The Constitution, Law and Justice Committee recently approved the Privacy Protection Regulations (Data Security), 5767-2017, which enacts new and comprehensive norms for entities that manage or hold databases regarding data security procedures. In practice, these regulations affect many entities in the Israeli marketplace, from small businesses managing client information databases to large corporations.
Nespresso Loses Court Battle with Espresso Club
The Israeli District Court of Tel Aviv ruled against global food giant, Nestle, and its subsidiary Nespresso in a claim filed by them in Israel against Espresso Club, an Israeli company, on the grounds of alleged copyright infringement, trademark violations, unfair competition and damage to Nespresso's reputation.
New Labor Court Ruling on The Subject of Age Discrimination
The subject of discrimination in the labor market in general, and the subject of ageism in particular, has lately become a hot topic in the public discourse. A recent ruling handed down by the Regional Labor Court in Tel-Aviv in the Bat Sheva Simchi vs. Maabarot Products Ltd. case addressed the issue of age discrimination.
A significant precedent was handed down recently by the Israeli Supreme Court on the subject of the judicial audit that should be performed in relation to companies’ business resolutions.
The judgment officially adopts the Business Judgment Rule prescribed in Israeli law with regard to the auditing standard that should be applied to board resolutions. The judgment further prescribes that it is also warranted to adopt the Enhanced Scrutiny Rule under circumstances when the Business Judgment Rule does not provide an adequate solution. The judgment also engages in subjects not yet addressed by the court, including issues pertaining to dividend distributions, leveraged buyouts, officers’ duties in a company and the relation between them.
The Right to Review Digital Database
Within the scope of a new directive published recently by the database registrar at the Israeli Law, Information and Technology Authority, entities, such as service-providers, that retain recordings of telephone conversations or chat correspondence with their customers will be forced to enable their customers (the subjects of the information) to also access information of this type. This according to the right of access prescribed in the Privacy Protection Law and the regulations instituted by virtue thereof.
The Israel Antitrust Authority (‘’IAA’’) has announced its intention to impose a financial sanction in the sum of NIS 25,640,000 on Bitan Wines, due to its violation of the terms of the merger between Bitan Wines and the Mega supermarket chain.
Foreign Companies are Immune to Private Antitrust Enforcement in Israel
Despite the growing sensitivity to violations of the competition laws and the uptrend in the imposition of stricter penalties by the authorities in respect thereof, business managers and consumers who have fallen victims to competition-law offenses in Israel hesitant in instituting civil proceedings against offenders.
For the first time, social NPO’s can enjoy attractive, convenient loan terms guaranteed by the State for funding an investment or working capital in the NPO, and without providing a personal guarantee.
International Taxation – New Draft Bill Will Require Foreign Companies to Report and Pay Tax in Israel
The Israel Tax Authority (“ITA”) is promoting legislation that will require foreign companies not subject to the Israeli tax regime today to report and even pay tax in Israel.
Last week, the Israel Securities Authority published draft legislation for public comments that will permit corporations to obtain loans through crowdfunding with an exemption from the prospectus requirement.
Draft Circular on Taxation of Activities Using Virtual Currencies
The Israel Tax Authority published a draft circular on taxation of virtual currencies (bitcoins and the like). According to the Draft, the ITA’s position is that virtual currencies should be deemed “assets” and not as currency or foreign currency or even as financial instruments.
Important Information about New Tax on Owners of Multiple Apartments
The new law prescribes that, as of January 1, 2017, every taxpayer must pay tax annually (January through December) for every residential apartment that he owns in excess of two apartments, at the sum defined pursuant to the provisions of the law. The taxpayer will be allowed to choose which of his apartments he deems to be his first two apartments, and which shall be taxable under this law.
Israel Antitrust Authority Publishes Draft Statement regarding Vertical Price Arrangements – Resale Price Maintenance (RPM)
A few days ago, the Israeli Antitrust Authority published a draft statement presenting its position with regard to the circumstances under which a supplier will be able to dictate the resale price of its products to its distributor for the next link in the supply chain (Resale Price Maintenance arrangements – RPM), without such an arrangement being considered an illegal restrictive arrangement.
Local Planning and Building Committee Requirement of Deeds of Indemnity is Ruled Illegal
A Supreme Court judgment handed down in December by the Honorable Justice Yoram Danziger ruled that the demand by local planning and building committees that deeds of indemnity be signed is illegal (Bikel Flowers Ltd. vs. the Local Planning and Building Committee – Rishon Letsiyon).
The Electricity Authority published the Guidelines for the next PV Plants’ Giant Projects in Israel
Further to the recent hearing held in October 2016 (see our clients update dated 01 December 2016), the Electricity Authority published on 19 December 2016, a decision detailing the main principles of the upcoming competitive process for the construction of Solar Power Plants in Israel, with a capacity of up to 1,000 MW.
Innovations in the Israeli Partnerships Legislation
In order to improve the Israeli partnership market and in order to bridge the wide gap that exists between partnership laws in Israel and the partnership laws in other countries, in December 2016, the Ministry of Justice published a draft Memorandum of Law – Partnerships.
2016 Overview of Israel's Third Sector Regulation and 2017 Trends
2016 was characterized mainly by the completion of a number of processes and initiatives promoted in recent years, mainly relating to tax issues and the recognition of non-profit organizations as public institutions entitled to tax benefits for donations received.
New Financial Services Law Establishes Mandatory Licensing Requirement for Financial Service-Providers
The Law establishes a mandatory licensing requirement for financial service-providers – credit providers or providers of financial asset services. One of the main innovations in this Law is that Financial Services Providers will be subject, for the first time, to supervision by a new financial regulator.
On December 2016 for the first time in Israel, an Israeli company was convinced for bribing a foreign public official. This is especially interesting due to the fact that this is also the first time the general prosecution in Israel based an indictment on Section 291A of the Israeli Penal Law, that was enacted in 2008, in the course of Israel's efforts to join the OECD as a member country.
Restrictive Arrangement in an Agreement May Possibly Lead to Nullification of the Entire Agreement
District Court rules that an unlawful restrictive provision can lead to cancellation of a 40 years agreement.
Update on Binary Options - Regulation on Trading Rings
About a year and a half ago a new regulatory regime regulating trading rings entered into force, requiring the operators of trading rings to obtain a regulatory license as a pre-condition to operating them, and prohibiting the operation of a trading ring without such a license.
“Wallet Companies” – Draft Tax Bill within the Scope of the Arrangements Law for 2017 - 2018
Recently, the Finance Committee concluded its deliberations regarding the imposition of tax legislation pertaining to “wallet companies” within the scope of the Arrangements Law for 2017 – 2018.
Update on Employee Rights – Minimum Wage, Annual Paid Leave, Pension
Three updates to employee rights (Minimum Wage – Annual Paid Leave – Pension) came into effect on July 2016. The following is important news about the next update to employee rights, which is expected to come into effect on 1.1.2017.
November 2016 marked the first time that the Ministry of Infrastructures and Energy invited an open international call for bids for 24 licenses to 24 blocks (each not exceeding 400 km2) in Israel’s economic waters at a distance of at least 7 kilometers from the shore.
The Israeli Public Utilities – Electricity Authority to Hold a Hearing Regarding New Quotas for Photovoltaic Power Plants
In October 2016, the Electricity Authority published a draft resolution to hold a hearing regarding the arrangement of a competitive proceeding to set the tariff payable for electricity generation using photovoltaic technology.
Bond Terms – Negative Pledge Relating to Floating Charges
A customary practice in the credit market makes the provision of financing for a corporation contingent upon the creation of a floating charge on all of its assets in favor of the financier. In most instances, the bond terms relating to the lien also include a ”negative pledge” – a restrictive stipulation that prohibits a corporation from creating additional liens without receiving the financier’s prior written approval.
Deadline Extension for Making Internet Websites and Mobile Applications Accessible to People With Disabilities
A few days ago the Knesset Labor, Welfare and Health Committee enacted an amendment to Section 35 of the website accessibility regulations, called "the Equal Rights for People with Disabilities (Service Accessibility Adjustments) Regulations 5773-2013" (the “Regulations”).
For the First Time, Tax Relief Has Been Approved for Contributions to an Israeli NPO Operating Abroad
In an unprecedented action, the Knesset Finance Committee has recently recognized an Israeli organization operating abroad as a ‘public institution’ pursuant to section 46 of the Israeli Income Tax Ordinance. Such recognition affords the non-profit organization, a tax benefit, by way of a tax credit to donors for their donations granted to that organization.
Extension Order Increasing the Allocations to Pension Insurance and Amendment to the Control of Financial Services
After about a year of uncertainty about the pension insurance allocation ratios according to Amendment number 12 to the Control of Financial Services (Provident Funds) Law of August 2015, the matter has recently been resolved.
