Recent Changes in the Israeli Tax Law – Double Taxation Agreement effective in 2017

There are again some changes and new developments in the Israeli tax law in the fight against tax evasion. Thus, the Israeli Money Laundering Law has been changed in April 2016 and certain tax offences are treated as predicate offences under the Money Laundering Law. As a direct response to this amendment, the Israeli Tax Authority (ITA) has extended the Temporary Voluntary Disclosure of 2014 again until 31 December 2016. In the area of the global exchange of information, Israel has signed in May 2016 the Multilateral Competent Authority Agreement (MCAA). Finally, the new double tax treaty for the avoidance of double taxation between Germany and Israel, signed in August 2014, will be effective as of January 1, 2017.

I.   Certain tax offences considered Money Laundering offences 

In April 2016 the Israeli Money Laundering Law has been amended once again. According to the amendment serious tax offences are to be considered as predicate offences under the Money Laundering Law. As a result the sanctions under the Prohibition on Money Laundering Law, like imprisonment up to 10 years, foreclosure and confiscation of property not yet reported to the Israeli Tax Authority (ITA) are now applicable to tax offences. Furthermore there is the possibility that information is directly transferred from the Money Laundering Authority to the Tax Authority. The amendment covers the following tax offences:

  • Offences under section 220 of the Income Tax Ordinance, when the omitted income exceeds 1,000,000 million Shekel for one year or 2,500,000 Shekel during the period of four years;
  • offences under section 98 (2c) of the Land Appreciation Tax Law ( real estate tax), when the transaction has not been reported at all or falsely reported and the value of the property exceeds 100,000 Shekels or when the sale’s or purchase value of an interest in real estate has been reduced by an amount exceeding 1,500,000 Shekel
  • or an offence under section 117 of the Value Added Tax Law (VAT), when for example the tax with respect to the offence amounts to 170,000 Shekel in a period of 12 months or 480,000 Shekels in a period of 48 months. In case of an offence under aggravating circumstances there is no minimum amount required.

The amendment to the Money Laundering Law is another step in the fight against “black capital” and is designed to increase the enforcement and detection of not reported assets and income. The amendment will enter into effect six months after the publication of the amendment, meaning December 7, 2016.

II.   Additional extension to the Temporary Voluntary Disclosure Procedure – December 31, 2016

In September 2014 the ITA has published a Temporary Voluntary Disclosure Procedure, which was supposed to expire first in September 2015 and has been extended to June 30, 2016 (see already: # 5 Newsletter/December 2014 – AHK Israel (English Version) and # 1 Newsletter 2016 – AHK Israel (English Version)). The additional extension of this procedure to December 31, 2016 is a direct response to the above described amendment to the Money Laundering Law. Taxpayers are granted an additional period of time to settle their tax affairs with the ITA , in order to receive immunization for criminal proceeding for the tax offence and even immunization for the offence under the Money Laundering Law. Taxpayers, who have not yet disclosed foreign income and assets, can still submit applications for a voluntary disclosure under the anonymous route as well as the fast track route introduced on September 7, 2014.

Under the anonymous route the application for the voluntary disclosure can be submitted anonymously, without disclosing the details of the taxpayer to the tax authorities. Only after conclusion of the negotiations regarding the tax liability, the name and the details of the taxpayer are revealed. (See # 5 Newsletter/December 2014 – AHK Israel (English Version)).

Under the fast track route, voluntary disclosure is possible by submitting amended tax returns for the relevant tax years. This route is only available, if the capital included in the voluntary disclosure does not exceed the sum of NIS 2,000,000 and the taxable income derived from such income does not exceed NIS 500,000 in any relevant tax years. (See # 5 Newsletter/December 2014 – AHK Israel (English Version)).

Voluntary Disclosure definitely still remains an attractive option to settle tax matters with the ITA, especially in view of the upcoming global automatic exchange of information in tax matters (See # 1 Newsletter 2016 – AHK Israel (English Version)).

III.   Israel signs the CRS Multilateral Competent Authority Agreement (MCAA)

In May 2016, Israel signed the multilateral competent authority agreement (MCAA) for the automatic exchange of information on the basis of the Common Reporting Standard (CRS). The agreement is a key element for the successful implementation of the automatic exchange of information between jurisdictions and specifies the details of what information of foreign accounts have to be collected and will be exchanged According to the CRS, developed by the OECD, certain financial institutions will collect and obtain information about their clients with foreign tax residence. This data will be transmitted annually to the national tax authorities, which will forward the information to the relevant foreign tax authorities. The information to be exchanged with respect to a reportable account include investment income such as interest, dividends, income from certain insurance contracts, account balances and proceeds from the sale of financial assets. Affected by the reporting requirement are financial institutions such as banks, custodians, brokers and certain insurance companies, trust companies and foundations ( see already to the automatic exchange of information # 2 Newsletter/May 2015 – AHK Israel (English Version)).

The Multilateral Competent Authority Agreement, signed by 83 countries, including Israel since May 2016, will strengthen the cooperation between the relevant jurisdictions for the automatic exchange of information and will enhance the discovery of the data and their transmission.

Israel has announced that it will start the implementation of the CRS and the exchange of data September 2018.

IV.   New Double Tax Treaty between Israel and Germany effective January 1, 2017

The New Double Tax Treaty between Israel and Germany, signed August 21, 2014 will enter into effect as of January 1, 2017 (see already with respect to the DBA # 4 Newsletter/2014 – AHK Israel (English Version)). This treaty will replace the previous double tax treaty between Germany and Israel signed in 1962 and effective since 1966.  The new treaty is based on the OECD Model Tax Convention. In the new treaty the withholding tax on passive income, like dividend, interest and royalties is substantially reduced compared to the existing treaty of 1962.

  • The maximum withholding tax for dividends is 5 % by the country, in which the distributing company has its residence, if the receiving company (other than a partnership) is the beneficial owner and holds at least 10 % of the capital of the company paying the dividend. In all other cases the maximum withholding tax is set at 10 %. These withholding tax rates for dividends are substantially reduced compared to the 25 % withholding tax under the current tax treaty.
  • The general maximum withholding tax for interest payments is set at 5 % subject to some exceptions. This constitutes a substantial reduction from the 15 % rate under the current tax treaty.
  • With respect to royalty payments the new treaty adopts the standard contained in the Model Tax Treaty of the OECD, according to which royalty payments are exempt from withholding tax and are only taxed in the residence state of the recipient.
  • With respect to capital gains on the sale of shares in a corporation the new treaty provides for tax exemption in the country where the corporation whose shares are sold has its tax residence, unless the value of the respective company is more than 50 % derived from immovable property. In this case the country in which the real property is situated will have the right to tax. In this connection the new treaty also contains a so called “exit” provision. If a resident of one country becomes the resident of the other country, the first mentioned country may tax accrued capital gains attributable to the property at the time of change of residence.
  • In connection with pension payments, annuities and similar payments the new treaty for the first time – explicitly states that compensation to victims of the Nazi Regime (including restitution payments) is exempt from tax both in Israel and Germany.

The new treaty also contains an article for the Exchange of Information. As a result, the Israeli Tax Authority can ask its German counterpart for information that is relevant to discover violations of Israeli tax law – and vice versa. Domestic bank secrecy laws will not prevent the authorities from exchanging information pursuant to the new treaty.