Lecturer: Guy Katz, Adv. CPA Tax Partner, Herzog, Fox and Neeman, Tel Aviv Email: katzg@hfn.co.il Tel: +972 (0)3-6922035
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US Citizens Residing in Israel US Citizens living in Israel are generally obligated to file a US tax return and are subject to tax on their world wide income. Israeli residents can often claim a foreign tax credit on their US return for tax paid in Israel and in Israel for certain taxes paid in the U.S.. Under the Bush Era Tax Cuts, rates in Israel were higher for most income categories (except for interest and short term capital gains) No US tax was owed on Income of Israeli Residents
Comparison of US-Israel Tax Rates in 2012 Income Category Israel United States Ordinary Income for Individuals Capital Gains 25% 30% (Controlling Shareholder) Dividends 25% 30% (Controlling Shareholder) 48% (top marginal rate) 35% (top marginal rate) 15% (long term) 35% (short term) 15% (Qualified dividends) 35% (non-qualified Dividends) Interest 15% (nominal instruments) 25% Marginal Rate (Controlling Shareholder) 35% (top marginal rate) 0% Municipal bonds
The First Bite Mechanism (Article 26(2) of Israel/USA Tax Treaty ) Where a United States citizen is a resident of Israel: (a) with respect to items of income that are exempt from United States tax, or that are subject to a reduced rate of United States tax when derived by a resident of Israel who is not a United States citizen, Israel shall allow as a credit against Israeli tax, subject to the provisions of Israeli tax law regarding credit for foreign tax, only the tax paid, if any, that the United States may impose under the provisions of this Convention, other than taxes that may be imposed solely by reason of citizenship under paragraph 3 of Article 6 (General rules of taxation); (b) for purposes of computing United States tax, the United States shall allow as a credit against United States tax the income tax paid to Israel after the credit referred to in subparagraph (a); the credit so allowed shall not reduce that portion of the United States tax that is creditable against Israeli tax in accordance with subparagraph (a); (c) for the exclusive purpose of relieving double taxation in the United States under subparagraph (b), items of income referred to in subparagraph (a) shall be deemed to arise in Israel to the extent necessary to avoid double taxation of such income under subparagraph (b).
Changes in Israel in 2013 The Wealth Levy The Tax. Individuals earning more than a total of NIS 800,000 from all income categories (subject to certain exemptions) will be subject to an additional 2% tax on their total income. Any Planning? Credit in the U.S. Can Wealth Levy be credited in the U.S.? Based on the language of the US Israel treaty : Article 1: the taxes that this treaty deals with In Israel taxes that are imposed under the Israeli Income Tax Ordinance Credit in Israel. Can U.S. Taxes be credited against the Wealth Levy?
Comparison of US-Israel Tax Rates in 2013 Income Category Israel United States Possible rates Ordinary Income for Individuals Capital Gains 25% 30% (Controlling Shareholder Dividends 25% 30% (Controlling Shareholder) 48% (top marginal rate) 39.6% (top marginal rate) 20% (Long term) 39.9% (short term) 39.6% (top marginal rate) Interest 25% Marginal Rate 39.6% (top marginal rate) * Add additional 2% in Israel if total Income exceeds NIS 800,000
Effects of the Fiscal Cliff on the US Foreign Tax Credit Tax Rate on Dividends in the US becomes higher than in Israel Disallowed Deductions in US causing higher taxable income: The Pease Limitation The Personal Exemption Phaseout Possible Exposure to Alternative Minimum Tax (expiration of the AMT Patch). Elimination of 2% payroll tax reduction Employees Stock Options
Distribution of a Dividend before the end of the year Wealth Levy in Israel + Possible increase in the dividend tax rate in the U.S. need to distribute a dividend before the end of the year. Distribution from Israeli companies- Section 302 of the Corporation Law - A company can distribute a dividend out of its profits provided that there is no reasonable possibility that the distribution will prevent the company from paying its existing and expected liabilities Profits the higher of the retained earnings or the retained earnings which were accumulated in the last two years, according to the last reviewed or audited financial statements provided that the date of the financial statements does not precede the distribution date by more than 6 months.