Amendment of the Income Tax Ordinance – Information Exchange Between Tax Authorities
An amendment to the Income Tax Ordinance that was recently enacted obligates financial institutions to identify the residency and citizenship of their foreign account holders. The financial institutions are required to report the information to the Israel Tax Authority, so that the ITA can then relay that information to the relevant foreign tax authority.
New Superior Court Ruling Regarding Taxation of Receipts
After years of district courts issuing contradictory rulings, the Supreme Court recently resolved the ambiguity surrounding the classification of compensation in respect of non-competition covenants when employees leave employers.
New Financial Reforms
During July, the Knesset passed the Control of Financial Services (Regulated Financial Services) Law. The Law is a harbinger of efforts to regulate the provision of financial services that had not been supervised up until now, apart from certain aspects pertaining to money laundering and the Regulation of Nonbank Loans Law. The Law also unifies the handling of all matters relating to the regulation of these services under one roof.
Reverse Vesting and Holdback – Good News for Entrepreneurs?
On July the Israel Tax Authority presented its position that the sale of equity by a founder should be treated as a capital gain and not income, irrespective of whether such shares had been subject to a Reverse Vesting mechanism and/or Holdback. A double edged sword for entrepreneurs.
The Ministry of Construction and Housing allows foreign construction companies to operate in Israel for the first time
In March 2016 the government adopted the housing cabinet’s recommendations regarding criteria for allowing foreign construction companies to begin operating in Israel. This move is one of the government’s strategies for increasing the volume of residential construction in Israel.
Israel Tax Authority extends Voluntary Disclosure period
The Israeli Tax Authority (ITA) has announced this morning that the temporary Provision regarding the voluntary disclosure procedure which was supposed to expire today, has been extended until December 31st, 2016.
Antitrust – New Amendments to Nine Block Exemptions
The Antitrust Commissioner intends to renew the validity and to amend nine block exemptions.
In the last year, the Israeli Securities Authority (ISA) has been reviewing license applications submitted for obtaining an online own-account financial trading license. As part of this licensing process, the ISA is intermittently issuing press releases clarifying various issues relating to the scope of the licensing legislation.
A few weeks ago, the ITA published a new circular which provides guidelines for the taxation of foreign corporate entities operating in Israel via the internet
Yesterday (March 13, 2016) the Israeli Ministry of Finance opened a consultation process in respect of draft legislation aimed at amending the Israeli VAT legislation, introducing VAT liability on out of state e-commerce and digital services providers that provide electronic and digital products and services into Israel, even if such providers do not have any place of business in Israel.
Casino in Israel - another role of the dice
From time to time, in the last 20 years, the notion of examining whether to establish a casino in Israel comes back to life. So far, this issue has not received much advancement by the government, for various reasons, such as religious parties’ opposition, the fear of an increase in gambling addictions, ideological opposition to casinos and so on and so forth.
Pending tax changes to short term apartment rents
The Israeli Tax Authority (ITA) recently announced, during a discussion of the parliamentary committee, that it is about to publish a tax circular in the matter of renting apartments for a short periods of time, including through Internet platforms such as Airbnb.
According to recently released data, In 2015 about 128,000 tourists visiting Israel rented apartments through Airbnb. This represents an increase of 45% compared to 2014, as well as an increase of 40% in the number of Israelis who offer their apartments for rent through Airbnb, which is now over 13,000.
Compensations for late delivery of new apartments
Developers can no longer rely on changes to an apartment, requested by the purchaser, as reason to avoid payment of compensation for late delivery. This was ruled recently by the Supreme Court in a case involving a dispute between purchasers of an apartment and a contracting company.
The Sale (Apartments) Law states that a delay of over 60 days from the date specified in the sale contract for the delivery of the apartment to the purchaser, means that the purchaser will be entitled to compensation without proof of damage, and this from the first day of delay.
In the abovementioned case, the sale contract which was signed by the purchasers and the contracting company stated that any request to change or supplement the apartment will postpone the delivery date of the apartment for at least 60 days.
It should be noted that clauses of this nature are common and appear in almost every sale contract from a contractor.
The Supreme Court ruled that the wording of the relevant clause is broad and vague, and gives the contractor unlimited options to determine the date of delivery, which creates uncertainty among the purchasers. Thus, the contractor prevents the purchasers from preparing themselves for a new and clear date on which the apartment will be delivered to them, and to plan their moves accordingly.
The Court further ruled that from now on, the contractor cannot rely on sweeping clauses in apartment sale contracts, which include provisions exempting him from paying compensation for delays in delivery of apartments, in any case where changes to the apartment were ordered by the purchasers.
However, the Court held that the parties can agree, for example, on a new and concrete postponed delivery date, in the case of making changes in the apartment at the request of the purchaser, in a later agreement signed by the parties.
The Court also noted that a new and postponed delivery date that will be determined by agreement, as mentioned, may be examined by the Court, in terms of its reasonableness in relation to the scope of changes made to the apartment and their nature.
“Accredited investor” – New amendment
As part of the Israel Security Authority’s measures towards easing some of the existing regulations, yesterday the ISA published an order (Amendment to the First Addendum to the Securities Law). The amendment significantly liberalizes the definition of “accredited investor” to whom securities may be offered or sold without having to publish a prospectus.
Entry of Foreign Mutual Funds to the Israeli Market
As part of the globalization of the Israeli capital market, the Financial Committee of the Israeli Knesset recently approved the Joint Investment Trust Regulations (Offer of Units of a Foreign Fund), according to which managers of foreign mutual funds may offer their funds to the Israeli public.
Update of the “Proper Management Rules” of Israeli Charitable Organization (‘amutah’)
Approximately two weeks ago, the Israeli Ministry of Justice issued a new revised edition of the booklet “Guidelines for Amutot conduct”, as well as a new and revised edition of the supplementary guidelines booklet regarding the “Registration of Amutot, Name, Objectives and Regulations”. These booklets include a number of revisions and clarifications to the previous drafting.
Do you play Texas Hold’em? An important court verdict was lately issued on this subject
Recently, the District Court discussed the legality of the Texas Hold’em Poker game. This was due to a criminal appeal against a Magistrate Court's verdict in regards to the charges that were served against the appellant and her husband, for organizing a Texas Hold’em Poker tournament in their apartment.
A precedential judgment in the matter of transfer pricing shuffles the cards as to granting options to employees
A judgment in the Contira case was handed down two weeks ago in the district court which dramatically changes the Cost Plus issues relevant to certain Israeli companies which provideservices to a foreign relatedcompany. The judgment impacts on the situation where the Israeli company’s employees are granted options in the framework of Section 102 of the Income Tax Ordinance (capital track).
Finally, Crowdfunding comes to Israel
The social phenomena of crowdfunding, adopted by high-tech startups as an alternative means to raise funds, was previously limited in Israel by Israel’s Securities Law. Section 15 of the law dictates that any offer or sale of shares to the public (i.e. to more than 35 potential investors) requires the issuance of a prospectus approved by the Securities Authority; a timely and costly endeavor, rendering crowdfunding prohibitive in Israel.
Release from liability, indemnity, and officers’ insurance in an Israeli charitable organization – is it possible?
Arrangements providing release from liability, indemnity and insurance to officers in an Israeli charitable organization ’amutah’ (or ‘amutot’ in plural; the Hebrew words referring to charitable organizations) (and in Israeli Public Benefit Companies) have been gaining momentum recently, both on the part of officers of such NPO’s who are seeking shelter under arrangements similar to those customary in business companies, and on the part of insurance companies, which consider third-sector organizations as being a market offering considerable untapped business potential.
As part of the global trend towards finding energy alternatives and towards encouraging the establishment of renewable-energy projects, the State of Israel has issued several significant tenders in recent years with the aim of securing cleaner and more sustainable energy sources. Such tenders include two separate tenders for the construction and operation of two solar-thermal power plants (Plot A and Plot B) in the vicinity of Kibbutz Ashalim in southern Israel and the Gilboa hydroelectric pumped storage power station.
The Israeli Registrar of Companies now in English - Increasing Certainty
The State of Israel has two official languages – Hebrew and Arabic. As a result, in recent years the Israeli Companies Registrar has held that all documents submitted to the Registrar have to be submitted in either of these official languages. If a document was submitted in English it would be rejected. Such documents include the constitutional documents – the articles of association of Israeli companies and debentures creating pledges over the assets of such companies.
Israeli Court eases TASE listing rules for foreign listed companies
The Economics Department of the Tel-Aviv – Jaffa District Court is continuing to issue precedent rulings, and this time, in relation to the interpretation of section 46.B. of the Securities Law, 5728 – 1968.
Discussions had been underway for some time between Mylan N.V., a foreign public company traded on the NASDAQ, and Perrigo Company Plc., a foreign company traded on the New York Stock Exchange and on the Tel-Aviv Stock Exchange, relating to Mylan’s potential acquisition of Perrigo’s shares. After these discussions failed to mature into a transaction, Mylan announced in the United States its firm intention of publishing a tender offer for Perrigo’s shares, despite the fact that Perrigo’s board of directors had rejected the offer (i.e., a hostile takeover).
