Effy Stern Tax LawProf. Yishai Beer 2011-2012 Tax Law Prof. Yishai Beer 2011-2012 *Lectures were given in Hebrew – this is a loose translation Table of Contents 5..............הבסיס החוקתי להטלת מיסים ואגרות; הכרת המאפיינים השונים של מס, אגרה ומחיר The role of the tax system – 5...........................................................................תפקידי מערכת המס Financing government expenditure..............................................................................................5 Equal distribution of wealth.........................................................................................................6 Directing the conduct of the citizens............................................................................................6 Basic concepts - :6...................................................................................................הגדרות בסיסיות (a) Direct tax/indirect tax – 6............................................................................מס ישיר/מס עקיף (b) Tax, tolls, charges – 7....................................................................................מס, אגרה, מכיר (c) Relative tax, progressive tax, regressive tax – 8...........מס יחסי, מס פרוגרסיבי, מס רגרסיבי (d) Tax brackets – 9......................................................................................מס שולי, מדרגות מס (d) Tax deductions, tax credits – 01..................................................................ניכוי מס, זיכוי מס Choosing a fair and just tax structure:............................................................................................11 Different forms of taxation (in the West):......................................................................................13 (1) Head tax or per capita tax - 31...................................................................................מס גולגולת (2) Income tax - :41..........................................................................................................מס הכנסה (3) VAT – (51....................................................................................מס צריכה/מס הוצאות, )מע"מ (4) Purchase tax – ((61........................................................................................................מס קנייה (5) Estate tax or property tax – 61.......................................................................................מס רכוש (6) Business tax – 61......................................................................................................מס עסקאות Fiscal policy, monetary policy – :71................................מדיניות מוניטארית, מדיניות פיסקאלית The tax system in Israel: (distinction between peyrot and etzim).............................................17 Different types of taxation (cont’d).................................................................................................18 Income tax – 81................................................................................................................מס הכנסה Taxation in Israel (cont’d)...............................................................................................................20 Income tax – 02................................................................................................................מס הכנסה Corporate Tax – 02...........................................................................................................מס חברות Betterment tax – 02................................................................................מס שבח/מס שבק מקרקעין 1 Effy Stern Tax Law Prof. Yishai Beer 2011-2012 Social security – ביטוח לאומיBL...................................................................................................20 Employment tax – 12.....................................................................................................מס מעסיקים Payroll tax – 12............................................................................................................מס שכר ורווח Consumption tax (VAT, purchase tax, customs) – (12...........מיסוי צריכה )מע"מ, מס קנייה, מכס Other taxes (Travel tax and money exchange tax – (22..................................................מס נסיעות Estate tax or property tax – 22............................................................................................מס רכוש Transaction tax – 32.......................................................................................................מיסוי עסקות Stamp Tax – 32...................................................................................................................מס בולים Purchase tax – 32..............................................................................................................מס רכישה 42......................................................................................................................................גישת המקור Economics and Constitutional law regarding taxation – 42..........דינה החוקה הכלכלית ודיני המס Compulsory loans.......................................................................................................................25 Section 245 TO: ...............................................................................................................26 The state’s authority to tax (case law)............................................................................................27 :92.............................................................................הכנסה מחייבת – בירור ההכנסה לפי הפקודה Question 1 – what type of tax – 92......................................................................