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Blog  / Tax

Adv. Harel Perlmutter
It is vital that entrepreneurs pay attention to possible tax benefits and tax liabilities from a startup’s earliest stages. Click to read the four things you should pay particular attention to.
Adv. Dreyfuss Ariella
Goodnight 2017…
December 31, 2017 / by Ariella Dreyfuss
It has certainly been an interesting 2017 in the Israeli Hi-Tech world, here is a rundown of 5 highlights, in case you missed them.
Adv. Danny Boguslavsky
Israel has long been acknowledged and admired for its vibrant start-up culture, fostered through government investment and pro-business policies. Further, the national focus on business development provides a regulatory structure that protects business owners from creditors and ensures proper structure for the public – incorporation. To take advantage of the corporate structure, you need to ensure that you follow the proper registration process, and select the right corporate vehicle to fit your emerging business model.   Why should start-ups incorporate? The most common corporate vehicle in Israel, and especially for start-ups, is a limited liability company. The main reasons for its popularity, and why entrepreneurs should incorporate at an early stage, are: The first and foremost reason for any individual to incorporate a company and become a shareholder thereof, is the fact that a company is a separate legal entity from its shareholders. This separation creates a “wall” between the company’s shareholders and its creditors, so that the shareholders and their private property are protected against the company’s creditors and they will not be personally liable for the company’s debts, to the extent allowed under the ‘piercing of the corporate veil’ provisions, according to law (whereby in extreme cases a shareholder can be held personally liable for the company’s debts). In addition, the shareholders cannot be obliged to pay the company's debts beyond the amount of their investment. Any early stage start-up is always seeking investors to invest in their product or idea. In exchange for their investment, the investors expect a form of guarantee in return. When operating under a company, the company can leverage its capital raising without actually giving a substantial consideration in return (such as personal guarantees) by offering the investors consideration in the form of company shares and/or share options. One of the main reasons for investors to invest in a start-up is its intellectual property. With incorporation, the IP is owned by the company and not by the founders, and the investors, who are also shareholders of a company, are the owners of the intellectual property too, in proportion to their shareholding percentages. Moreover, in the event one of the company’s founders terminates its engagement with company, the IP shall remain with the company and not with the departing founder. A start-up which wishes to expand will search for quality employees to join and can offer them benefits such as options.     For those start-ups who are or become profitable, the tax rate for companies in Israel is 24% (as of 2017), compared to the individual tax rate, which can be as high as 50%.   How to incorporate Before you can do business in Israel as a company, you must register your company with both the Registrar of Companies and the Tax Authorities, which fall within the control of the Ministry of Justice and the Ministry of Finance, respectively.   When registering a company, the following steps must be taken: File an application for the company’s incorporation which includes, inter alia, the company’s suggested name, its share capital, its shareholders and their holdings, and its first directors. Draft the company’s articles of association, which governs the relationship between the company and its shareholders and between the shareholders and themselves. Pay a registration fee of NIS 2,606 (as of today).   The process can feel onerous at times, but each step is important. Besides the importance of operating legally, the paperwork establishes the rules of conduct and governance both in respect of the present and going forward. This is why the incorporation procedure is critical.   “Originally published on the IDC Legal Clinic website”
Adv. Liat Keisary
What do the United States, the UK, France, Germany, Italy, Spain, Switzerland and the Netherlands all have in common? In these countries (and many others), estate tax is collected on large inheritances. These taxes are imposed not only on the money of the deceased, but also on their real-estate properties, shares, pension funds, and other assets.   In recent years, there has been a shift towards expanding the scope of these tax collections. An example of this can be found in the UK. On April 6, 2017, an amendment will take effect that expands the scope of the estate tax on trusts, or on individuals with residential properties in the UK.   The major impact of the new amendment is that now it will also apply to individuals who live outside the UK, to trusts with beneficiaries outside the UK, and to directors of foreign companies that own residential property in the UK.   In Israel, on the other hand, the estate tax was cancelled in 1981 and in recent years there has been a string of benefits granted to every new immigrant or returning resident that decides to leave it all and move to Israel.   