A new Israeli government draft bill was published last week for public comments – “Disclosure Obligations of Recipients of Support from Foreign Political Entities Law (Increased Transparency by Recipients of Support, when the Majority of their Funding is from Donations from Foreign Political Entities).”
The objective of this draft bill is to impose increased transparency on NGOs (associations/NPOs and public-benefit companies) regarding their activities, when the majority of their funding is from donations from ‘Foreign Political Entities’, beyond the transparency that is imposed on all recipients of such donations.
“Green Licensing” Reform in Israel
Recently, the Israeli Ministry of Environmental Protection published a preliminary draft bill relating to the proposed Integrated Environmental Licensing Law, 5775-2015.
This preliminary draft bill, which is based on the European Union’s Industrial Emissions Directive 2010/75/EU, was disseminated as a result of the Israeli government’s decision in April 2015 to work towards improving environmental regulations and encouraging “green” growth by promoting an integrated environmental licensing law. This came in the wake of the Israeli government’s commitment as part of its OECD accession process, after a number of years of collaborative efforts between the Ministry of Environmental Protection and other government ministries and after consulting with numerous authorities in the business, public and third sectors.
Recently, the Supreme Court handed down a ruling that constitutes a precedent: loan agreements which an entrepreneur offered to public investors are tantamount to “securities,” and therefore, require the publication of a prospectus, pursuant to the provisions of the Securities Law.
New amendments to the Israeli report regulations
As part of the series of reliefs that the Israel Securities Authority is promoting in order to ease the regulatory burden applied to entities under its supervision, a number of amendments to the Securities Regulations (Periodic and Immediate Reports), 5730 – 1970 were promulgated in the Official Gazette recently.
Recently, an official announcement was issued on behalf of the Law, Information and Technology Authority of the Israeli Ministry of Justice ("ILITA"), as a result of the ruling of the European Union’s Court of Justice invalidating the Safe Harbor Arrangement governing transfers of personal information from Europe to the United States – at this stage, the transfer of personal information from Israel to organizations in the United States on the basis of that arrangement is prohibited.
The key points in the announcement of ILITA –
Transfers of personal information outside of EU member countries
According to the principles specified in the provisions of the European directive regarding protection of personal information (Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data) (the "European Directive”) – the transfer of personal information outside the borders of European Union member countries is prohibited, except for specific exceptions, including transfers of information to a country that the European Union has deemed as providing an adequate level of protection for personal information.
The Safe Harbor Arrangement
The decision of the EU Commission of July 26, 2000 (Commission Decision 2000/520/EC) (the "EU Commission Decision”) prescribed that American corporations included in a Safe Harbor Arrangement, guarantee an adequate level of protection of personal information. According to the arrangement concluded between the U.S. Department of Commerce and the European Commissioner, an American organization desiring to be included in the arrangement must undertake strict principles for safeguarding personal information similar to the requirements of the European law and subject to the provisions of the European Directive (the "Safe Harbor Arrangement”).
The Safe Harbor Arrangement enabled those same thousands of American companies sheltered under it (including such companies as Google, Facebook, Amazon and Microsoft) to transfer personal information about EU citizens from Europe to the United States, for the purposes of processing, saving and storage.
Ruling of the European Union’s Court of Justice
In the wake of the revelations that were made following the Edward Snowden exposé in 2013 about how U.S. intelligence agencies are making use of information, an Austrian citizen, Maximilian Schrems, who was a Facebook user, filed a complaint with the Data Protection Commission in Ireland alleging that American law and practice are failing to provide adequate protection against American authorities’ monitoring of information being transferred to the United States, including European users’ information stored in Facebook’s servers located in the United States.
The Irish Data Protection Commission rejected the complaint, based mainly on the aforesaid EU Commission Decision, which approved the Safe Harbor Arrangement. In light of this, the aforesaid complaint was referred to the European Union Court of Justice.
In its judgment of October 6, 2015, the European Court of Justice stated that, according to U.S. law, American companies’ commitment to comply with the Safe Harbor principles concerning use of information do not apply to public and government authorities in the United States, and therefore – American authorities’ demands for disclosure of information, on the grounds of national security or public interest, that are being issued to American companies, are compelling American companies to disclose personal information, even when such demands violate the provisions of the Safe Harbor Arrangement.
The court ruled that, notwithstanding the provisions of the European Directive, the U.S. law enables the authorities there to access and process personal data in a manner that has no bearing on the purposes for which the information was collected, and that far exceeds what is strictly necessary and proportionate. According to the court ruling, the law in the United States cannot be defined as proportional, since it grants agencies authorities that are too sweeping, such as the authority to access and store all personal information of any kind of all persons whose data has been transferred from EU member countries, indiscriminately, without any restrictions or exceptions being made in the context of the objective pursued, and without prescribing criteria for setting limits to the government authorities’ access to data, and to their ability to make subsequent use thereof. According to the court’s line of reasoning, the legislation that grants blanket authorization to government authorities to access content of communicated messages – constitutes a material violation of the fundamental right to privacy.
The court also stated that the U.S. law does not provide individuals any means of legal redress or of exercising their right to peruse personal data that is being stored about them in the United States, and thus, the U.S. law is prejudicing the fundamental right to effective judicial protection of their rights to privacy.
In view of the aforegoing, the European Court has ruled that the EU Commission Decision approving the Safe Harbor Arrangement is invalid. Subsequently, the court also ordered the Irish Data Protection Commission to re-examine the complaint submitted to it and to ascertain whether it is warranted to suspend transfers of information of European Facebook users to the United States, on the grounds that it is impossible to guarantee adequate protection of this information.
Repercussions of the European ruling on the privacy protection regime in Israel
The Privacy Protection Regulations (Transfers of Information to Databases Outside the Borders of Israel), 5761 – 2001 (the "Regulations”) prohibit any cross-border transfer of information from a database in Israel, unless the local law of the recipient country guarantees a level of protection for the information that is not inferior to the level of protection under Israeli law, or unless one of the exceptions specified in the sub-sections of section 2 of the Regulations applies.
One of the exceptions, specified in Regulation 2(8)(2), prescribes that personal information may be transferred from Israel to a foreign country to which the European Union permits information transfers.
In light of the EU Commission Decision, which states that organizations that are committed to the principles of the Safe Harbor Arrangement are providing an “adequate level of protection” for personal information, as this term is defined in section 25(2) of the European Directive – the position of ILITA had been – up until now – that these companies fall within the scope of the exception that enables transfers of personal information from Israel pursuant to Regulation 2(8)(2) of the Regulations.
Now, ILITA is stating in its announcement that, as a result of the above ruling of the European court, its position at this stage is that it is no longer possible to rely on this exception in the Regulations as a basis for justifying transfers of personal information from Israel to organizations in the United States.
Given that the Safe Harbor Arrangement is no longer valid pursuant to European law, and for as long as some other valid arrangement is not put into place, or until such time as the European Union issues another official decision pertaining to information transfers from European Union member countries to destinations in the United States, database owners who want to transfer personal information from Israel to organizations in the United States are required to examine whether they can justify the information transfer based on one of the other exceptions specified in the Regulations.
As part of its endeavor to streamline public reporting and ease some of the regulatory burden imposed on publicly listed companies, the Israeli Securities Authority (ISA) this week introduced an amendment to the Securities Regulations governing periodic and immediate reports. The amendment deals with a number of issues, including reporting on agreement negotiations and the companies’ right to delay public reporting.
The Previous Status
Prior to the recent amendment, in certain instances, a TASE listed public company is required to publish an immediate report on agreement negotiations, even before the binding agreement is entered into.
The company’s board may resolve to delay the publication of the immediate report, as long as the relevant information has not been made public, and provided that either - the publication of the report may jeopardize the completion of a transaction or action to which the company is party, or if there is concern that publication of the report will jeopardize the consummation of the transaction or have a significant adverse effect on its terms.
Under the current regulations raise a number of difficulties. One is determining the particular point in time when the information becomes material, and therefore must be publicly reported, keeping in mind the desire to not undermine the chances of concluding the transaction. Similarly, determining when disclosure may have “significant adverse effect” on the conditions of the transaction is also difficult to implement.
One of the purposes of the recent amendment is to enable reporting companies to delay public reporting on any agreement negotiations. A company will be allowed to delay such report until it enters into an agreement, including a “preliminary agreement”. The amendment clarifies that a “preliminary agreement” may also be an oral agreement, provided it includes the key terms of the transaction.
The new authority to delay reporting on any agreement negotiations is in addition to the previous right of companies to delay public reporting. For example, the amended regulations do not derogate from public companies’ right to delay reporting following the engagement in a “preliminary agreement”, in the event that there is concern that public disclosure may jeopardize the consummation of the transaction or have a significant adverse effect on its conditions.