מה סוג ההכנסה Section 6 TO: ....................................................................................................................30 Question 2 - ‘who is the tax payer’ – 03.......................................................שאלת זהות הנישום Question 3 – regarding international standing – 03...........................................מעמד הבינלאומי Question 4 - The question of timing ((13.............................................................................עיתוי Question 5 – what is the chargeable income – ?33.............................................הכנסה מחייבת Chargeable income ( – )הכנסה מחייבתthe American model....................................................34 Chargeable income ( –)הכנסה מחייבתthe British/Israeli model ((43......................גישת המקור Legislative source for taxation, section 2 – 2 '43...........................................סעיפי המקור, ס Section 2(1): Business or vocation – 63...................................................עסק או משלח יד Section 2(1) Business and vocation and section 2(10) “other sources” ..........................37 04.....................................................................................................עסקת אקראי בעלת אופי מסחרי Section 2(1) cont’d – Incidental transactions of commercial character - עסקת אקראי :14.............................................................................................................בעלת אופי מסחרי In Summary: the tests for incidental transactions..................................................................45 64.....................................................................................הכנסת עבודה, הכנסה מעסק או משלח יד Section 2(2) Employment - 64.......................................................................הכנסת עבודה Tests to help decide whether we are dealing with employment income (Section 2(2)) – הכנסת 64.........................................................................................................................................עבודה Waiters – tips .............................................................................................................................49 15..................................................................................................הכנסה והוצאה רעיונית - אופציות Imputed/conceptual income – 15...............................................................................הכנסה רעיונית Section 2(2) TO: Employment .........................................................................................52 Section 3i TO:...................................................................................................................................54 Option 3 of section 3i.................................................................................................................59 Section 3i: (cont’d)............................................................................................................61 26...............................................................................................................הכנסות פיננסיות לסוגיהם With regards to options given to workers as an incentive we mentioned section 102:.................62 Section 102 TO: Share allocation to employees – 26.......................הקצאת מניות לעובדים Section 2(4): Dividends, interest, linkage differentials, discounts – ,דיבידנד, ריבית 56.........................................................................................................והפרשי הצמדה, ונכיון 2 Effy Stern Tax Law Prof. Yishai Beer 2011-2012 Section 9(13) TO: Exemptions ........................................................................................67 At what point do we tax linkage differentials/interest – 86.....שאלת העיתוי הפרשי הצמדה/ריבית 86................................................................................................בסיס המזומנים – בסיס המסחרי At what point do we tax exchange differentials– 07...............................שאלת העיתוי הפרשי שער At what point do we tax discounts fees – 17...............................................שאלת העיתוי דמי ניכוין 17..................................................................................................................................................אנונה Section 2(5) Benefits – pensions, usufruct, or annuity – 17..............קיצבה מלוג או אנונה Section 2(6): House, property and land (rent, royalties, key money, premiums and other profits derived from house, property, land or industrial buildings) – ,דמי שכירות תגמולים, דמי מפתח, פרמיות ורווחים אחרים שמקורם באחוזת בית או קרקע או בניין 47..............................................................................................................................תעשייתי Section 2(7): Other assets (gains or profits derived from any asset other than house, property, land or industrial buildings) – 67.....................................................נכסים אחרים Section 2(8): Agriculture (gains or profits derived from agriculture, land cultivation, afforestation, or crops) – 67.......................................................................הכנסה מחקלאות Section 2(9): Patent & Copyright – 77...................................................פטנט וזכות-יוצרים Section 8B TO: Income in advance...................................................................................77 Capital gains tax - 87..................................................................................................מיסוי רווחי הון Tax rates ( )שיעורי מסin Israel – before 2003 and after.................................................................79 Time line of taxes in Israel.....................................................................................................81 The international dimension of capital income – 18.................