We wish to inform you in brief that due to the Corona crisis, the following are the benefits provided by the governmental National Insurance Institute of Israel (“the NIII”):
•Employees who leave on furlough are entitled to unemployment benefits (under certain conditions, in particular, a six-month employment period of one-and-a-half years before the furlough). The NIII will provide an unemployment wage to the mentioned unemployed.
• Self-employed individuals are entitled to a special grant by the Income Tax Authority and the NIII of up to NIS 6,000. The grant is granted under certain condition, mainly that the self-employed submitted an annual income tax return for 2018 (for businesses established in the 2019 only if the tax return is submitted before the 1st of June 2020), the taxable income is of over NIS 24,000 in 2018 and the total taxable income for 2018 was up to NIS 240,000 (if married, for both spouses up to NIS 340,000). As for now, many self-employed do not qualify, in particular self-employed performing their activity through a company (controlling shareholders). It is foreseen that they also will enter the benefitting circle in the near future as well. Also, as a further grant is expected in May.
•A grant to families of NIS 500 per child and up to four children is expected for Passover, according to the Prime Minister announcement.
•A special adjustment grant for employees aged 67 and over who have been forced out or put in leave on
furlough by the employer due to the Corona crisis is expected to be up to NIS 6,000.
In these frenzied days, most of the citizens of the country are under curfew in their homes, following directives or recommendations that have been issued by the Ministry of Health. Furthermore and in light of the circumstances, most business people are now located within the borders of the State of Israel, even though in normal circumstances they are in the habit of staying out of the country for business purposes, whether this be because of the “closing of the borders” and whether because of taking the need to self-quarantine in Israel or abroad, when moving between countries, into account. This applies, inter alia, to foreign residents who have come to Israel and have been forced to stay here “until the storm has passed”. On a broader scale, global economic activity in general, and economic activity in particular have been reduced to the minimum that is necessary in many cases and in certain cases it has even been halted completely.
The question that needs to be asks is how these circumstances may affect questions regarding the residence of an individualin certain cases, the tests for control and management, which are relevant to a company’s residency status, the way in which the calculation of the place where income is produced is performed, including the existence of a permanent institution or the clarification of the Israeli part of “mixed income”, which a new immigrant or a returning veteran resident has, and other issues.
In our opinion, there is room for giving consideration to the publication of general guidance, even of it is subject to the specific circumstances in each individual case, that the current period (“The Corona period”) should be eliminated when considering the impact of the aspects that are mentioned above, whether this be in relation to people who have been required to stay in Israel because of the situation and whether in relation to those who have become “stuck” outside of Israel.
The residency of an individual
1. The presumption of days for the determination or residency:
The provisions of the Income Tax Ordinance in Israel (hereinafter: “The ITO”) determine that there is a positive presumption of Israeli residency,pursuant to which staying for 183 days in a tax year, or a cumulative stay of 425 days in three years ending in the tax year, constitutes a presumption of such residency in Israel. This presumption can be contradicted by the assessee or by the assessing officer. It is obvious that the Corona period may move the scales unjustly in the direction of residence in Israel in many cases.
The provisions of the ITO also determine a positive presumption in relation to foreign residency, pursuant to which staying for 183 days outside of Israel in two consecutive years and the existence of a center of life a life abroad in two consecutive years constitutes a presumption of such foreign residency, as from the first tax year. This presumption is not contradictable. In this case too, because of the Corona period, a different conclusion may be determined that the conclusion that might have been determined in regular times.
The elimination of the Corona period will balance the equation in this connection, both in relation to residency in Israel and also in relation for foreign residency.
2. Days in a stay as part of the clarification of the center of life:
For all matters relating to the center of life (which is the main test for the examination of residency), the issues need to be examined at an objective level, however, consideration should also be given to the assessee’s subjective intention. Thus, insofar as the circumstances of the case indicate a temporary enforced stay by the assessee in Israel (or abroad), then we should try to eliminate that impact insofar as is possible, or it should be given lower weighting in the examination of the center of life.
The following are a number of aspect that are connected to the aforesaid:
– In tax rulings, which have been given by the Israeli Tax Authority (hereinafter: “ITA”) in connection with residency, the days in which the individual stayed in order to nurse a close family member have been eliminated, because of the fact that there has been an external constraint. Therefore, in our opinion, an assessee’s enforced stay for medical reasons and/or because of legal directives should also be eliminated.