The amended regulations maintain the existing overriding rule, whereby reporting may only be delayed for as long as the information is not made public. Once the negotiations or the transaction are leaked to the public domain, the company is required to issue an immediate report.
Following the amendment, the regulations now also lists those circumstances where public companies are required to issue reports on material agreement negotiations preceeding certain voluntary securities transactions, including prior to the publication of a tender offer, the publication of a prospectus (excluding a shelf prospectus), or a merger proceeding.
Though not addressed by the regulations, this recent amendment places further emphasis on the distinction between the point in time when a listed company issues an immediate report on a contemplated agreement, and the time when the same future agreement should be considered “insider information”. In other words, the knowledge of particular negotiations might constitute “insider information” even before the reporting obligation arises with respect to those negotiations.
In this regard, as soon as a company chooses to delay a report, the information should be deemed “insider information,” and should preclude anyone in possession of that information from executing transactions with the company’s securities.
In this regard, the explanatory notes to the recent amendment include the ISA’ position, whereby there are instances where negotiations do constitute “insider information”, but a reporting obligation in respect thereof does not yet apply. This position of the ISA is in line with the recent opinion of the Tel Aviv District Court, which considered an appeal on the decision of the Administrative Enforcement Committee with regard to the publication of a tender offer by Africa-Israel Industries Ltd. while in possession of non-public information on material negotiations
Casino in Israel?
The Israeli Prime Minister, Benjamin Netanyahu, has instructed the Transport Minister and the Tourism Minister, to evaluate the possibility and ramifications of establishing a brick and mortar casino in Eilat, one of Israel's main touristic destinations. The review will look into, inter alia, the economic potential of establishing such a casino, the impact it would have on Eilat and the potential social risks involved.
While the review and analysis of the issues related to establishing a terrestrial casino in Israel has taken place several times in the past – and did not amount to anything of substance - it seems that the likelihood of a positive decision this time is higher, given the economic enhancing impact of such a casino for Eilat and Israel, the potential of such a casino to reduce the scope of illegal gambling taking place in Israel as well as what seems to be a lesser negative sentiment towards casinos in Israel.
Current Legal Situation
As it currently stands, casino gambling is prohibited in Israel. According to the penal law, any person who organizes or conducts gambling faces a prison term as well as a fine. There are several exceptions to this rule, relating to gambling conducted in a social context, or to certain types of games if these are conducted in accordance with a permit issued in advance by the Minister of Finance.
The two other main exceptions to the prohibition on gambling relate to gambling conducted by the two gambling monopolies – the National Lottery and the Israel Sports Betting Board (the "ISBB"). The National Lottery is authorized to offer scratch cards, lotteries and similar games, while the ISBB is authorized to offer sports betting and horserace wagering.
In addition, up to several years ago a brick and mortar casino operated within the Palestinian city of Jericho, which was subject to Palestinian law and hence did not run afoul of the Israeli penal law. However, this casino was abandoned several years ago due to, inter alia, the violent clashes between Israel and the Palestinian Authority, leaving Israelis, who are avid gamblers, with no legal full blown terrestrial casino within the Israeli borders.
It follows that in order to establish a brick and mortar casino in Israel, a legislative change is required. Such will include an amendment of the penal law, but could very well see additional legislative changes, depending on the recommendations resulting from the abovementioned review by the Transport Minister and the Tourism Minister.
The Road Ahead
Naturally, a positive recommendation presented to the Prime Minister in respect of a casino in Israel is the first step in order to commence the very long process required so as to establish such a casino. After which, it can be assumed that the process will include, inter alia, the following:
* A public consultation process as to whether and how to establish a casino;
* Substantial legislative activity, in the form of primary and secondary legislation that will provide an all-encompassing legislative environment for such a casino (including, inter alia, anti-money laundering, responsible gambling, technical testing etc.).
* A tender for choosing the casino operator;
* A planning and zoning process; such process will include choosing the location of the casino, although it can be assumed that it is highly probable that Eilat will be chosen as the casino location.
All of the above and many additional actions, will take several years; however, it is highly advisable that any interested stakeholder will take note of the current review and future processes, and will be a part of these even at this early stage, so as to be able to provide its insights and educate the Israeli authorities. Given the past unsuccessful attempts to establish a casino in Israel, it is vital that this review and process will be handled properly, and any help that can be provided by relevant stakeholders is of the utmost importance.
Israel Tax Authority extends voluntary disclosure program
As expected, the Israeli Tax Authority has decided to extend the temporary order regarding anonymous Voluntary Disclosure.
The Israeli Tax Authority announced that the temporary order regarding voluntary disclosure, which was supposed to expire on September 6, 2015, has been extended.
The temporary order was published a year ago and was limited to one year. The regular procedure has been restricted until 31/12/2016.
In total, last year 3290 requests were submitted, about 60% of them anonymous. In light of this success, it was decided to extend the duration of the temporary order.
Additional information regarding the dates will be announced later.
New ITA circular, Aug 2015
On August 16, 2015, the Israel Tax Authority published a new circular (number 8/2015), which is effective immediately. The circular presents the new material requisite tests and criteria for recognizing an organization as a ‘public institution’ pursuant to section 46 of the Israeli Income Tax Ordinance. Certification issued to an organization pursuant to section 46 of the Income Tax Ordinance confers a tax benefit, by way of tax credits to donors in respect of donations they grant to that organization, at a rate of 35% for an individual donor and 26.5% for a corporate donor (according to the corporate tax rate).
Amendment 101 to the Building and Planning Law was promulgated in April 2015. The amendment concerns a transfer and expansion of authorities to the local committees and sweeping amendments designed to shorten, streamline and simplify construction licensing.
Following is a brief review of the amendments, which shall come into effect on January 1, 2016.
Three construction licensing tracks were defined:
Structures exempt from a permit requirement – light-weight structures, such as storage sheds, pergolas, awnings, fences, winter-time enclosures and more (this amendment came into effect at the beginning of August).
Fast-track permits – structures (to be defined by the Minister) that are unlikely to pose a substantive hazard or disturbance, or to have a material impact on the appearance of the building, on the environment or on their character or characteristics. This track relates to building additions, such as apartment protected spaces, porches, small rooms of up to 25 square meters, elevators, enclosures of open pillared storeys, and more.
Standard-track permits – the amendments relating to fast-track permits will come into effect on January 1, 2016, which shorten the waiting time until the authority must issue its response to 45 workdays. In cases whereby a response is not issued, then the permit application shall be deemed an approved permit. According to the amendments relating to standard-track permits, if a permit is not issued after 90 workdays, the applicant may file an appeal to a district appeals committee authorized to issue the permit.
The law specifies the work stages, procedures and timeframes for the issuance of construction permits, completion certificates / Form 4 / use and occupancy permits.
External planning and building control and inspection institutes are to be established
The main objectives of setting up external institutes are to centralize all approval authorities (municipality and local committees) and professional controllers and inspectors in a one-stop format. The amendment prescribes provisions regarding the establishment and accreditation of authorized control and inspection institutes, and defines roles: design controllers, who are responsible for verifying that the permit complies with the building code provisions addressing the building’s stability and safety and suitability for use; and construction inspectors, who are responsible for verifying that construction is being executed in compliance with the building code.
Online permits – the legislation includes instructions for filing online applications for building permits.
Affordable housing – besides the issue of licensing, another section of Amendment 101, which addresses the issue of affordable housing, Addendum Six to the Planning and Building Law comes into effect on January 1, 2016. Inter alia, the amendment authorizes local committees to approve plans for adding construction lots and for adding public uses, including rental housing, which will apply to buildings and lots defined in plans as being intended for affordable housing.
Update about planning and building amendments anticipated in the
proposed State Budget for 2015-16, which was approved by the government on August 6, 2015
As part of the efforts to resolve the housing crisis, a number of additional legislative amendments have been proposed in resolutions of the Israel Land Council and in National Outline Plan 35 that relate to planning and infrastructure and real-estate registration. The purpose of the amendments is to increase the supply of apartments in the market by removing barriers and by accelerating the pace of land development and the planning and construction of apartments.
Briefly, these amendments include: increasing the number of local planning committees and expanding their authorities, streamlining of parcelization and partitioning procedures, accelerating the construction and marketing of State lands, government funding for the planning of privately-owned housing complexes, lowering of infrastructure barriers, encouraging development agreements between local authorities and entrepreneurs, building permit exemptions for particular types of national infrastructure works, uniform primary legislation on the subject of development permits in local authorities and converting buildings currently deemed under nonconforming use to apartments for residential use.
On July 29, 2015 the Knesset passed the 7th Amendment to the Encouragement of Research and Development in the Industry Law.
