Verbit CEO won't find it easy to stop paying tax in Israel

Tom Livne credit: Arik Sultan
Tom Livne credit: Arik Sultan

Tom Livne says he may leave Israel and stop paying tax here to protest the government. But it is not easy to close an Israel Tax Authority file.

In the wake of Israeli payment platform company Papaya Global CEO Eynat Guez's threat to transfer all the company's money out of Israel due to the government's planned judicial reform, it is the turn of automatic transcription and captioning company Verbit CEO Tom Livne to issue an ultimatum. He told Channel 12 News reporter Amalia Douek that he planned leaving the country and stopping paying tax here.

Livne said, "In recent years I have personally paid tens of millions of dollars in taxes here, and the company has paid hundreds of millions of dollars. The way I am going, and I hope many others will follow me, is in stopping being a resident of the State of Israel and stopping paying taxes here."

Meanwhile Livne received a mild and conciliatory response on Twitter from Minister of Finance Bezalel Smotrich. "We are brothers. I hope that you will change your mind. I'll be happy to meet."

However, if there is no reconciliation, perhaps Livne should know that even if he is determined to close his Israel Tax Authority file, it is by no means certain that he will be able to do so very quickly and it could cost him a lot of money.

Exit tax and residency termination

Two basic factors that must be taken into account when emigrating from Israel are the exit tax and termination of residency. Because tax in Israel is individual, in order to stop paying tax in Israel you must cease being an Israeli resident - and it is not so simple to cut oneself off from the country. Even if Livne succeeds, the state still asks for a cut of the assets accrued, when he was an Israeli resident.

Bracha & Co. law firm partner Adv. Yariv Aviram CPA, a former director of the Israel Tax Authority international taxation unit's department of covenants and information exchange, explains, "It is not so easy or quick (sometimes it can take several years) to stop paying tax in Israel, and this issue should be weighed carefully even when relocating and breaking off residency in Israel. Detachment from residency for tax purposes continues for a period even after leaving the country, and after the cutoff there is the exit tax on profits in the country that have not yet been realized."

In Israeli law there is a clause that stipulates an "exit tax" - which is imposed on those who cease to be residents of Israel, and is intended to tax profit from an asset that was not realized before leaving. In practice, the Tax Authority does not collect the exit tax from many of those who leave the country due to difficulties in monitoring the sale of assets, since the tax is not paid when leaving the country and cutting off residency, but when the assets are sold, but in many cases those former Israelis did not report their departure from the country, and certainly did not report the sale of the assets later on that they had accumulated while living in Israel.

Until his publicized statement that he would leave the country, Livne could still enjoy relative anonymity when he left the country, but now the Tax Authority will follow him everywhere in the world and zealously examine the sales of his private assets.

All this will only happen if Livne succeeds in convincing the Tax Authority that he really has left and that is in itself not so simple.

Just ask Bar Refaeli

In recent years the Tax Authority has done battle with dozens of Israelis who have supposedly left the country and live abroad for a certain period but did not report their income overseas, claiming that they were not Israeli residents. The most famous of these cases in recent years was international supermodel Bar Refaeli who was convicted together with her mother Tsipi Refaeli on a range of tax offenses including hiding overseas income. Another case that made headlines was the poker player Rafi Amit who paid tax in Israel even though he spent most of his time abroad.

Aviram says, "You cannot stop paying taxes in Israel even after you have left Israel. Sometimes it takes many years to terminate residency and no longer be a resident of Israel, and only then is the question examined as to whether you fall under the definition of a foreign resident - only after four years from the date of departure can it be decided whether you even disconnected your residency and what the actual date of departure was."

What determines the disconnection from Israel is the number of days that "emigrant" chooses to spend in Israel each year. A resident of Israel is subject to income tax on income earned worldwide, while a foreign resident is subject to tax only on income earned in Israel. The definition of residency in the Income Tax Ordinance is determined based on numerical presumptions according to which a person who is in Israel for more than 183 days a year is a resident of Israel. Even those who have stayed in Israel for 30 days or more in one tax year, when the total period of their stay in Israel in the tax year and in the two preceding years is 425 days or more - will be considered a resident of the country for tax purposes.

In addition to the numerical calculations, there is the "Center of Life" test, which examines that person's ties to Israel, including: a permanent home, family members remaining in Israel, business ties, location of assets, membership in professional social clubs, social and economic ties, and more.

Why is it so much tax?

Like so many companies that have invested in future growth, Verbit has also been a loss-making company, but the drying up of investments in the tech industry over the last six months, and the pressure of investors, has led startup entrepreneurs and growth companies to strive for profitability.

Verbit is currently using the $400 million it raised in 2021 to acquire profitable companies. Sources familiar with the company tell "Globes" that Verbit still has $130-150 million in cash and that after cuts made last year in which 60 employees were laid off, the company plans moving to profit during 2023.

Livne himself became rich as Verbit raised money in 2020 and 2021, selling shares in the company worth tens of millions of dollars in secondary deals. According to estimates between 25% and 33% of the capital raised by Israeli tech companies in 2021 ended up in the pockets of founders, senior managers and early investors who sold their shares on to new investors. In other words, Israeli entrepreneurs personally earned somewhere between $6.4 billion and $8.4 billion from the funds raised.

Livne himself who earned tens of millions of dollars became a wealthy CEO and prominent investor in the funds that financed him during that period: Viola, Vertex and Disruptive, which has also announced that it is transferring its bank accounts abroad. He has also invested in Kaltura, Hippo, Similarweb, ironSource and JFrog. "I bought the shares when they were low," he has told "Globes" in the past. Therefore the "tens of millions of dollars," he paid in tax was in capital gains tax, or 25% of his income.

Published by Globes, Israel business news - - on February 2, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Tom Livne credit: Arik Sultan
Tom Livne credit: Arik Sultan
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