Distribution of a Dividend before the end of the year Which amounts can be distributed for tax purposes under Israeli tax law? Distribution of revaluation profits. Tax Authorities position CA 8500/2010 Pearl v. Assessment Officer Which amounts can be distributed for tax purposes under U.S. tax law? E&P account Distribution up to the E&P account is considered as a dividend Above the E&P account a reduction of the tax basis of the share Above that a capital gain
Distribution of a Dividend before the end of the year Should there be an actual distribution?
Completion of Sale Transactions before the end of the year From an Israeli perspective From a U.S. perspective
Whether to Check the Box Before Going over the Cliff? US Citizens operating in Israel through a company may consider making a check the box election and making the company transparent for US taxes. Israeli Dividend = 30% Israeli Corporate Tax = 25% US Ordinary Rate= 39.6% [creditable] Dividend Israeli Business Income Personal Consulting Company Effective Tax Rate = 54.7% Dividend Israeli Business Income Effective Tax Rate = 47.5% (49% with Wealth Levy) US Dividend = 39.6% Israeli Corporate Tax = 25%
New 3.8% Medicare Tax on Unearned Income If the AGI is over $200,000 for Individuals and over $250,000 for married couples the Unearned Income may be subject to an additional 3.8% tax. This aggravates the situation in the previous slide the effective rate in the first scenario could approach 57.55%
Israeli Residents Investing in U.S. Real Property LLC is not transparent in Israel Dividend to Israel 32% US Business Income = 39.6% US LLC Israeli tax 50%-39.6%=10.4% US Business Income LLC is transparent in Israel 2013 Effective Rate without Transparency = 58.9% 2013 Effective Rate with Transparency = 50%
Estate and Gift Planning
Gifts from Israeli Residents The Israeli Perspective. Gifts to between relatives who are both Israeli residents are tax exempt in Israel. There is currently no Estate Tax in Israel Sun-Setting Benefits Lifetime credit amount to be reduced from $5,000,000 to $1,000,000 Rates to rise from 35% to 55% US Citizens may consider giving gifts before the lifetime credit amount is reduced.
Inheritance to US Persons Planning Opportunities Outright inheritance/ gift to a U.S. person before the end of the year Example Gifting a House to a Non-U.S. Spouse Israeli taxes Mas Shevah + Purchase tax + Reporting to the Israeli Tax Authority. Need for completion before the end of the year. Third parties rights. Valuation (who is qualified as appraiser, minority discount etc.) Reporting in the U.S. Gift agreement + changes of ownership.
Preparing yourself to the Israeli Estate Taxes! Will the Israeli Kennest Impose Estate and Gift taxes on Israeli residents? Possible solutions: Gifting money to the next generation. Creation of a trust for the benefit of the next generation.
Inheritance by non-u.s. persons to US Persons US Dynasty Trust Structure Settlor- Deceased Israeli Resident US Testamentary Trust Distributions US Beneficiaries
Inheritance to US Persons US Dynasty Trust Structure U.S. tax consequences: The Trust will be subject to Federal income tax (state income taxes could probably be avoided) on its world-wide income. The Trust will not be subject to U.S. estate tax upon the death of beneficiaries (skip generations). The Trust can make distributions to its beneficiaries without additional U.S. tax liability (except for possible state taxes). Proper planning can ensure that the U.S. trust will obtain the assets with a step-up in the tax basis.
Inheritance to US Persons US Dynasty Trust Structure Israeli tax consequences: Testamentary trust in which all the beneficiaries are foreign residents is not subject to tax and reporting in Israel. Transferring assets into the trust is not subject to tax in Israel.
Caveat This presentation provides a very general and non-exhaustive description of the issues discussed. Accordingly, this presentation does not provide any U.S. or Israeli tax advice and it cannot be relied upon. To the extent required, the viewers should apply to obtain the relevant tax advice in Israel and in the U.S. according to their personal circumstance. Most of the provisions that are examined in this presentation has not yet enacted and there is no case law that deals with them. Accordingly, we cannot assure you that the views which are presented in the presentation will be accepted by any tax authority or court. The presenter is only qualified as an Israeli tax advisor and not as a U.S. tax advisor.