The purpose of the amendment is to allow the State of Israel to effectively and efficiently continue its support of the various companies which promote technological innovation and address the current challenges this industry faces in light of the importance of the high tech industry to the Israeli economy.
The amendment establishes the National Authority for Technological Innovation (NATI), which is intended to replace the Office of the Chief Scientist (OCS). Prior to the amendment, the OCS is entrusted with the operation of the various state incentive programs pursuant to the Encouragement of Research and Development in the Industry Law 1984 (R&D Law).
In order to achieve the required flexibility, the NATI will be authorized to establish the various government incentive programs and to manage the incentives system pursuant to the R&D Law.
NATI will be headed by the Chief Scientist, and will be entrusted with the establishment of various incentive programs. This would replace all the existing programs either pursuant to the R&D Law, and those promulgated by the General Manager of the Ministry of Economy, such as the incubator programs.
Transfer of Know-how
The amendment cancels the existing provisions of the R&D Law, and its regulations, regarding transfer of manufacturing outside of Israel and transfer of know-how outside of Israel. The NATI Council will be authorized to promulgate relevant provisions for each of the incentive programs.
The existing provisions related to transfer of know-how outside of Israel will remain in force with respect to the current incentive programs and funding received thereunder for an interim period.
Although the amendment emphasizes the need to retain know-how in Israel, this may lead to a more tailored approach to transfer of know-how requests with respect to existing incentive programs and address some of the difficulties encountered in cross border transactions.
The Research Committees will remain the entity in charge of the granting of the incentives, the day to day administration and the decisions related to transfer of know-how and production.
The NATI Council will be comprised of 8 members, including 3 representatives of the public. The inclusion of public representatives is intended to increase the dialog between NATI and the private sector and to ensure that NATI is responsive to market needs. However, the Council will not be able to approve any incentive programs without the presence of all the government representatives.
NATI will be funded through the state budget and the royalty repayments due to the state treasury will be used to encourage technological innovation by NATI. In addition, in rare cases and if professionally justified, NATI may issue bonds for the purpose of funding certain incentive programs.
The Amendment will enter into force on January 1, 2016 and all the incentives granted pursuant to the current R&D Law will be deemed as granted by the NATI. NATI will also assume the Chief Scientist's obligations under any international research agreements.
The Amendment holds a promise for more flexibility and new types of government incentives for innovative technologies. It remains to be seen whether the restructuring and the establishment of NATI will be executed as planned and whether the promise for transparent innovative governmental support will be fulfilled.
The new regulatory regime in respect of own account financial trading recently came into effect in Israel. This followed a legislative process that took more than four and a half years since the enactment of the relevant primary legislation. This legislation assigned the Israeli Securities Authority (ISA) with the role of the regulator in charge of licensing of the relevant stakeholders and overseeing the implementation and enforcement of the legislation.
While the ISA is still reviewing the license applications filed, on August 2, 2015 it also issued a warning to the public at large concerning algo trading; that is, concerning various businesses that offer the public, in most instances via the internet, the opportunity to trade in financial products where the trading decisions are taken by automatic robots that operate on the basis of an algorithm.
In light of the increase in complaints received by the ISA regarding this matter, the ISA stated that such services usually require a regulatory license, and that offering these services without such a license contravenes the law. The ISA pointed out that the regulatory requirements in the applicable legislation are aimed at protecting the customers and their money, and to provide various legislative arrangements relating to, inter alia, fiduciary duties, confidentiality, reporting requirements and the prevention of conflict of interest. The lack of the regulatory oversight subjects the customers that trade via these businesses to significant risks that may cause the customers to lose all of their money.
If the algo trading industry continues to expand in Israel, it is highly likely that the legislator and the ISA will take measures, whether legislative or administrative, aimed at protecting the public from unlicensed operations. Such measures are more than welcomed and will bring about the expulsion from the market of rogue businesses, that operate in an illicit manner and that do not or cannot protect the funds of their customers. These measures will enable worthy and respectable businesses to increase their market share and provide more than adequate service to their customers. Let us hope that these measures will be taken sooner rather than later.
Court ruling with a deterrent effect – imposing personal liability on directors of an Israeli non-profit organization (NPO)
In May 2015, the Jerusalem District Court issued a judgment imposing personal liability in light of lawful conduct of the affairs of an NPO, on the general manager and authorized signatory of the NPO, as well as on the estate of the general manager’s father, OBM (who had been the chairman of the NPO’s executive board). The Court adjudged them personally to pay the inclusive sum of approximately NIS 13 million.
At issue is an NPO which, according to its formal-registered objectives, was established for the purposes of assisting victims of drug-related crimes, of increasing the public’s awareness of the pervasiveness of drug abuse, of providing information on drug-related issues and of increasing the public’s awareness of drug-induced violence.
Already in 2011, the court had issued a liquidation order against this NPO, after the Registrar of Amutot (NPOs) had appointed an investigator to investigate the NPO and his report of severe findings had prompted the Registrar to file a motion with the court to liquidate the NPO. At that time, based on the investigator’s report, the court had ruled that it was clearly the court’s duty to liquidate the NPO for the good of the public and appointed a liquidator for the NPO’s assets pursuant to the liquidation order.
The investigator’s report on the NPO indeed contained severe findings: that the NPO’s institutions were dysfunctional and failed to supervise the activities of the NPO’s general manager, whose actions were contrary to the interests of the NPO and had nothing to do with fulfillment and promotion of the NPO’s objectives, while misleading the NPO’s donors and exploiting their goodwill and ingenuousness. Thus, the report found, inter alia, that the NPO had raised a substantial amount of donations from the public, but took no action to promote NPO’s objectives; in fact, the gist of the NPO’s activities amounted to recruiting donations for the purpose of paying salaries to the NPO’s employees (which itself constitutes a prohibited distribution).
The report also found that, in addition to the routine fund-raising setup, the NPO also kept a separate extensive fund-raising setup that was off the NPO’s books; that the funds collected through charity boxes (approximately 1,500 charity boxes dispersed at different places of business) and payment vouchers never reached the NPO, but rather, were unlawfully misappropriated by functionaries at the NPO and used to pay salaries. The report also found that cash payments were being made to employees without duly reporting them to the tax authorities.
In light of all of the above, and as a result of the liquidator’s motion, the court ruled that the NPO’s general manager and the estate of the NPO’s executive board chairman (the general manager’s father) shall each be adjudged to return approximately NIS 6.5 million to the NPO, and collectively, approximately NIS 13 million. The judgment also appointed the liquidator (who was appointed pursuant to the aforesaid liquidation order), as the receiver of the real-estate assets and land rights of that general manager and on all assets of the chairman’s estate for the purpose of realization of the judgment and at the sum of the adjudged debt. Pursuant to the provisions of the Israeli (Non-Profit Organization) (‘amutot’) Law, the proceeds to be received in the NPO’s liquidation account as a result of the realization of the aforesaid assets shall be transferred to other NPOs having similar objectives for use towards fulfilling the objectives for which the public’s donations had originally been raised.
This judgment constitutes an example of the imposition of personal liability on directors and officers of an NPO without requiring any lifting of the corporate veil. Pursuant to the provisions of the law, a person may be held personally liable and adjudged to pay obligations and debts of an NPO if the NPO was being fraudulently operated or if inappropriate use was being made of funds by those in charge, while breaching the duties of fiduciary and care that are imposed on them (pursuant to sections 373 and 374 of the Companies Ordinance, which apply to an NPO under liquidation by virtue of section 54 of the NPO (‘amutot’) Law).
Furthermore, this judgment shines a spotlight on the importance of an NPO to act in accordance with its registered objectives and fulfillment of those. According to the provisions of the law, an NPO must act in accordance with its formal-registered objectives and prohibited from performing actions that do not fall within the scope of its objectives. Moreover, an NPO must utilize its resources (funds, assets, goodwill, equipment etc.) solely for the purpose of promoting its objectives. If an NPO has received funds, whether as donations or as support for the purpose of promoting a particular objective, it must use those funds for the objective for which they were provided and not for any other objective (even if such other objective does fall within the scope of the NPO’s objectives). Furthermore, if the representation given to donors is that a particular use shall be made of funds raised for the NPO, those funds must be expended for that purpose and may not be accumulated or allocated for other uses (even if they do fall within the scope of the NPO’s objectives).
Activities by an NPO that are not in conformity with its stated objectives may lead to its liquidation, to the imposition of personal liability on directors, officers and functionaries of the NPO, and even, in particular instances, to the imposition of criminal sanctions.
Jurisdiction clause in online terms and conditions
On May 31, 2015, an Israeli District Court issued a ruling that could have a profound effect on Israeli facing e-commerce activity. In a nutshell, the Court ruled that despite a clear section in the terms and conditions of PayPal as to the jurisdiction in which any legal dispute between PayPal and any of its clients should be adjudicated, such a dispute can nevertheless be handled by a different court – which, in this matter, was an Israeli court.