המימד הבינלאומי של הכנסה הונית Various concepts.............................................................................................................................82 What is considered a capital asset (Section 88) – 48...............................................הגדרת נכסי הון Clause 88 TO: ....................................................................................................................84 68.................................הבחנה בין הכנסה הונית לבין הכנסה פירותית; שינוי יעוד; עיתוי; מוניטין Severance pay – 78......................................................................................................פיצויי פיטורים Taxation on reputation – 88...........................................................................................מיסוי מוניטין Transferring assets – 98.....................................................................................................שינוי ייעוד ( שינוי הייעוד בחוקSections 85 & 100) .........................................................................................92 Six types of situations of :29.........................................................................................שינוי ייעוד 49..............................................................................................פרשנות דיני המס; עסקה מלאכותית Artificial transaction ( Section 86) – 49............................................................... עסקה מלאכותית Interpretation of the Tax code – 49..............................................................................פרשנות המס In Summary – the tests for artificial transactions:...............................................................101 101...................................................................................................................הוצאות מותרות בניכוי Deduction of expenses (Section 17) – :201..................................................................ניקוי הוצאות 701..............................................................................................................................השתלמויות Section 46 TO: ...............................................................................................................108 In summary: tests whether deduction will be allowed – 011................הוצאות מותרות בניכוי Mixed expenses – 011............................................................................................הוצאות מעורבות Timing and deduction – 111..................................................................... כללי העיתוי של ההוצאה 211...........................................................................................................................חוב מותנה - תלוי 211.................................................................................................................חובות מותנה/חוב תלוי Warranties – 211..........................................................................................................כתבי אחריות Business entities that have cases pending against them - גופים עסקיים שיש כנגדם תביעות 311.........................................................................................................................משפטיות פתוחות 3 ....... קיזוז הפסדים Setting off losses – 521................................................................................................... We need to give in a minimum of 10 targilim...................מסוימות Section 32 TO: Deductions that are not to be allowed – 121.......................ניכויים שאין להתירם 521.....קיזוז פירותי Section 28(b) TO: ... and 3........................................................ 2..............Effy Stern Tax Law Prof................................................................................... Yishai Beer 2011-2012 Deduction of expenses (cont’d) and relevant legislation (Section 17) – ניכוי הוצאות ותתי 17 '311.................... * Attendance is mandatory * He said that this is not an easy course........... Reading will help for the exam........... For every class (starting next week) we need to give in a targul on the required reading...... and for that reason he stressed that it’s important to attend class.............................. The maximum to write is a page.......... 4 ......................קיזוז הוני Class 1 30/10/11 * There will be a lot of reading.......................... he said that he changes the course every year in light of the dynamic nature of the field and for that reason he said that we should be wary when reading the machbarot of previous years.................................... He explained that the course is complex because this course deals with many disciplines............... * Regarding machberot bechina................................ The point of the targul is to force us to read the material (in other words the targul doesn’t have to be accurate)................................................................................................ He said that you don’t need to have previous knowledge of other courses................................ but nonetheless the course is multidisciplinary................................................126 Offsetting capital – 821......................מגבלות כמותיות להוצאה המוכרת........118 Section 31 TO: Regulations on the deduction of expenses & תקנות מס הכנסה )ניכוי הוצאות (811............. but if can even be a few lines (average is half a page)................