Sponsored content by Adv. Doron Levy
In January, a first draft bill of the government decisions file was published for the public review as they are expected to be ratified under the Arrangements Law during the discussions of the state budget for 2022-2023. The draft bill addresses possible amendments to the Income Tax Ordinance, VAT Law, Real Estate Taxation Law, and other tax-related laws. These amendments hold lateral implications for tax aspects and may significantly influence companies and individuals.
These draft bills are expected to be revised after comments from the professional chambers and additional factors, and it’s not inevitable that some of the mentioned revisions will be separated from the framework of the Arrangements Law. Adv. Doron Levy, a senior partner in Amit, Pollak, Matalon & Co. Law firm, who serves as the head of taxation and the class action departments, reviews the main points of proposed revisions with respect to the tax amendments in the law. According to him, the guiding principle is "attempts to reduce the uncertainty for investors and companies with respect to their tax payments".
What are the proposed revisions reducing black capital, crime in the gray market, and the use of cash?
"It is proposed to set a limit on possession of cash over an amount of NIS 200,000 so that it will be determined that the possession of cash, both by an individual and by a business, at an amount higher than this amount, will constitute a criminal offense punishable by a fine at a rate of 30% of the amount exceeding NIS 200,000 or an administrative fine to be determined later, exempting a business that received this money up to seven business days. It is further proposed to set transitional provisions that will enable reporting legitimately-held cash to the tax authorities and decreasing them gradually over the years so that each year, the possession of the allowed amount will decrease by NIS 72,000 from the amount reported the previous year. This is to avoid incrimination of those who had legal cash in their possession (before the law entered into force) and had not been able to deposit it".
Adv. Doron Levy further adds that "additionally, it is proposed to impose a reporting obligation for possession of cash at amounts between NIS 100,00 and 200,000, similar to the amount permitted in the Prohibition of Money Laundering Order, whereby failure to report, or reporting a lower amount held in practice, may result in the seizure of the amount exceeding the permitted possession amount, and additional amounts that were not reported, up to a ceiling of NIS 100,00 and for a period of up to 14 days or more under certain conditions, as well as an administrative tax fine at a rate of 10% from to full amount of cash held or NIS 20,000, whichever is lower. As part of the changes, also regarding loans provided by supervised financial institutions, it is proposed that these loans will be subject to the limit set in the law regarding the provision of cash loans (NIS 6,000). To strengthen the enforcement, the period for retaining information received according to the reporting obligation duty will be extended to a period of seven years, and it will be possible to transfer information for the purposes of investigations by enforcement agencies, including violations under the Customs ordinance".
Following the government decision from August 2021, and as a completion provision to the reporting obligation duty mentioned above, and to create deterrence among tax payers by expanding the cooperation and transfer of fluent information among the various authorities, Adv. Doron Levy notes that "it is proposed to create, in the Income Tax Ordinance, a completion set of a mechanism of provisions that require the transfer of information, in an online manner, by all the financial and clearance institutions to the Tax Authority regarding the activity of their clients in all accounts and types managed by them".
Additionally, Adv. Levy notes: "To prevent the use of fictitious invoices, it is proposed to set the operation of a monitoring mechanism on tax invoices whose amount, before VAT, exceeds NIS 5,000 by the assignment of approval numbers for the invoices. The dealer will be required to contact the Tax Authority and request an assignment number if the purchaser requests to do so, in which case, the dealer will be obliged to state this number on the invoice".
What do you recommend doing in light of the expected revisions?
"Due to the new limitations that are expected to be imposed on both individuals and dealers, including supervised financials institutions or financial service providers, for example, regarding possession and reporting of cash, it is recommended to prepare accordingly and consider reducing the holding of cash possession as much as possible; it is also advisable to ensure the existence of proper references and supportive documents addressing to the source of funds, and insofar as there is a doubt as to their source, consider turning to a voluntary disclosure procedure in an appropriate reporting to avoid the possibility them being caught".
Technology Regulation
"The rapid development of technology is often ahead of the authorities, and therefore the draft bill also addresses digital assets and the promotion of the regulation regarding activity in those assets", adds Adv. Doron Levy. According to him, "it is proposed to clarify, in the tax legislation, the classification of all types of digital assets, including in the VAT Law, the methods of proving the "cost" and "purchase date" of the digital asset, the classification of the asset location according to the residency of the digital asset owner and its connection to an asset or a service in Israel, the provisions regarding the reporting obligation duty date, the withholding tax, and the payment of advances in relation to income from digital assets".
