The world is getting smaller

Two interest articles have appeared in The Marker (Hebrew) over the last 24 hours.

The first article discusses the fact that the Treasury has agreed to put into place measures necessary to ensure that Israel will be compliant with the OECD's multilateral exchange of information agreement regarding bank account holders by 2018. The agreement, which also includes a number of other countries, essentially means that Israel will be transferring information about bank account holders who live outside Israel to each of the 50 or so countries, and in turn, Israel will receive similar information from each of those countries regarding Israelis holding such accounts.

The second article relates the recent story of a European who wanted to withdraw a significant sum from his Israeli bank account. The bank requested him to sign a declaration that he has fully declared the account and accounted for the taxes in his country of residence. When the customer refused to do so, the bank refused to release the funds.

Between these two articles, we can see how the world is getting smaller and it is getting more difficult to evade taxes without the relevant authorities finding out. Furthermore, the banks and investment houses themselves are starting to act as the world's policemen as they are frightened of serious sanctions - primarily from the US government, but potentially from others as well.

As such, it is highly recommended that one who has hitherto undeclared assets and unreported income take the opportunity to come forward, clear out the past by paying the back taxes due and start reporting everything in full. In Israel, a Voluntary Disclosure scheme was announced just 6 weeks ago (see here for more), and it is highly recommended that anyone in this situation takes the opportunity to straighten their affairs NOW. It will be far better for everyone involved if you make the approach to the tax authority rather than the other way round.

The "House Company" - חברת בית

Feel free to join the Tax in Israel Facebook group

In the previous post, we saw an example of how a company can, under certain circumstances, have its income treated as taxable in the hands of the shareholders.

The one other example under Israeli law is the "house company". In order to qualify as such a company, there are two conditions that must be met:

1. The company is owned and controlled by no more than 5 people. For these purposes, first-degree family members and business partners count as a single petson.

2. The company deals primarily in the property business. The type of property and the type of income (i.e. rentals, capital gains etc) are not relevant.

At the request of the company, the company profits can be taxed in the hands of the shareholders (as property income - and taxed accordingly as passive income for both Income Tax and Bituach Leumi purposes), according to each shareholder's share of the profits. This is different to a "Family Company" wherby only one of the shareholders is taxed on the entire profit.

Furthermore, the application to be a "house company" need not be made in advance, and can be changed every year - as per the choice of the company and the shareholders. Again, this is different to a "Family Company" where the status must be requested soon after incorporation and once the status has been changed by the Company, it cannot reaquire such a status.

The "Family Company" can therefore, potentially, be a very attractive option for those who want to invest in property across the world, but without owing the property outright (e.g. for inheritance tax purposes).