קיזוז הפסדים Offsetting profits – 521........................................... The grades of the targul are 1..... And it is worth 20% of the grade (the exam is worth 80%)......... סעיפים חשובים תחת ס Section 30 TO: Restrictions on reductions: ..... Disputes do rise however. For the first few classes we will deal with the introduction and basic questions that arise. With regards to this role of taxation. Equal distribution of wealth Another reason given for taxation is to redistribute wealth in a more equal fashion ( )צדק חלוקתיin light of principles of social justice ( . Financing government expenditure Regardless of the philosophy a given state may have (welfare state or pure capitalist) every state needs capital to finance its programs and to fulfill its everyday functions.Effy Stern Tax Law Prof. The role of the tax system – תפקידי מערכת המס The role of the tax system is to: (1) finance government expenditure. the primary role of taxation is to finance government expenditure.)צדק חברתיWith regards to this function of taxation. Yishai Beer 2011-2012 הבסיס החוקתי להטלת מיסים ואגרות.g. rather this is under tax law. regards the limits put on government programs. (2) promote the equal distribution of wealth (3) . say Joe goes into my pocket and takes 1000$ dollars. the second part will deal with basic concepts ( )הגדרת יסודof tax law. הכרת המאפיינים השונים של מס. there is 1 Regarding the role of the tax system he explained that the whole issue of the protests in Tel Aviv is actually a tax issue 5 . But if the person that took the money was the tax authority than obviously it wouldn’t be a penal issue. and the fourth section will deal with the constitutional aspects of tax law (( )דיני חוקה כלכליםe. charging a tax on imports).g. the third section will be a brief overview of the different forms of taxation. The introduction will have four parts: the first part deals with the role of the tax system. there is unanimity of opinion that this is an appropriate and necessary reason for taxation. This raises various constitutional and administrative issues.1( )צדק חברתי/צדק חלוקתיand to direct the conduct of the citizens (e. So that would be dealt with by the penal law. אגרה ומחיר There are two parts to the course. g.:הגדרות בסיסיות (a) Direct tax/indirect tax – מס ישיר/מס עקיף There is a distinction between direct tax and indirect tax. Regarding the other two roles played by taxation (redistribution of wealth and directing the conduct of the citizens) there is much controversy.g. Indirect tax is paid by he who is not obligated by law to pay it. a smoker that becomes sick ends up being a financial burden on society). Another example would be tax incentives to live in the periphery). a tax on alcoholic beverages or tobacco.). He explained that the justification for the interference of the state (say with the cigarette example) is that a smoker that chooses to smoke is not only doing something despite knowledge of its harmful effects.e.e. it still doesn’t justify the fact that the state needs to be in charge of our pension. As we explained 2 Here I would ask Milton Friedman’s suggestion that despite the justification for this paternalistic argument. To sum up: the role played by taxation which is to finance government programs is an undisputed role regardless of ones philosophy and the proper role of the state. we many times see that taxes aren’t imposed equally (e.Effy Stern Tax Law who to take from? how much to take? and who should receive? etc. The issue that arises here is paternalism. income tax). mandatory pension plans2). He explained that in some areas the tax authority doesn’t want to cause us to abstain from a certain activity. Directing the conduct of the citizens Prof.g. Direct tax is paid by whomever is obligated to pay the tax according to law.g. Disagreements with regards to questions such as how to divide the cake (i. According to this definition direct tax is the tax paid by someone who is obligated to pay it (e. but on the contrary it tries to encourage it (e. but is also imposing negative externalities on society (e. the tax authorities) is problematic. The classical distinction between the two was ‘who is paying the tax’.g. The third role we mentioned is that the tax authority is supposed to direct the conduct of the citizens (e. With that being said. rather they should require us to put aside a pension but privatize pension plans so that the market can decide what where and how (just a thought: its possible that this area of privatized). 6 . Basic concepts . if the justification for cigarette tax is based on its harmful effects than why should a local brand be cheaper than a foreign brand?!) This demonstrates the fact that this role played by taxation (i. Yishai Beer 2011-2012 much disagreement. we will now be obligated to pay a fee when we go to the emergency room. He continued with the example and said that say that the fee is 20$. Yishai Beer 2011-2012 indirect tax is when the person who is obligated to pay the tax “rolls” the responsibility onto someone else (who otherwise wouldn’t be obligated to pay the tax). He gave another example of the current issue in Israel regarding the doctor’s protest. that means that the state is subsidizing the other 80$. tolls.g. . The last concept we listed was .Effy Stern Tax Law Prof. This tax is only paid if you buy. Fees ( )אגרהrefers to a mandatory payment decided by a government authority. charges – מס. a person dies and his inheritance owes taxes. VAT ( )מס ערך מוסףthe tax we pay when we buy something in a store) than we will say it’s an indirect tax. although as we see.מכירThis is when the state sells a service. Assuming that in light of the doctors protest. was in the US for the past year.