– There are tax rulings in which employees in a relocation or other individuals have committed to a maximum period of staying in Israel (between 75 and 90 days) as part of the terms of the decision, in order to be considered to be foreign residents. Furthermore, there are decisions going in the opposite direction, which require a minimal number of days stayed in Israel (142 days) for the purpose or receiving confirmation of residency for tax purposes, for example. It is obvious that an unwilling stay in Israel, or abroad, in the Corona period, may cause the breach of these tax decisions.
– The regulations that have been promulgated under the ITO, enable the elimination of a period of medical hospitalization in Israel, or a period of sickness in Israel, when counting the days stayed for the purpose of testing the center of life. Albeit the Corona period is not “hospitalization” within the literal meaning of the term, and it does not constitute “a sickness” (except for those who are really unlucky), however the rationale that lies behind the elimination this period is of course also relevant to the Corona period.
The attribution of income to Israel in the case of mixed income
A new immigrant (including someone who has returned to Israel after being a foreign resident for at least 10 years), is entitled to an exemption on the income that he produced outside of Israel for a period of ten years from the time of his immigration or return.
For an immigrant who provides services (whether as a salaried employee or as a self-employed person) where they are alternatively in Israel and abroad, the ITA has determined, within the framework of tax decisions and a professional circular, that he must report on the “Israeli” part of the income from that mixed activity.
The ITA accepts and prefers the business days approach for dividing income between the countries, pursuant to which the Israeli part will be calculated in accordance with the number of business days in which the individual stayed in Israel as compared with the number of business days in the year. However, if the circumstances justify this (and with supporting documentation being presented), it is possible to apportion the income differently. In the ruling in the “Yehuda Talmi” case, for example, which deals with the subject, it was stated in the background reasoning that the ITA too accepted and agreed that in certain cases it is possible to multiply the business days in Israel by a particular factor, which typifies a smaller number of work hours, or a lesser economic contribution that those attributed to work done abroad (“The multiplier approach”).
Within the framework of that same professional circular and the tax rulings on the subject, it has been determined that weekends, festivals and holidays should be eliminated within the framework of the calculation of the business days. However, it is not mentioned explicitly that sick days should be eliminated, however it would appear that this is self-evident.
For the case before us – a new immigrant’s enforced stay in Israel will increase the relative part that is attributed to Israel, even though this is a temporary period that lies outside the regular conduct. Accordingly, the elimination of the Corona period (similarly to the elimination that is expected for days of sick leaves generally) will balance the distortion.
If the position that the Corona period should be eliminated in its entirety is not accepted, at the very least, the number of business days in that period should be multiplied by some factor whatsoever, which would reduce the part of the income that is attributed to Israel, because of the fact that the economic activity during the Corona period has in any event been reduced significantly.
Control and management and the permanent establishment issue in activity involving the provision of services
An enforced stay in Israel because of the circumstances that exist, which extends for weeks and maybe even for several months, may lead to the determination of Israeli residency for a company, because of the existence of control and management from Israel, or lead to the existence of an enforced permanent establishment in Israel.
1. Residency of a company
The definition of the term “resident” that appears in the Israeli Tax Ordinance, in relation to a Company, determines that a company (which was incorporated abroad) will be considered as being resident in Israel, if the control and the management of its business are operated from Israel. Thus for example, an officer who is a member of the management of an international company, who is “stuck” in Israel as a result of the Corona crisis and who continues to manage the company as usual, could expose that foreign company to taxation in (on all of its income).
Moreover, the determination of Israeli residence for such a company, even if for a short period of time, may cause the imposition of “exit tax” on the Company, at the time at which the Company ceases to be deemed to be resident in Israel, after the Corona period, and clearly, this is not what the legislator intended.
Our position is that the control and management mechanism in relation to the Company should be examined from a long-term perspective, and no determination regarding the company’s place of residence for tax purposes should not be concluded from a temporary stay in Israel, all the more so as a result of circumstances that are not under the control of the company or its manager.
2. Permanent establishment:
A similar issue arrives in relation to the existence of a permanent establishment in Israel, which may arise because of a senior officer’s stay in Israel, which has been forced by the circumstances and who executes decisions in the Company’s name (such as in the case of the manager in the example that appears above).
In this connection, it can be claimed that because of the temporary nature that the economic presence in Israel in the circumstances that are described above has, it cannot be determined that a permanent establishment arises in Israel for a foreign company. This also fits with the aspect of the determinations that are required for the existence of a permanent establishment in the tax treaties that the State of Israel has signed upon, and if the economic presence in Israel is temporary, all the more so in the circumstances that have been forced upon the project, the requirement in the said determinations is not met.