On January 1, 2007, income tax reforms creating tax cuts for new immigrants and returning residents, took effect retroactively. The reform creates a ten-year tax exemption and reporting exemption in Israel.   Are you entitled to benefits? First of all, to clarify: a new immigrant/first-time Israeli resident is a person that becomes an Israeli resident that has never been an Israeli resident before. In contrast, a returning resident is a person that becomes an Israeli resident again, after residing outside of Israel for ten consecutive years.   Do you belong to one of the categories above? If so, in addition to other benefits, you are entitled to the following: Capital gains derived from abroad- a tax exemption on capital gains from the sale of assets outside of Israel, as long as they are sold within ten years of the date you became an Israeli resident - regardless of the date of purchase. Passive income derived from abroad - a tax exemption, lasting ten years from the date you became an Israeli resident, on passive income, such as interest, dividends, pension, and royalties produced or generated outside of Israel. Active income derived from abroad - a tax exemption, lasting ten years from the date you became an Israeli resident, on active income - i.e., income from work or business - produced or generated outside of Israel.   Beyond these benefits, new immigrants are also entitled to a discount on the purchase tax for property purchased in Israel during the period beginning one year prior to their immigration and continuing for seven years after their immigration. The immigrant purchase tax rate, starting on January 1, 2017 until January 15, 2018 is: 0.5% on the portion of the property’s value that is up to approximately NIS 1,759,310; 5% of the portion of the property's value above approximately NIS 1,734,225.   Note that this benefit may be exercised once for a residential apartment, and once for a business oriented property.   It is important to remember that after ten years, a reporting requirement for income from abroad goes into effect. Since the reform only went into effect in 2007, issues are only just starting to emerge for which answers haven’t been provided yet, such as the exposure for retroactive payments - with emphasis on national insurance payments - and exposure from the tax authority.   Have you started packing?   Source: barlaw.co.il
Dr. Baruch Dotan
The explosion of e-commerce in the last 15 years has made it easier than ever to manage the logistics of doing business in multiple countries. The global reach it creates, though, has spawned a litany of tax questions. You need to determine which jurisdictions have the authority to tax you and your business activity and what taxes apply. Your physical location and your end-customer locations can impact what you pay to whom, but other factors might also apply. Managing this process is critical to your continued e-commerce operations.   Where to Tax Income The issue of the jurisdiction to tax e-commerce is a complicated one, which many countries have yet to resolve. In 2016, the Israeli tax authority laid down guidelines on taxation for companies involved in e-commerce business in Israel. A company will owe taxes to Israel for e-commerce income if it either has a physical presence or a significant economic / digital presence in Israel. Thus, even if you do not have a physical presence within Israel, Israeli tax liability may still be triggered on account of various non-physical factors, which usually are not common in determining tax liability.   Value-Added Tax for E-Commerce Value-added tax (VAT) presents its own concerns. Do you pay this tax to the location where the customer is located, or where you have your base or a physical presence? Part of this depends on what you are selling. In the EU, for example, payment of VAT on physical goods goes to the seller's location. Electronic services, on the other hand, are charged VAT where the end consumer is located.   In Israel, Section 60 of the VAT Act requires foreign companies that have business or activities in Israel to register a representative in the country within 30 days of beginning to operate in Israel. This registration helps ensure that sales completed in Israel allow for identification and collection of VAT liability.  Here, too, the guidelines issued by the Israeli tax authority allow for creating VAT liability solely on the basis of a significant economic presence in Israel.   How to Collect Taxes on E-Commerce Your business can collect these taxes much more effectively by building multinational tax rates into its e-commerce platform. Applications that identify recipients by IP address or other indicators of the customers' locations can connect to current VAT tables to identify what to charge. Similarly, income taxes can be calculated by sorting where sales occur and where the economic impact falls.   Barnea & Co. has experienced attorneys adept at helping clients manage the intricacies of multinational tax issues that arise through e-commerce. Contact us for help piecing your taxation puzzle together.   Source: barlaw.co.il
Adv. Liat Keisary
