Tax Break

Who said tax is boring?

Archive for the month “December, 2018”

Wakey-wakey!

clock

Two minutes to midnight

It is the morning of the Maths exam that will decide which, if any, university awaits the candidate. He/she suddenly realizes that he/she hasn’t even started learning the syllabus.

How many of us have periodically woken in a cold sweat from that nightmare in the course of our adult lives?

I sometimes feel that, especially around the December full moon, tax advisers do their darnedest to  induce such feelings in the populace with ‘Achtung!’ articles of what must be done  (but clearly can’t be achieved)  before drawbridges go up for the Christmas/New Year break.

475px-The_Scream 2

Don’t panic!

I only ever tried to panic a prospective client once. (I warned a foreign company that  they needed to get their VAT house in order to avoid risk of  criminal prosecution, they ignored me and went to an alternative firm that proffered soothing advice, and they were criminally prosecuted two years later).

So, allow me to preface my remarks on Israel’s  10 year tax exemption period for first-time and certain returning residents by stressing that they are not aimed at those whose benefits end in the next few weeks, but rather in 2019 and thereafter. People who arrived on their equivalent of the  Mayflower  in 2008 (or earlier) are either sorted out, or the best of luck.

Everybody – that is the entire Jewish world, the OECD and the IMF – by now knows that Israel has operated a territorial tax system for first-time and certain returning residents since 2008 (with retroactive force to 2007). The law states that a first-time resident or veteran returning resident is exempt for ten years from income produced or derived outside Israel or whose source is in assets outside of Israel, as well as capital gains from the sale of such assets. The problem is that (from my experience) many mistakenly believe that, as long as they don’t go to work on a kibbutz milking cows, they can forget about tax for ten years. In reality, even those who do not incur any Israeli taxation during the exemption period need to be prepared for the day at the end of the decade when they fall off the tax cliff.

OLIM-HADASHIM

New olim, yes. New residents, perhaps

First of all the good news. Despite the drafting of the law being as hopeless as much other tax legislation in the country, more than ten years down the road the  tax authorities seem to have made their peace with much of the excruciatingly inconsistent language, as well as the fundamentals of residence. Grammatical glitches appear to have been passed over unnoticed, and nobody seems to be bothered about the repeated careless use of the word ‘Oleh’ in pronouncements, aliyah not being a prerequisite for tax residence. 2018 saw the first annual filings of residents coming out of the ten years (for the 2017 tax year), and most of the reporting snafus will presumably be ironed out over the coming months. Similarly, some of the more heroic assumptions required as the assessee slowly glides out of the exemption period (there are special provisions for capital gains) can be expected to be blessed, or otherwise, by the authorities.

As people start to report, the authorities could take an interest in the exemption period, looking for amounts that should have been reported despite the exemption.

In any event, among the issues assessees need to be considering as the watershed approaches are:

  1. When did they actually become resident? Although, in terms of the wording of the law, residence under domestic law as opposed to treaty is an annual thing, the authorities have repeatedly made clear in writing that they interpret it as something that can change mid-year. So far, so good. The problem is that their pronouncements on when the ten years actually starts have made clear it is not necessarily the night they give you a funny hat and a flag at Ben Gurion airport if, for example, there was already a home in Israel and/or significant time has been spent in Israel.
  2. Are they sure none of their income was ‘produced or derived’ in Israel, and thus liable to tax? There have been rulings over the last decade concerning new residents working  with foreign companies from Israel ‘by remote control’ through internet, e-mail etc, or trading foreign securities from Israel. The tax authorities are operating an amnesty procedure until the end of next year – although if an anonymous request is desired, it has to be made by the end of this month (ouch!).
  3. Corporate structures abroad, while being convenient as long as Israeli taxation does not apply, may need reorganizing. That is something that generally needs to be done while the exemption is still in place.
  4. Decisions need to be made regarding whether to realize assets – significantly  parts of securities portfolios  – before the end of the exemption period, or to benefit from the only gradual linear increase in capital gains in the post-exemption period.
  5. Thanks to developing legislation since 2006, trusts are supposed to be largely tax neutral – but there are still some horrible jagged edges that can create nasty tax accidents . There are certain benefits to new-resident settlors or beneficiaries that soothe the pain as long as the exemption period lasts. The long-term future of such trusts needs to be considered.
nuclear

Public Service Announcement

I sincerely hope this hasn’t scared anybody. I prefer to think of it as a Public Service Announcement. Really.

Bad Cumpany

scaramander

‘Come, come Mr Bond’

If, like me, you have been wondering for decades what the European Parliament is there for, wonder no more. Following a recent vote, the august institution is considering  setting up an investigations unit to tackle two humongous European fraud schemes  named improbably  ‘cum-cum’ and ‘cum-ex’. The first warning that something was afoot came in 1992, and the fan turned brown in 2017, but the wheels of power turn slowly in Strasbourg. (Or was it Brussels? Or Luxembourg?)

For those without a Latin education, the schemes translate as ‘with-with’ and ‘with-without’. It would be nice to leave it at that, but I had better explain.

Both schemes revolve around dividends on stocks. A stock is cum-dividend when a securities buyer is destined to receive a dividend that a company has declared but not paid. That is the status quo (more Latin) until the date at which the stock trades ex-dividend – when the dividend will go to the seller. Thanks to lacunae (Latin noun – first declension nominative plural, like mensa/mensae) especially in German law, but evidently in about ten other European jurisdictions, bankers and the other usual suspects were (possibly still are) able to bleed national treasuries of scarcely imaginable sums.

The cum-cum smacks more of an old-style tax avoidance scheme than hardcore evasion. Stocks of German companies held by foreigners who were not eligible to  dividend witholding tax exemption were ‘lent’ (effectively sold with an agreement to repurchase , – but it isn’t written that way) to bona fide German banks shortly before a payment date. The stock went back at a lower price without the dividend. Naughty, but with loud protests that it only made hay while the legislators slept. There was one exemption, and the bank had a technical right to it.

Godfather

He knew how to make sure a secret was kept

Cum-ex was a far dodgier form of exploitation, which did not rely on foreigners. It did, however, require collusion and, on the grounds that ‘two people can keep a secret as long as one of them is dead’, it was bound to be found out eventually (having said which, the German and other authorities seem to have made gargantuan efforts to miss what was going on beneath their noses). Basically, a bank would ‘borrow’ stocks cum-dividend within two days of the dividend payment date and would sell them (short) to a third party. Delivery was required in two days, by which time the stock had gone ex-dividend. The procedure in force until 2011 in Germany (and heaven knows what is still happening elsewhere) was that the bank had to make a compensatory transfer between the seller and the buyer for the net after-tax amount of the dividend, and then issue a certificate of withholding to the buyer even though he did not actually receive the dividend. The theory went that the seller would no longer be entitled to that withholding as he had transferred the dividend amount to the buyer, and therefore would not receive a withholding certificate. Aye, and there’s the rub. The short seller of the stock was not the ultimate owner and had not suffered the withholding tax. The ultimate owner also received a witholding tax certificate (if handled correctly, the number of withholding tax certificates could be multiplied) enabling two or more ‘owners’ to cash in on the same tax benefit. This is not clever tax avoidance. It is clearly tax evasion. And it has cost European state coffers an estimated €60 billion.

mob

The words ‘company’ and ‘companion’ derived from the Latin ‘cum panis’ – with bread

But, at least we know we can now sleep safe at night in the knowledge that the European Parliament is on to it. It has only taken them 26 years. Rumour has it that MEPs are soon to issue a communique announcing the end of the Second World War. The suspense is killing.

 

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