This year marks the 50th anniversary of the first performance of the classic satirical farce ‘Accidental Death of an Anarchist’, in which two policeman under investigation for the death of a suspect in their custody weave a web of increasingly improbable explanations as to how he fell out of the interrogation room window.
I don’t know what just made me think (nostalgically) of the play, but there was a Tel Aviv District Court decision about 10 days ago that, quite coincidentally, brought a coast to coast smile to my wizened face.
It is actually an old story, originating with a decision by the same judge in 2016 that, on appeal, was ping-ponged back to him for further thought by the High Court . Well, he thought again and spent 63 pages sharing those thoughts, coming to the same conclusion as the first time – the little man was right, and the tax authorities were wrong.
To cut to the chase, the case involved a group of investors who jointly held shares through a foreign holding company (in fact, two foreign holding companies, but let’s not confuse ourselves with irrelevant facts) in a foreign trading company that eventually went public. The foreign holding company was in one of those fungible, fun exotic getaways – The Turks and Caicos Islands, completing a structure that was popular at the time of the company’s creation before Israel abandoned its territorial basis of taxation in 2003.
Stuck with a Doctor Dolittle Pushmi-Pullyu situation, where shareholders had to effectively sell shares in the traded company together via the holding company, their accountant approached the Israeli tax authority to rule that shares of the trading company transferred to the individual shareholders would only be taxable on their sale. The guys at the tax authority were willing to listen. They accepted that the holding company was merely a conduit for the ultimate shareholders and came up with a ruling that accepted the request with the proviso that, if the shares were not sold by a certain date, the tax charge – defined as a dividend from the holding company – would crystalize at that date. A month later, ostensibly because not all the shareholders had signed on the agreement (quite probably due to tax authority bureaucracy), the tax authority cancelled the deal. They might have cancelled the deal for the more convincing reason that they had no right to make it in the first place – conduit companies are extremely specific in Israeli law, and none of those specifics apply to this case – but, they didn’t.
By the time the ‘Dear John’ letter from the tax authority had arrived on the shareholders’ doorstep, they had already organized the transfer of shares resulting in a whopping great tax bill on the deemed dividend from the holding company, setting the scene for a whopping great court case.
To complicate matters, while all this was happening the shareholders changed horses, or at least accountants, mid-stream. Their new advisor advised them that it looked to him like the shares were in fact held in trust by the holding company, so there should be no tax until sale even without the tax authority’s benevolence. Apparently concurrent with this dazzling epiphany – hey presto – a Swiss lawyer came yodeling over the alps with an undated Fiduciary Agreement (trust agreement), the date of which could only be verified by reference to a fax machine’s header imprint on the last page. When the original accountant was asked if a trust arrangement had ever been mentioned to him, he tactfully answered that he did not recall, but – ‘if it walks like a duck, swims like a duck, and quacks like a duck, it is a duck’. A comedian accountant.
The judge came out firing at the tax authority on all cylinders – they should never have cancelled the agreement just because everyone had not yet signed, while this had all the trappings of a genuine trust arrangement – lock stock and barrel. He reinstated the original agreement (rather than going down the trust route), which was all that was being requested (the price of the shares along with the exchange rate had plummeted by the date the agreement required tax to be paid).
It is not clear whether this is going to be ping-ponged back to the High Court – but, inter alia, it raises an interesting question regarding trusts and holding companies. The trust tax law is extremely restrictive as to what qualifies as a transparent holding company in a trust context – only a Trust Assets Holding Company with its draconian conditions. Non-compliance with the terms of the law (which, in the case of older trusts at least, is a matter of fact rather than design) can lead to punitive tax situation. Could this case, despite the specific wording in the law, help widen the definition of ‘transparent’?
In the version of the play that I saw in London in the 1970s, the window was high, and the policemen had to prove that the anarchist had managed to move a table against the wall, place a chair on top, and climb up and out while they had their backs turned. A bit of a stretch, but you never know…