The benefits of operating under a license and regulatory regime
A higher value for the operator, on account of greater certainty to investors and the market in general. "Cleaner" operation is of higher value, even if carries with it smaller revenue.
Avoiding regulatory pitfalls with the regulators; operating without a regulatory license could prevent the operator from obtaining future licenses, in the jurisdiction of operation or other jurisdictions.
Third party intermediaries & customers
The procurement of a regulatory license is also important for the relationship with various intermediaries such as payment processors, banks, internet service providers and more. Without a license, the manner of doing business becomes more difficult and the costs associated are increased. Customers also tend to prefer operators with a regulatory license.
A regulatory license issued in any one EU jurisdiction can be passported into all other EU jurisdictions and be valid there without the need to obtain another regulatory license.
Obviously, avoiding various sanctions due to operating without a regulatory license.
Implications of the introduction of a regulatory regime
Exit of operators / less competition / consolidation of the market
Existing operators that are not able to obtain a license will exit the market / sell their business to new licensees, leading to larger market share of the licensees.
New operators will delay entry until the market stabilizes
Operators that have yet to enter the market due to the lack of a regulatory regime will prefer to delay their entry until the new regulatory regime stabilizes. This allows the existing operators to catch market share without new competition.
Close relationship with the regulators
Being involved in the legislative process that creates the licensing regime allows for a close relationship with the regulators, that could benefit the future licensees.
New investors entering the market
A new licensing regime allows for investors that up till now avoided the market due to the lack of a licensing regime, to enter the market and provide additional funding for the licensed operators.
Taxation of e-commerce in Israel – income tax perspectives according to a draft circular of the income tax authority
The Israeli Tax Authority (ITA) published a draft circular concerning the taxation of foreign corporations that derive income from the provision of services via the internet to Israeli residents.
Such circular was published due to the need of the ITA to provide an interpretation of the Israeli tax legislation, in respect of income derived from e-commerce, so as to accommodate the substantial e-commerce activities taking place in or via Israel. The current definitions and rules, which relate to terms such as permanent establishment or place of doing business, have been commonly used in respect of brick and mortar businesses, and the need has arisen to provide an interpretation for such terms so as to allow them to appropriately be applied to the digital economy.
However, despite the need to provide an all-encompassing solution, the ITA specifies that the draft circular applies only to situations in which a foreign corporation provides services (as opposed to products) via the internet to Israeli residents, and specifically where such corporation uses an affiliated Israeli company that performs various tasks for it. The ITA notes that additional issues may be reviewed in the future. In this article, we will focus solely on income tax issues. However, it should be emphasized that the draft circular deals also with VAT issues. These will be reviewed in another article that will be published in the near future.
The draft circular first analyzes what will amount to a fixed place of business for the purpose of creating a permanent establishment. In this respect, it is noted, rightfully I may add, that very limited importance should be attached to the location of the server, if at all, and that a permanent establishment can exist in a jurisdiction in which the servers are not located.
The draft circular clarifies that where (a) the core activity of the foreign corporation is performed via the internet, (b) the foreign corporation uses a facility in Israel, and (c) where the following criteria, in part or in full, exist, then the foreign corporation’s online activity may create a permanent establishment in Israel for that foreign corporation:
- On top of the facility in Israel, the foreign corporation operates a website that is fitted for the use of Israeli customers (through the use of language, ads, style, currency etc.);
- The website links between an Israeli customer and Israeli suppliers;
- The popularity of the use of the website by Israeli users is high;
- The profit that can be generated from the website increases with the rise in the number of users of the website and their activity;
- Representatives of the foreign corporation in Israel are involved in locating customers or collecting information, with the aid of the Israeli facility;
- Customer relationship management – ongoing relationship between the foreign corporation’s representatives and the Israeli customers, with the aid of the Israeli facility; such includes, inter alia, organizing customer conferences, creating opportunities for the introduction of new products, development and modification of the customer service, providing feedback in respect of the activities of the foreign corporation in the local market etc.
- The scope of the marketing and support services provided in Israel by the foreign corporation’s representative is significant;
- The foreign corporation faces business risks in Israel.
The draft circular further clarifies that facilities of an affiliated Israeli corporation that are at the disposal of the foreign corporation, that are used by the foreign corporation for the purpose of generating income which is not income of the Israeli company, may be considered in certain circumstances as facilities of the foreign corporation.
In addition, according to the draft circular, an employee of an Israeli corporation, who operates in accordance with the instructions of the foreign corporation, may be considered as an employee of the foreign corporation or as acting on its behalf and thus create a permanent establishment for the foreign corporation.
The scope of the foreign corporation’s involvement in the recruitment of Israeli employees and in determining their employment terms might create a permanent establishment for the foreign corporation.
The ITA suggests that a broader interpretation of the term “permanent establishment” might be adopted in the future, so as to tax in Israel a purely online activity of foreign corporations, where these corporations have a significant digital presence in Israel. Such interpretation, if adopted, will be applied where, for instance, (a) a significant number of contracts for the provision of digital services is executed between the foreign corporation and Israeli residents, (b) the services of the foreign corporation are broadly consumed by Israeli residents, or (c) the foreign corporation receives substantial payments from Israeli residents in connection with contractual obligations for the provision of a service which is a part of the core activity of the business of the foreign corporation.
As to the alternative of having a permanent establishment on the basis of the existence of a dependent agent, the draft circular notes that in some instances, a local corporation or agent could be considered a dependent agent and create a permanent establishment for the foreign corporation, if the agent is in fact contracting in the name of the foreign corporation. In order to determine this, the following factors, inter alia, will be taken into account:
- The scope of authority granted to the agent to intervene in the negotiations between the Israeli customer and the foreign corporation;
- Whether the agent is authorized to provide the customer with any price and commercial terms in a manner that binds the foreign corporation, regardless of whether these are dictated in advance or whether the agent has discretion to determine them;
- Significant involvement of the agent in tailoring the contract for the needs and requirements of the customer;
- The agent’s authority to provide benefits;
- Whether the agent is a party to the contract between the foreign corporation and the customer.
The draft circular provides that where the contract with the Israeli customer is a uniform contract, without any possibility for meaningful negotiations, such contract will be reviewed in accordance with its terms and the direct contribution of the agent to the execution of the contract.
All of the above will be reviewed, and where it is found that the involvement of the agent in the negotiations is high, and that its decisions bind the foreign corporation, it is more likely that the conclusion will be that this agent is a dependent agent that creates a permanent establishment for the foreign corporation.
The draft circular is a major development in the sphere of Israeli taxation of e-commerce, and represents the first time that the ITA has attempted to take a real look into the taxation of the digital economy. While it is disappointing that the ITA failed to provide a comprehensive solution in this context, but rather focused on a limited part of this economy, there is no doubt that this draft circular presents a major development that needs to be carefully reviewed by all stakeholders. It is highly recommended that relevant stakeholders will take legal advice as to the potential ramifications this draft circular might have on their activities, operations and structure, and prepare themselves for the changes ahead.
April 2015 News flash – labor laws
An amendment to the Minimum Wage Law was recently promulgated, which will be gradually applied with reference to four periods. The first period begins on April 1, 2015, when the minimum wage is to be updated to NIS 4,650 (gross). The first update must be made in the April 2015 wage, which is payable at the beginning of May 2015.
All employers in the economy, including employers who are not employing employees at minimum wage, must specify the minimum wage rate in all pay slips. As a result, pay slips must be revised accordingly.
Pursuant to the law, for the purpose of calculating compliance with the minimum wage, base wage/combined wage, cost of living increases and permanent allowances being paid to employees on account of their work must be taken into account.
The subsequent minimum wage updates shall be as follows:
On April 1, 2016, the wage shall be updated to the higher of NIS 4,650 or 47.5% of the average wage in the economy as it shall be on that date.
On July 1, 2016, the wage shall be updated to the higher of the wage during the second period or NIS 4,825.
On January 1, 2017, the minimum wage shall be updated to NIS 5,000.
If you need additional details or advice regarding specific circumstances, feel free to contact our Labor Law Department.
Recently, Judge Ruth Ronen of the Economic Department of the Tel-Aviv District Court handed down a ruling which related to an issue which is pertinent to virtually every publicly listed company.
When do negotiations reach a point of becoming material information, thereby constituting inside information? The background to this case was that Africa Israel Industries had published a tender offer in 2012 for the purchase of shares in Negev Ceramics, without publicly disclosing that negotiations were being conducted with Olympia, a Canadian company. The Administration Enforcement Committee (established under the Securities Law) had ruled that the publishing of the tender coupled with lack of disclosure constituted insider information. Judge Ronen presided over the appeal against this ruling.
Judge Ronen ruled that the negotiations had indeed reached the point of becoming material information. Her decision was based on the application of the materiality/magnitude test, which weights the probability of the event occurring against the anticipated impact of the event on the company.
