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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 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. This, even if such providers do not have any place of business in Israel.
In the last 20 years, the notion of examining whether to establish a casino in Israel comes back from time to time, 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.
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.
Introduction 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.
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.
Introduction 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.
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 benefits of operating under a license and regulatory regime ValueA 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.Future licensingAvoiding 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 customersThe 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.EU passportingA 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.SanctionsObviously, 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 marketExisting 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 stabilizesOperators 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 regulatorsBeing 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 marketA 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.
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. AnalysisIf 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.