Israel’s recent budget had something for everyone. There was a 1% hike in VAT, the cruellest but most efficient tax, that in its stark regressiveness hurts the poorest most. The freezing of progressive income tax rates along with national insurance tweaking has more than tickled the underbelly of the employed masses and shopkeepers of the nation, while a clampdown on personal companies accompanied by the wholesale grabbing of profits out of privately held companies has the upper financial echelons gasping for breath.

The authors of the Budget could have been writing the script for a Bond movie. 007 arrives in a hot Third World country where he is met at the airport by a sweating factotum from the local Station. The viewer knows that the poor fellow will be dead within 5 minutes – a single bullet to the head or heart. Then there is the not-quite- Bond Girl who, less simply, ends up lifeless on a bed under a coating of gold paint or, having been the unfortunate fall girl in a William Tell contest to shoot a shot of whisky from her head, dead and smelling of whisky. In all cases the assassin is guaranteed success.

 And then there is Bond…

‘Good-bye Mr Bond’. How many times have we heard that over the last 60 plus years? All Blofeld or the others had to do was put one slug through his bonce at close range and it would all have been over. But no, Bond’s death has invariably been a drawn-out work of modern art culminating in his miraculous survival.

And so it starts to seem with the Budget. The poor and ordinary have been dished out their undeserved punishment simply and effectively, while the others – the ones with the spare cash – have been presented with one of the most excruciatingly complex pieces of tax legislation in modern times. And, according to the thesis that the more complicated the legislation the more fees for the tax lawyers and accountants – it is not only going to be a bumper couple of years for the Treasury.

Although the tax authorities have had their eyes on companies with one or a handful of shareholders (closely held) for years, the current assault began in earnest around 8 years ago, a previous occasion when the Treasury was in need of a quick fix to its finances. Because Israel operates a classical two-tier tax system, where profits retained in a company are liable to company tax but avoid tax on dividends, many had got into the habit of investing in homes, yachts or airplanes through their companies. There were also senior company personnel who formed companies through which to be paid their compensation, once again to defer dividends and keep their current tax low. The adjustment in the law led to income of this nature as well as that of independent contractors who were heavily committed to one client, being taxed at marginal personal rates – negating the advantage of the company structure.

The new amendment, apart from widening the applicability of the existing law, goes rather clumsily for most closely held companies that have more than a 25% profit margin, irrespective of the nature of their business, after excluding all sorts of passive income, the excess being liable to tax at marginal rates in the hands of the individuals. Holdings in partnerships, previously excluded (read lawyers and accountants) are now included.

If that weren’t enough, a closely held company is to face an annual 2% corporate tax charge on its undistributed reserves after all sorts of deductions designed to avoid bankrupting the company, unless the company distributes 6% of its reserves, or half its reserves after the aforementioned bankruptcy avoiding deductions. For reasons best known to the politicians, hi tech companies are largely exempt from this surtax, despite the fact that the successful ones would generally attract enough interest in early investment rounds to take them out of closely held status anyway. Evidently the plodders are to be rewarded for plodding.

There are loads of questions being asked – many of which predominantly include ‘Why?’ and ‘What?’ (the latter often constituting a standalone sentence after reading subclauses of the amendment). It is all certainly a lot more complex than the VAT and National Insurance increases.

There is, however, some good news. The new law evidently does not apply to foreign companies, although in an hour long Webcast last week for Hi-tech people (you will recall that Hi-tech is largely excluded, so it was important to the mandarins to explain the law to them rather than anybody else), the ITA said they are considering somehow expanding the law to them, even though Israel has a robust CFC regime, not to mention a foreign personal services company regime. That will hopefully die before it falls to the cutting room floor.  Another note of cheer –  foreign residents are not supposed to be affected.

The really good news, though, has come as the result of a rare reality check by the bureaucrats. The motive in building this clumsy legislation was the country’s need for more funds NOW. When they reached the end of the labyrinthic clauses somebody whispered in somebody’s ear that, in practice, they won’t see any money from this until 2027 or 2078. Solution – they are allowing companies to transfer assets at cost to their shareholders during 2025, with capital gains tax deferred until sale, and only charging tax on the intrinsic dividend. In addition there are transitional arrangements in the early years of the law to incentivise distribution.

It will be interesting to see what comes first – a full understanding of this amendment or the answer as to whether Bond survived that explosion in ‘No Time to Die’? In the meantime, I need a drink – martini shaken not stirred.