been published:
The transferred company has been incorporated after 1.1.2018.
The absorbing company is not a transparent entity (in its country of residence), it is a new company that has been incorporated for the purpose of the structural change and it has not assets or liabilities whatsoever as at the time of the structural change.
The application is submitted within a period of three months preceding the structural change.
There is no consideration in money or in money’s worth in respect of the transfer of the shares.
The tax rate for companies in the foreign company’s country of residence exceeds 15% and there is taxation on passive profits in companies outside of that country, which are controlled by the foreign company (CFC rules).
The rate of tax to be deducted at source, which is set in the treaty between the two countries on the distribution of dividend from the company to a foreign company is at least 10%.
There is no transfer of tangible assets, activity and/or intangible assets in the company being transferred outside of Israel.
The trustee and the tax arrangement
It has been determined that the timing of the structural change will be the time of the transfer of the rights actually being transferred and in the event that the transfer of the rights is not executed within 90 days from the time of the signing of the tax ruling, the ruling will be cancelled unless an extension has been provided in writing. Furthermore, it is agreed that the rights that are allocated and the eights that are transferred by the trustee who will be responsible to the Tax Authority for the payment of the full amount of the tax deriving from the transfer of the rights, from the conditions of the tax ruling and from the provisions of any law, in respect of the rights that are allocated and in respect of the rights that are transferred, which will be the case until approval is received from the Assessing Officer.
The distribution of a dividend and capital gains on the sale of shares
When a dividend is distributed from the company to a foreign company, which is sourced in profits that have arisen until the end of a period of two years following the end of the tax year in which the structural change is made (hereinafter: “The period”), the foreign company will be chargeable at the rate of 30% in Israel. When a distribution is made out of profits that have been made after the period, the foreign company will be chargeable with tax in Israel on a dividend in accordance with the provision of the treaty. Furthermore, an arrangement has been determined for a credit for the tax deducted at source as aforesaid, at the time of the distribution of the dividend from the foreign company to the holders of the rights.
The sale of the shares being transferred by the foreign company is to be made pro-rata and will be viewed as if they had been sold by a company that is resident in Israel (in accordance with the “standing in the place of” principle, which is chargeable with capital gains tax in Israel without a right of deduction, offset, exemption or credit (including from foreign tax), and the sale of the shares that are allocated in the absorbing company will be chargeable with tax and done in accordance with the provisions of the Israel Tax Ordinance.
In summary, this is an outline for a tax ruling on a green path, which enables a structural change in which the absorbing company is a foreign company that is resident in a treaty country. However, the numerous and stringent conditions may not be appropriate for every such structural change and accordingly consideration should be given to compliance with these conditions prior to the execution of the process.
We would like to remind our readers that a voluntary disclosure process that enables the submission of anonymous applications will end at the end of the year 2018. The significance of this is that it is sufficient that someone has submitted his application by December 31, 2018, even if the handling of the application continues afterwards. Applications that are submitted as from January 2019 for voluntary disclosure will be required to submit an application that includes the taxpayer’s details!
It is clear that the situation of a taxpayer for whom an anonymous application is submitted is better, since he has the possibility of assessing the tax results and the agreement that will be signed with the Tax Authority before his details are exposed, that taxpayer also has the possibility of “retracting” and withdrawing the application and experience shows that within the framework of the anonymous process, the preparedness to reach agreements is greater.
In respect of crypto investors – a lot has been spoken about the tax authority’s position is that Bitcoin, Ethereum and the other crypto currencies constitute “an asset” and accordingly their sale is taxable as-capital gains, this position also applies to exchanges between crypto currencies and tokens – which constitute tax events. In recent months, we have encountered numerous clients who have received approaches from the Tax Authority and a demand for the submission of annual reports for recent years. Clients that received such demands are generally found on lists that the Tax Authority holds and it is known that they have purchased or sold crypto currencies. This information generally comes from files of central players in the industry who have been checked and it has been found that they sold currencies to those clients and the Tax Authority also has other ways to arrive at that information.
We should mention that a crypto investor who receives a demand from the Tax Authority – is not entitled to refer to a voluntary disclosure process, which is because the Tax Authority “has begun an examination”, prior to the submission of the application, and this is one of the conditions for the submission of the application. Solutions to this problem can be found by way of submitting reports to the Authority as requested by the Authority and reaching an arrangement whilst holding negotiations in respect of the tax implications. We would mention on this subject that we are aware of the existence of pending proceedings on the subject in the Courts, and it is our assessment that it will not be long until a ruling is handed down as to whether or not the crypto currencies are an “asset”.
At this opportunity, we are calling on the Tax Authority to publish a clear position on the issue of the crypto currency alternatives – this is an issue that constitutes the core of the problem in the arrangement of the field and will present as an example a Bitcoin, which was purchased at a price of $200, and which was exchanged in the last quarter of 2017 in consideration for Ethereum coins, where the value of the Bitcoin was $18,000 – in accordance with the Authority’s approach, the very fact of the exchange between the coins constitutes “a sale” of the Bitcoin coin (with a profit of $17,800) , which is chargeable with capital gains tax. A statement was published in the press recently that a senior person in the Tax Authority has given instructions for relief on the subject of a FIFO or a LIFO calculation, however this relief will not solve the fact that already one year after the last quarter of 2017, the Bitcoin (and the other tokens) have not reached the price levels that they had towards the end of the year 2017 – a period in which the crypto investors were “celebrating” and in retrospect , these were “celebrations on paper”, most of which have not been realized into “Fiat” money.