אגרת השידורJoe. Ruben goes to the market to buy a Tupac CD. For this reason we made a different distinction between direct and indirect tax. but here there is a compensation to the payer. another store tells him that if he pays in cash than he will charge 100$. water.g. and John is in Israel and watches TV all day. if you don’t buy the product than you don’t have to pay the tax. This is sale like any other market sale (e. there is a compensation/benefit). This is despite the fact that he is dead and won’t benefit from the tax he still has to pay). (E. if the tax is a tax on consumption (( )צריכהe. (b) Tax. This he explained 3 This seems like ?מכיר 7 . according to which.g. but there is not necessarily a direct correlation between the individual taxpayer and the benefit dispensed (e. One store charges 90$ plus tax totaling 100$.g. Both of these people have to pay the tax as mandated by the law despite the fact that one benefited from the tax and the other didn’t. we look at what is the basis of the tax. and in reality the cost of the doctor is 100$. Basically he is charging you the tax by building it into the price – he is rolling the responsibility on to you – the customer. this would be an example of a fee ( )אגרהbecause anyone who want to go to the emergency room has to pay it3. If the tax is a tax on income or capital ( )הוןthan we will consider it a direct tax. מכיר Tax ( )מסrefers to a mandatory payment that is decided by a government authority wherein the payer doesn’t receive any sort of direct-compensation for his payment (e.g. אגרה. the rich man or the poor man. goes up.e.000$ or 100. What happened than is that people started incorporating because corporations don’t have to pay bituach leumi. but if you take it from the poor man you are taking away his breakfast). progressive tax. Either way this was an example of regressive tax and he said that while it sounds unjust. costing the government millions as a result. To explain the logic behind such a tax structure we mentioned a current matter being suggested in the Knesset which would be to cancel the bituach leumi payments.000$ pays less tax than the guy making 40. Yishai Beer 2011-2012 is what we call a negative tax. מס פרוגרסיבי. this would be an example of positive tax (i. (d) Tax brackets – מס שולי. Progressive tax says that as your income goes up the (percentage) amount of how much tax you pay. Regressive tax is the opposite of progressive tax. regardless if you earn an annual income of 20. Prof. If it’s a relative tax than we don’t need to establish brackets 4 Number is arbitrary 8 .g. This would be a situation where the rich man pays a lower percentage of tax than the poor man. Because many people were upset they canceled the tax ceiling. מס רגרסיבי A relative tax is where everyone pays the same tax (e. So this he explained ends up being a situation for regressive tax. needs to establish tax brackets. everyone pays 10% of their income. In light of this they are considering reversing the situation.000$.000 and up4. but relatively speaking everyone pays the same amount (GOP candidate Herman Cain advocated a relative tax). The logic behind this tax structure is based on what we mentioned above regarding distribution of wealth. He explained that historically the bituach leumi tax was according to the relative income of the person. than you paid the same amount). tax). מדרגות מס Regarding מס שוליand :מדרגות מסhe explained that any tax system that is not a relative tax system. An opposite example would be where the state would charge 200$ (c) Relative tax.000$) according to this system the rich person ends up paying more than the poor man. and the answer (according to this theory) is that it is worth more to the poor man (because if you take the dollar from the rich man it wont effect him.Effy Stern Tax Law for the visit to the ER. regressive tax – מס יחסי. because proportionally speaking the guy making 100. up till a certain point where it became a flat tax (once you made 40. there are situations where we would want a regressive tax. This had catastrophic effects. As the saying goes ‘to whom is the last dollar worth more. )הוצאות לצורך הכנסהSo when configuring taxes. Class 2 1/11/11 Last class we discussed various concepts of tax law (progressive. so the total amount that he would pay is 3100$. However in Israel there is an exception.100$) that is why we say מס שוליor incremental tax wherein the tax percentage progresses in increments. So in the aforementioned example he would pay 100$ on the first 1000$. Sammy’s Pizza sells one million worth of pizza. Yishai Beer 2011-2012 because everyone pays the same percentage amount. on the next level he will pay 400$.000$ would be 4. relative. He explained מס שוליwith an example: say for the first 1000$ you make you pay 10% tax. because 40% of 10. wherein there is also a relative tax. he is allowed to do deduct these expenses. regressive. tax credits – ניכוי מס.Effy Stern Tax Law Prof. So if you were to graph this than we would see steps or brackets – tax brackets. etc). and for every additional dollar up till 10. זיכוי מס He explained tax deductions ( )ניכוי מסwith an example. on the next level he will pay 600$. This doesn’t mean he profited one million. With regards to tax credits ( )זיכוי מסthis refers to the amount that reduces the .000$ you pay 40%. after deducting these expenses he pays tax on the remainder. for every additional dollar up till 3000$ you pay 20% (the 2000$ is the )שוליand for every additional dollar up till 5000$ you pay 30%. But the moment you have a progressive or regressive tax than you need to establish brackets which establish who pays how much. this is when we are dealing with corporate tax (a big company and a small company will pay the same [relative] tax)5. In this case the שיעור המס השוליis 40%. (d) Tax deductions. because he first has to deduct his expenses of the business ( .000$ (and he is only paying 3. 