It is not difficult to see the logic in the assumption that the fact that negotiations are underway might be material information and that therefore, whoever executes transactions with securities while in possession of such information is considered as having made use of insider information. However, it appears that the ISA’s Administrative Enforcement Committee was prepared to go even further and expressed the opinion that the same materiality test for the purpose of ascertaining abuse of insider information should be used for the purpose of ascertaining the application of a reporting obligation. The Committee’s position may be interpreted as deciding that, when negotiations reach the point of becoming material, the Company must issue an appropriate immediate report.
Judge Ronen decided that it was unwarranted to examine the correlation between abuse of insider information and a corporation’s general disclosure obligation, within the scope of the petition.
However, the critical question remains: Should every public company assume that it is obliged to publish an immediate report every time it conducts negotiations and they reach the level of becoming “material”?
Firstly, one must consider whether such a requirement is reasonable and feasible. One must keep in mind two salient points: There is never certainty that negotiations, whether or not material, will eventually lead to an agreement and; the very disclosure that negotiations are underway could thwart the transaction or adversely affect its conditions. Secondly, since negotiations are often a dynamic, lengthy process, it is unreasonable to expect public companies to repetitively perform analyses during the course of negotiations in order to ascertain whether, at any given stage, the correlation between the probability of a successful conclusion of the negotiations and the anticipated impact of the current draft of the agreement, has reached a level of “materiality” that dictates the publication of an immediate report.
Even if the conclusion had been that it would be advisable and wise to oblige public companies to publish immediate reports about negotiations, considering the implications and possible repercussions, such an obligation should be clearly and unequivocally defined. For example, the Securities Law prescribes specific provisions regarding insider information. Furthermore, the Securities Regulations include express provisions regarding the imposition of reporting obligations, and require the reporting of any transaction for the purchase of a “material asset.” The Regulations enable the company’s board of directors to delay the reporting under particular circumstances, but do not allow a company to delay reporting in any instance of securities being offered pursuant to a prospectus.
In other words, there are circumstances when information about material negotiations must be published: before the execution of a transaction with securities, before the publishing of a tender offer and before the publication of a prospectus, and in relation to purchases of material assets. However, one should not deduce from this that there is a sweeping obligation to publish an immediate report about negotiations, and certainly, it would be advisable to carefully analyze all relevant considerations, such as reasonability and the appropriate legal source before imposing such an obligation.
New Procedure for Work Visas for Foreign Experts
The Israel Immigration Authority recently published a new, experimental, streamlined procedure for issuance of work visas for foreign experts, allowing the holder to work in Israel for up to 30 days over a 12 month period.
Previously, multinational companies that wished to send professionals to Israel to work with their Israeli R&D centers or strategic partners for short periods of time were required to apply for and obtain a work permit (from the Ministry of Economy) and then a work visa at an Israeli consulate abroad, all before entering Israel.
Under the new procedure, application for a work permit for an expert employee will be expedited, with full processing completed within 6 days in most cases. Once the work permit is granted, the expert may enter Israel as a tourist, provided that he or she reports to the Immigration Authority within two business days of arrival, where the tourist visa will be converted to a work visa.
This new process should lessen the burden on multinationals or non-Israeli acquirers that require their expert employees to supervise operations in Israel, and it allows these companies to send their experts to Israel on an urgent basis.
Amendment no. 14 to the Non-Profit Organizations Law
Amendment no. 14 to the Non-Profit Organizations (Amutot) Law, came into effect in February, 2015.
The purpose of the Amendment is to hone the rules of corporate governance that apply to amutot and includes provisions designed to strengthen the nature of the audit in amutot, increasing transparency and strengthening the oversight and investigation authorities of the Registrar of Amutot.
The Amendment sets out provisions for the following issues: mandatory appointment of an internal auditor for an Amutah; expansion of the authorities of the Audit Committee (or the Audit Body of an amutah, as the case may be); granting oversight authorities and certification of supervisors by the Registrar of Amutot; expansion of the oversight authorities of the Registrar of Amutot through the use of external inspectors; expansion of the oversight authorities of the Registrar of Amutot regarding independent investigation of an amutah (and without the appointment of an external investigator); and various general provisions in a number of areas related to the relationship between the Registrar of Amutot and the amutot, and between the amutot themselves.
One of the main changes in the Amendment relates to a new entity in an amutah - the internal auditor. An amutah with a turnover exceeding NIS 10 million (or exceeding a higher amount to be determined by the Minister of Justice) - must appoint an internal auditor (“Internal Auditor”) in addition to the existing internal auditing bodies that are stipulated in the Amutot Law (Audit Committee, or the Audit Body as the case may be, and the Auditing Accountant).
The Internal Auditor will report to the Audit Committee on all matters related to professional issues, and to the Executive Board of the amutah on hierarchical-organizational matters. The appointment of the Internal Auditor will be done by the Executive Board of the amutah with the approval of the Audit Committee, and in the event of a disagreement, the General Assembly will decide.
Responsibilities of the Internal Auditor include, inter alia: (a) submitting a proposal for the annual or periodic work plan for the approval of the Executive Board, after the Audit Committee has examined it, and the Executive Board will approve it, with the changes it sees fit; (b) conducting an internal audit, in addition to the aforementioned work plan, on matters that may arise for urgent examination as imposed upon him by the Executive Board or the Audit Committee; (c) submitting a report on the findings as part of the annual and/or periodic work plan - to the Executive Board, CEO and the Audit Committee of the amutah.
Amendment No. 14 also includes provisions which expand the authorities of the Audit Committee (or the Audit Body of an amutah, as applicable). Such expansion includes identifying and fixing problems in the amutah’s business administration, inter alia, by consulting with the amutah’s Internal Auditor or with its accountant, and to make proposals to the Executive Board regarding ways of correcting such problems.
Additionally, added to the authorities of the Audit Committee, is the authority to examine the internal auditing system, including the Internal Auditor’s work plan, the amutah’s accountant remuneration and also to make arrangements regarding the manner of handling complaints brought by amutah employees regarding flaws in the conduct of its business and regarding the protection that will be provided to employees who complain, as aforementioned.
The recent decision of the Antitrust Commissioner with regard to the existence of a natural gas monopoly illustrates all the more emphatically the absence of an orderly legislative framework to regulate all matters pertaining to oil and gas exploration and production in Israel.
Nevertheless, moves are being made to clarify the regulatory framework concerning off shore Oil & Gas. A few weeks beforethe Commissioner’s decision, the government had submitted a draft bill to the knesset on the matter of Israel's maritime zones.
The draft bill is worded in a way that adopts the customary provisions of the international Convention of the Law of the Sea of 1982, even though the State of Israel is not one of its signatories.
The draft bill defines five maritime zones, including the exclusive economic zone of the State of Israel. Besides defining the boundaries of the exclusive economic zone, the draft bill also prescribes the State’s powers and authorities and the laws that shall apply to that zone.
The adoption of the draft bill by the knesset will create certainty and reduce the ambiguity surrounding all issues pertaining to oil and gas exploration, production, utilization and management in Israel’s economic waters. and should encourage foreign companies to consider entry into the Israeli market.
Treatment of Electronic Waste
The Environment Treatment of Electrical and Electronic Equipment and Batteries Law (the “Law”) came into effect recently, as well as the regulations promulgated thereunder. The Law and the regulations prescribe arrangements for the environmental treatment of electrical and electronic equipment, batteries and accumulators in Israel in order to encourage re-use of electrical and electronic equipment, batteries and accumulators and in order to mitigate the negative effects of such equipment and batteries and of the waste generated by them on the environment and on public health.
The Law adopts recommended EU practices and constitutes an additional layer in the Ministry of Environmental Protection’s policy for handling solid waste and is being added to other arrangements in effect addressing this issue.
First, the law defines "electrical and electronic equipment". Excluding batteries and accumulators for which the definitions are pretty clear, the law determinates a number of technical conditions and cumulative definition of electrical and electronic equipment. Included - fridge, microwave, washing machine, computer, etc., the law also lists the items for which the law is not applicable, for example - electrical and electronic equipment contaminated medical, medical electronic devices for transplant, incandescent lights, and other motor vehicle.
Another main and principal section of the Law prescribes provisions specifying the responsibilities imposed on all parties involved in the chain of sales of electrical and electronic equipment, batteries and accumulators in Israel. These include manufacturers, importers, vendors and holders of electronic waste. The responsibilities and obligations imposed on manufacturers and importers under the Law are the broadest from among all aforementioned parties in the chain of sales of electrical and electronic equipment and batteries.