What is the purpose of the regulation set up in question?
"The intention is to protect investors and consumers and minimize areas of regulatory uncertainty, to comply with international standards and reduce the uncertainty of tax payment for investors and companies. Even though this amendment may significantly influence the activity of all companies and individuals operating in the field of digital assets, it is likely that, after receiving the remarks of the professional chambers and other bodies, this proposal for comprehensive and broad regulation of this field - in the aspects of the capital markets, insurance and savings, securities, consulting, banking, and tax - will be separated from the framework of the Arrangements Law and it is doubtful that it will remain in its current wording".
The market is not composed entirely of big corporations. What is planned for smaller businesses?
"The intention is to create a voluntary mechanism, under which, according to the new track, small businesses will be entitled to deduct an expenditure rate of 20% from their turnover, as an alternative to the demand for deducting actual expenses. This change is expected to exempt from submission of an annual tax report and other duties such as advance payments and capital statements. The draft proposes consolidating the new track for small businesses in the tax income with the existing exempt business track in VAT".
Cooling down the rental market
In 2022, an additional surge in rental prices was recorded. According to the data of the Central Bureau of Statistics, in some localities, an increase of about 20% was recorded during the past year. In this regard, it is proposed to apply a reporting obligation duty on tax-exempt income and to establish a designated database and cancel the index linkage of the amount of the tax-exempt income ceiling (NIS 5,471 as of 2023).
It is also proposed to rectify the current situation, where a person renting an apartment is technically required to pay tax for the rent payments they receive. However, they cannot deduct their paid rent, even for a room in a nursing home. "The result is that the same taxpayer is being charged tax without being economically enriched since the rent being paid to them is used to pay rent for residential purposes", explains Adv. Doron Levy. "The proposed draft bill seeks to allow an offset between the two sources, up to the amount of rent paid by the taxpayer or up to NIS 7,500, whichever is lower".
"The amendment is also consistent with the spirit of the times, while most apartment owners don’t necessarily live in the apartment they own, including owners of a single apartment - for example, the winners of the "Tenant's Price" who win an apartment in areas that does not overlap with their center of life, and choose to rent out those won apartments". Adv. Doron Levy further adds that "for this move to go into effect and achieve its proper purpose, the reporting obligations duty must be implemented and enforced in practice to avoid becoming a dead letter (i.e., a written law that is not enforced).
At the same time, according to the proposed draft bill, in the first year in which the reporting duty is in effect, no sanctions will apply for failure to report rent income below the ceiling unless the violator has received a written notice regarding the violation or offense, and repeatedly violated the same directive.
Another residential-related matter is Real Estate taxation. The plan for collecting a reduced land appreciation tax is expected to benefit those who are holding lands before 2001. Currently, there is an interest in returning into effect a temporary provision that was in effect in the past, which will determine that an individual in possession of real estate on which at least 15 housing units may be built, who will enter into a sale transaction by the end of 2026 and complete the construction procedures within four years, could benefit from a maximum calculation of 25%. "This is a significant tax benefit that may, to our understanding, encourage land sales", Explains Adv. Doron Levy.
Additionally, it is proposed to shorten the period for the re-exchange of a single housing unit. Currently, the period stands at 24 months; It is proposed to shorten the period in which the sold apartment is considered a single residential unit owned by the seller, even if they have, in addition to the sold apartment, a residential unit to replace the apartment being sold, to 12 months.
Another proposition is to revoke the beneficiary linear exemption regarding an individual who has purchased land and is building a residential apartment unless a building permit is issued by the end of 2026. In addition, a shell apartment will be taxable with purchase tax as a residential apartment. It is proposed to cancel the 3-judge appeal committee and qualify the district court with a single judge. Lawyer Levy says, "We believe that if the amendment is accepted, the above proposition will weaken the strength of the taxpayer in those deliberations".
What is left now is to see which amendments will be accepted and enter the Arrangements Law, which will be separated from it, and which will not pass at all.