9 .חשבון המסHe explained that the tax system 5 In light of the Trachtenberg report the corporate tax will be raised to 26-27% (currently it is 24% of profits). In England the corporate tax is progressive. He explained that it would be inaccurate to say that he pays 40% tax. As we said the tax structure in Israel is a progressive tax system. The reason why Israel has a relative corporate tax is because it wants to discourage people from opening subsidiaries to bring down their tax bracket. and on the final level he will 2000$. ובלבד שלא יינתן זיכוי בכל אחת משלוש שנות המס כאמור.)חשבון מסRegarding which is better for the taxpayer. ‘you donated 1000. Section 46 TO: תרומה למוסד ציבורי אדם שתרם בשנת מס פלונית סכום העולה על 013 שקלים חדשים ()תיקון מס' 5664. than ניקויwould basically mean that we deduct 1000 which means that they in fact earned 900. there are two groups of tax payers. provided that the amount doesn’t exceed 30% of their chargeable income of the given year. 999. if the government wants to encourage philanthropy it depends on which group you are trying to encourage. because out of every 1000 they usually only get to keep 600 (they pay 400 out of every 1000 to the government). So back to the original question.6)ניכויthe other group (middle class) that pays 20% would rather a credit because in this case a deduction is worth 200$ (for every 1000$. because they pay 20%) whereas a credit (as explained in the above footnote) would be worth 350$).g. or in other words they would deduct 350$ off of your tax account ( .על התקרה לזיכוי For instance if you have a receipt that you donated 1000$ to Yad Sarah. יזוכה מהמס 2011 בהתאם להוראות סעיף זה בשלוש שנות המס הבאות בזו אחר זו. לפי הנמוך מביניהם ) להלן – התקרה 2009 -תש"ע -הודעה תשע"א לזיכוי(.ניקוי 10 . ובשיעור הקבוע בסעיף 621)א( מסכום ( ' 2005 -תשס"ה התרומה – אם הוא חבר-בני-אדם. סכום העולה על התקרה לזיכוי שנתרם באותה שנת מס. Because basically the government tells the guy. In Israel we have the credit ( )זיכויsystem.636. Both of these groups donated 1000$ each: The group that pays 40% would choose a tax deduction ( . Whereas זיכויwould only be worth to them 350 (the law says that with donations the tax is 35%).Effy Stern Tax Law Prof. or a credit. one group pays מס שוליof 40% and the other group pays 20%. 6 If this group was earning 1 million. Yishai Beer 2011-2012 wants to encourage philanthropy to public institutions (public institutions that are recognized as such by the law). what that basically means is that they save 400. than you would receive back 35% of 1000% (350$) as a tax credit than you would receive 350$ back.7 שקלים חדשים. יזוכה מהמס שהוא חייב בו באותה שנה בשיעור ( ' 2000 "תשס תיקון מסא-741(של %53 מסכום התרומה – אם הוא יחיד. what this means is that they saved 400 (60% of 1000). Tax deductions [may] have a regressive effect (because deductions ( )ניכויworks to the benefit of the rich – the richer you are the less you pay). או על 000. the answer is that it depends on the מס השוליof the person (e. so we will deduct another 1000 of what you made. thus they would rather . או למוסד ציבורי כמשמעותו בסעיף 9)2( שקבע לענין זה שר האוצר ( תיקון מס 1994 "תשנ תיקון מסד-421(באישור ועדת הכספים של הכנסת. )א ( 1984 תשמ"ד-' 69(לקרן לאומית. ובלבד שלא יינתן זיכוי בשנת מס פלונית בשל ((154 'תיקון מס 2007 -תשס"ז סכום כולל של תרומות העולה על %03 מההכנסה החייבת של הנישום באותה ()הוראת שעה שנה. to a public institution (in accordance with section 9(2) TO) than they are entitled to a tax credit. According to 46 Tax Ordinances (TO) if one gave a donation of over 310 shekels. בשל סכום כולל של תרומות העולה . a deduction. she would continue to work in the law firm and earn 14. Yishai Beer 2011-2012 Neutrality: In deciding ‘how to choose a just/fair tax structure’. We want that the tax system will do its best not to effect people’s decisions.). and the boss promises to send him a cleaning lady that will clean the house for him valued at 45$. thus 58%). In a world without taxes. Before she had children she was earning 14. the basic principles on which the structure must be based must first be established. So. but she is an earner as well (the money that is not being spent on watching the kids. or in other words that it should remain neutral (Examples where tax law is not neutral: you have a couple that is considering getting married. not only does she work. 11 . cook. and focus his energies on what he is good at (programming). paying someone to clean. people will make their decisions based on tax considerations. One day before he is about to head home his boss tells him to stay overtime and for each extra hour he will receive 100$ (Jim pays 45% taxes.000$. in a world with taxes he will choose to go home (because as we said for each 100$ he is only left with 42$ (58%) and than he will have to go home and pay a cleaning lady 45 (he losses 3$). Second avol. So in a world without taxes Jim would choose to stay at work.