Purchasing a residential property is generally one of the most profound, expensive and important decisions you make in your life. Even more so when purchasing a residential property in Israel. Following is a check list containing 10 most important tips on how to do it the right way:   1. Locating the right property- there are a few ways to proceed. The first way is via various web sites, which usually do not involve payment of a fee. Another way that is more common is via a real estate agent. It is important to confirm that the agent has a valid real estate license and is proficient in English. You must be aware that purchasing a property using a real estate agent increases the costs of the transaction as the agent’s fees range between 1% to 2% (V.A.T exclusive) of the purchase price. However, this extra cost can prove to be worthwhile, especially when dealing with a professional, experienced agent who has a thorough knowledge of the property market.   2. What to buy - it is very important to understand what you want to buy, for example a house or an apartment, whether to buy an apartment off plan (or under construction) from a contractor or to buy a finished apartment. Your choice to buy an apartment or a house can have important consequences. It is important to know that when purchasing an apartment from a contractor (off plan or under construction) there may be many unforeseen problems (such as late delivery, structural defects, financial problems of the contractor etc.). But the advantage of buying an apartment from a contractor is a lower purchase price (approx. 15%) when compared to a pre-existing property. Also, you can buy the apartment in a “shell” condition and design it to fit your personal requirements.   3. Property inquiry - it is very important to engage an engineer or similarly qualified professional. to check the quality of construction and to make sure there are no building irregularities. If you wish to buy a house it is important that you have its size measured to ensure that the correct specifications are recorded with the authorities, such as the Land Registry.   4. Engaging with the right lawyer - it is extremely essential that you engage a competent, experienced lawyer to represent you. It is vital that you are guided and assisted throughout the process, from the negotiation stage until the conclusion of the transaction, by a lawyer who will both protect and advance your interests. The lawyer’s fees generally range between 0.5% to 1.5 % (V.A.T exclusive) of the purchase price.   5. Financing - the purchase price for the property can be paid fully in cash or via a combination of cash and mortgage finance. Usually the lender will grant a non-resident a loan which will not exceed 50% of the purchase price. Receiving approval for mortgage funding from local banks for non-residents cannot be taken for granted and is not always successful.   6. Signing the contract - it is important to know that the provisions of the contract are negotiable and are not “cast in stone”. All the necessary legal checks in respect of the property should be carried out prior to the signature of the contract. For example, whether there any existing property mortgages, foreclosures or anything else that could affect the transaction. It is important to ensure that the structuring of payments under the contract is reasonable and attainable.   7. Receipt of possession -it is very important that at the time of delivery of the property the seller and buyer have drawn up a delivery protocol, which will specify any defects which need to be remedied by the seller. At the time of delivery you should arrange for the transfer of all utilities, rates accounts into your name.   8. Taxes - currently, non-residents are required to pay purchase tax of 8% of the purchase price up to NIS 4,896,165 and 10% of the purchase price which exceeds NIS 4,896,165.   9. Opening a bank account- in recent years the requirements for opening a bank account by non-residents have become quite stringent. The bank requires the foreign resident to sign a waiver of confidentiality towards the Bank, a statement about the place of residence and a deposit of a cash amount in the account. Alternatively, you can arrange for your lawyer to open a trust account to effect payments. Please note that opening a trust account will entail the signing of similar documents as are necessary when opening a personal bank account.   10. Post Purchase Issues- (I) Receipts - upon a subsequent sale of the property, you may have to pay Capital Gains Tax. However, for this purpose you are entitled to deduct various expenses, such as renovations, purchase taxes, legal fees, agent’s fees etc. It is therefore critical that you retain all relevant receipts, which must be under your name and must include all relevant details relating to the property and of course, keep a copy of all taxes paid upon the purchase as well as the purchase agreement and your passport.(II) Insurance - you must insure the property and its contents. Non-residents who do not intend to occupy the property on a continuous basis should ensure that someone inspects the apartment once every two weeks, otherwise the premiums will be more expensive and in some cases insurance cover may be refused. (III) Taxes - if you intend to rent out your property to a third person, you have a duty to report your income to the Israel Tax Authority if the rental exceeds approx. NIS 5,070 per month.   Source: barlaw.co.il
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