Thus, the obligations of manufacturers and importers pursuant to the Law include,inter alia: the obligation to recycle electronic equipment, batteries and accumulators according to a scale of annual quantities; report obligations to the Ministry of Environmental Protection; the obligation to prepare and publish procedures for environmental treatment and preparations for re-use of each type of electrical and electronic equipment, batteries and accumulators that they sell in Israel. The obligations of vendors pursuant to the Law include, inter alia: obligating vendors that are selling electrical and electronic equipment (that is also suitable for household use) to accept the electrical and electronic equipment waste handed over to it by the buyer (that is also suitable for household use) in their places of business at the time of sale or at the time of delivery; the obligation to store equipment and battery waste; the obligation to engage with an ‘accredited compliance body’ for the purpose of removing and transferring the equipment and battery waste in their possession and to pay for the aforesaid removal; and the obligation to keep records of the waste equipment that was so accepted and removed. The obligations of holders pursuant to the Law include engaging with an ‘accredited compliance body’ for the purpose of removing the equipment and battery waste in their possession (the cost of the waste removal shall apply to that ‘accredited compliance body’).
The last sections of the Law prescribe provisions regarding penalties (fines and arrests according to three levels of severity); provisions regarding the obligations and liabilities of office holders (and the imposition of fines in respect of violations); and administrative pecuniary sanctions resulting from breaches of relevant obligations prescribed in the Law (depending upon the degree of severity of the breach).
Formation of a Governmental Committee to Review Mining Royalties is Not Grounds for Arbitration
The Jerusalem District Court recently issued its ruling in the matter of Dead Sea Works Ltd. vs. the State of Israel. The proceeding included a discussion of Dead Sea Works’ petition to activate the arbitration clause stipulated in its concession agreement with the State of Israel. The petition was filed after the State refused to appoint an arbitrator pursuant to the arbitration clause.
Dead Sea Works sought to refer to arbitration the very formation of the Sheshinski Committee, pleading that it constitutes a violation the State’s covenant not to raise the rate of royalties payable by the Dead Sea Works for its mining license. Indeed, the Sheshinski Committee was formed for the purpose of reviewing the State’s policy on royalties due in consideration for the use of Israel’s natural resources.
The District Court rejected Dead Sea Works’ petition. It ruled that the mere formation of the Sheshinski Committee does not give rise to a dispute according to the arbitration mechanism prescribed in the concession agreement.
The Court issued its ruling based on the specific language of the arbitration clause in the concession agreement; it is conceivable that Dead Sea Works might have been allowed to pursue its position through arbitration proceedings had the arbitration clauses been worded differently.
Court decision on temporary residence abroad
On 21 October 2014, the Haifa District Court handed down its decision in “Yael Zor v the Tax Assessor Haifa” (12-01-19466) concerning temporary residency abroad.
The case relates to a senior employee of a multinational enterprise the shipping company, Zim, who worked in Hong Kong for a subsidiary of the group from January 2006 to August 2008. The employee lived abroad for a period of less than 3 years and, afterwards, resumed tax residence - together with her family - again in Israel.
When the employee returned to Israel, she filed an application for the refund of the taxes that her employer had continued to withhold on her salary during the period that she had lived in Hong Kong.
The tax authorities denied the tax refund. Instead, they issued an assessment qualifying the taxpayer, during the years 2006 to 2008, as an “employee overseas” according to Section 67 A of the Income Tax Ordinance and its Regulations (“Earner of income derived from work performed outside Israel”) 5743-1987; and therefore they assessed tax on the income earned abroad. The tax authorities’ position has always been that the tax residency may only end when a person is outside of Israel for a period of at least 3 years.
The Court decided in favour of the taxpayer and instructed the tax authorities to refund the tax withheld.
The Court considered that the 2003 reform of the personal income tax made the determination of the residence of a taxpayer crucially important. The determination of tax residency based on the “place of the centre of life” demands a qualitative assessment besides the dry legal presumption of residency based on the number of days that a taxpayer is present in Israel in a given year and previous years. The presumption may be disproved by the taxpayer or by the tax authorities based on factual circumstances, reminded the Court.
Consequently, the Court determined that even though the requirements for legal presumption of residency were met, the taxpayer successfully proved that she was not a resident of Israel. For this purpose, the Court took into account various factual considerations to determine the place of centre of life, such as:
- that the taxpayer worked in Hong Kong;
- the family had a bank account in Hong Kong;
- the medical insurance covered the family members during their stay abroad and for this purpose it coverage was expressly extended;
- the taxpayer’s children studied in Hong Kong;
- the family lived in a rented apartment in Hong Kong which was entirely at their disposal; and
- the family had sold their cars in Israel before moving abroad. The Court attributed also substantial weight to the subjective intentions of the taxpayer and her family measured by the fact that the husband had resigned from his employment in Israel for the purposes of the family’s relocation and that the couple's house in Israel had been rented out long term.
Recent Tax Developments
Release of Information to Foreign Tax Authorities
Two pending amendments to Israeli tax legislation will, if adopted, permit the exchange of information about taxpayers in a multinational context. The passing of these amendments will also allow for implementation of multilateral agreements for ‘exchange of information’ regarding individuals and corporate tax payers.
In addition, a recent change in the Law on Prohibition of Money Laundering (2000), subjects legal and accounting professionals to a number of KYC (‘Know Your Client’) requirements from now on.
Revised Tax Amnesty Arrangement Published and Now in Effect
On 7 September 2014, the Israeli Tax Authorities issued a new general voluntary disclosure arrangement, effective until 31 December 2016. The new procedure also covers indirect taxes (VAT, import duties, and real property transfer taxes).
Anonymous applications may be submitted until 6 September 2015 as part of a transitional package that has been put in effect. In such a case the taxpayer’s identity is disclosed only upon approval of the application. This transitional procedure includes an expedited track for ‘modest taxpayers’, having an unreported capital of up to NIS 2 million and a taxable income of less than 0.5 million NIS. It is not possible to file an application anonymously for this simplified procedure.
Losses, exclusively incurred during the tax years of the disclosure, may be offset.
It has been announced that this amnesty shall be the last clemency offered.
Israel - Revision Voluntary Disclosure Tax Amnesty
The Israeli Tax Authorities ("ITA") have recently been very active in its efforts to detect tax evaders and unreported global income of Israeli tax residents. On the 7th of September a New Voluntary Disclosure Program, replacing the previous program, went into effect.
About a month ago, the Israeli High Court of Justice deliberated a case petitioning the court to order the Minister of Finance and the Director of the Israeli Tax Authority to impose value added tax on multinational companies, such as Google and Facebook, arguing that they are providing services and selling goods in Israel via the internet, without being required to pay VAT, which gives them an unfair advantage over Israeli competitors.
The petitioner pleaded that the multinational corporations are conducting extensive business activities in Israel, which include, inter alia, marketing and communications in Hebrew with Israeli customers and payment in Israeli currency. The petitioner also argued against the “location of the server” criteria that the Israeli Tax Authority is using in order to ascertain whether a transaction via the internet is executed in Israel.
The court dismissed the petition and stated that it is premature, given that the VAT authorities are drafting a circular on the said subject, which is expected to be released soon. The dismissal of the petition does not conclude one way or the other the issue of VAT liability, as this issue will surely be the subject of legal proceedings in the future.
Nevertheless, the question of tax liability is only one aspect of internet activities. There are many issues, including slander, consumer protection, gambling, forex, pharmaceuticals, protection of privacy and copyrights, which are arising in relation to internet activity. In relation to all of these, the fundamental question is which legal system will determine whether any given action is legal or not. Of course, these issues are not unique to Israel, and significant progress has been made, and some judicial rulings on these questions have already been issued, in various countries.
For more information, please free to contact Dr. Dotan Baruch, head of Internet department
A public offer in Israel of securities of a foreign corporation is subject to the Israeli Securities Law – even if there is a foreign law and jurisdiction provision
The Tel Aviv District Court recently issued a decision clarifying that a public offer in Israel of securities of a foreign company is subject to the provisions of the Israel Securities Law, even where the investment agreement stipulates that it will be subject to a non-Israeli law and dispute resolution jurisdiction.
In the case at issue, a Cayman Island entity raised from a group of more than 100 Israeli investors about USD 10 million to be used for the construction of a hotel in Thailand. The investment agreement included a provision applying Thai laws and specifying Thailand as the exclusive dispute resolution venue.
Subsequently, certain of the investors filed a lawsuit claiming that the securities had been sold in violation of the Israeli Securities Law, which prescribes, inter alia, that “no person shall offer securities to the public other than pursuant to a prospectus, the publication of which has been authorized by the Israeli Securities Authority”.
The defendants, on their part, filed a motion to dismiss the lawsuit in limine and a motion to hold a hearing on the Thai jurisdiction stipulated in the agreement.
In its decision the court rejected the motion to dismiss the claim and ruled that the relevant provisions of the Israeli Securities Law are not discretionary, and that a foreign law and jurisdiction provision in an agreement is not legally binding if it relates to a dispute relating to laws designed to protect the public in Israel.
For more information, please fell free to contact Michael Barnea, managing partner and head of Capital Markets & Securities department