As is well known, a foreign company will be deemed to be a company that is resident in Israel, if the control of its business and the management thereof are operated in Israel even though it was incorporated outside of Israel. In the past, an amendment was made to the definition of “resident of Israel” in respect of a company. Within the framework of the amendment, a relief was determined, pursuant to which in a case in which the control and the management are operated in Israel, by a new immigrant or a returning veteran resident (“The beneficiary individual”), the foreign company will not be deemed to be resident in Israel. We would mention that the exemption also applies in respect of management and control by “someone acting on his behalf” of the beneficiary individual. If the foreign company has activity in Israel, for example in light of the activity of the controlling interest or someone acting on his behalf in Israel, it is not exempt from tax on income that is sourced in this activity.
Recently, many of the new immigrants have been coming to the end of the benefits period (ten years) and are required to make preparations for a new regime that applies to them.
Insofar as the beneficiary individual does indeed conduct control and management from Israel, they have to make preparations in due time, before the end of the benefits period, and to ensure to transfer the control and the management to outside of Israel. In particular, they must ensure that they execute their authority and execute the significant activity for the Company when they are outside of Israel, they must ensure that the key employees and management are outside of Israel, in appropriate cases they should consider the “emigration” of the foreign companies back to the countries in which in any case the management set up operates and etcetera.
The following are abbreviated details of the possible tax implications, if the beneficiary individual who holds a foreign company did not think or is unable to maintain control and management outside of Israel at the end of the benefits period:
First and foremost, insofar as the foreign company is resident in Israel, its income is chargeable to taxation in Israel, without connection to the place in which it is produced.
Further, when the beneficiary individual sells the company, there may be a claim that the exemption will not apply, because the asset that has been sold is an asset in Israel and in light of the rationale that it is determined in the regulations that capital gains from its sale will be deemed to be a gain that has been produced in Israel. We would mention that the law provides an exemption to a beneficiary individual, even after the benefits period, which is linear, such that only part of the capital gain arising after the end of the benefits period relative to the entire period in which the shares are held will be chargeable with taxation.
In our opinion, the language of the law supports specifically the application of the exemption, since the exemption is granted on a capital gain from the sale of an asset that the beneficiary individual had outside of Israel. There is no doubt that this asset was outside of Israel until the end of the benefits period; moreover, even if the company is now resident in Israel for tax purposes, it is still a company that was incorporated outside of Israel and as such it is deemed to be an asset outside of Israel.
Insofar as the exemption may be negated despite the language of the section, in accordance with the practical interpretation of the Law, at the least a proportionate exemption should be granted for the period in which there is no doubt regarding the company being a foreign company. In addition, insofar as the foreign company has been acquired or founded by a beneficiary individual before they came to Israel, it will be possible to support a position according to which they will be exempt from tax at the time of its sale (in a linear manner) even though it is deemed to be resident in Israel because of the control and management at the time of its sale. This is because of the provisions of the Ordinance, which grant a tax exemption for a beneficiary individual on the sale of a security in a company that is resident in Israel, and solely that they were a foreign resident at the time of the purchase of the security, and capital gains will apply to this matter, as of the security was an asset that he had outside of Israel before he became a resident of Israel.
In a case in which the issue is not with a sale-back of shares in a company but rather the sale-back of activity/ assets by the Company, “the problem” is even more certain and significant, since the more that the issue is with a company that is resident in Israel under the force of “control and management” at the time of the sale, then two levels of tax will apply to the sale – corporate income tax on the sale of operations/ the assets and dividend tax when the profits are distributed to the beneficiary individual. Insofar as a (full or partial) tax exemption may be granted on the sale of the shares, it will be possible to sweeten the pill by liquidating the company after the sale of the activity/ the assets and thus benefit from a liniary exemption on the capital gain on liquidation instead of the full tax that would apply to a dividend.
In light of all of the aforesaid, an individual beneficiary, who is reaching the end of the benefits period should place an emphasis on the issue of control and management. In the appropriate cases, consideration should be given to making a structural change immediately before the end of the benefits period in order to retain the tax exemption that is due to them, on the increase in the value of a company up to that time and also to consider an approach to the Taxes Authority to arrange the tax regime that will apply from that time onwards.