הכנסה רעיוניתthis term refers to all work wherein the reward is in שווה כסףsuch as a housewife. and with Bituach Leumi he pays another 13%. but because of the tax structure he will choose to go home and clean. The first principle we mentioned is the principle of neutrality. However.Effy Stern Tax Law Choosing a fair and just tax structure: Prof. In the example he gave he valued his wife’s house-work at 8000$. So what we have is a situation where from a utilitarian point of view we would want this guy to work at what he is best at – programming. However in a world where there are taxes7 (and the מס שוליis 50%) than the rational decision would be for her 7 In a world where there are taxes but there aren’t taxes or pay for that matter on the work of a housewife. interestingly enough it’s possible that there would be tax incentives that may influence their decision in one or the other direction. In a world without taxes we would expect persons to act in way that maximized their individual utility. Jim is a computer programmer. in a way that served to their greatest benefit. He gave another example: You have two lawyers that are sitting outside the court house. However in a world with taxes.000$ and than spend 8000$ on all the house chores (that would be the rational choice). As we explained the law tries to channel the citizenry towards a desired conduct. So in response we would say that first avol she is working (she is running the house). and they are trying to figure out how to divide the finances. complaining about the fact that their wives don’t work (they are busy at home running the house). The term he used for the theoretical value of the work of a housewife was . etc. because he is forced to rent an apartment. 8 9 This very issue was dealt with in the case 4243/08 .g. Horizontal justice & Vertical justice: With regards to justice and equality we mentioned horizontal justice and vertical justice: If we are trying to achieve a just tax structure than we should strive for a horizontal system. they would all do as they wish. yesterday’s example with bituach leumi. Carl invested the money in a money-making venture. Nathan.g.ורד פריSee infra at 100 It’s a reduced tax [ ]שיעור מופחתrate but nonetheless there is a tax. the logic was that there were a few tycoons in Israel. And according to vertical justice we would put each person in the tax bracket in accordance with their wealth. Brothers. Utility: With regards to considerations of utility occasionally we try to adjust the tax structure but in the end it doesn’t work (e. he is unable to deduct the expense as a business expense) and every dollar that he earns out of his business venture is subject to full taxes! So out of the three brothers. He gave another example: There used to be an inheritance tax in Israel. each brother would be taxed. being that he spent all his money on the business venture (and being that he is renting an apartment for his private use.Effy Stern Tax Law Prof. So once again we see the tax structure influencing our decisions)8. Nathan ends up in the best situation. Nathan used the money to buy an apartment (thus being that he could rent it for 5000$ a month it’s as if he is making 5000$ a month). The problem with such a system is the inherent difficulty in applying it. he rented out the apartment for 5000$ a month and than rented somewhere else. Thus again we see that the tax structure is not neutral and it influences the decisions we make. He explained that according to the law although Nathan is theoretically making 5000$ it is not taxable. and would be taxed equally for their investment). Solomon also bought an apartment but rather than live there. meaning that each source of income should be taxed equally (so in the aforementioned example of the three brothers. received 250k each as an inheritance. and Carl. Carl’s situation is even worse. whereas Carl ends up in the worst situation. 12 . However. We also see the tax structure influencing our decisions with regards to housing ( )דיורand whether to buy or to rent (e. Solomon. because if she worked at the law firm than in the end she would only end up with 7000$ and than she will have to pay another 8000$ for the house work. So in a world without taxes. But in a world with taxes their decisions would possibly be different. Solomon would have to pay tax on the rent money that he is receiving9 (and the house that he himself is renting is not considered an expense). Yishai Beer 2011-2012 to stay at home. and therefore it’s important to get a deeper understanding of it. it said that if you want your head than you pay a tax. which is that it is easy to collect.מס גולגולת A head tax was common in ancient Rome. A Disadvantage of income tax. and for that reason you won’t find any western country that has a head tax. To sum up: In approaching a tax structure and trying to figure out which road to take. or in other words. the principles that need to be looked at are the principles of justice. the problem was that it wasn’t just. a reason why a state cant rely solely on income tax is because: there are people that don’t pay their income tax. In Israel there was a tax similar to a head tax known as .מס נסיעותbut it was repealed in 1985. Crudely put. it takes away the incentive of people to save (e.:מס הכנסה A reason why this tax is so popular is because of the advantage that it has. and neutrality. (2) Income tax . Thereby making the tax inefficient). utility. He explained that the tax system constantly evolves and changes.g. equality. At a later date we will discuss ‘what is income’. Different forms of taxation (in the West): (1) Head tax or per capita tax . This was an easy and efficient tax to collect. In 1981 the inheritance tax was repealed being that the administrative costs involved in collecting the inheritance tax were higher than the state was making off of the inheritance tax itself.Effy Stern Tax Law Prof. or in other words each person has to pay a head tax. Yishai Beer 2011-2012 and there is no reason that their children should receive all the money and become tycoons as well. Class 3 6/11/11 We began with a brief overview of various tax systems that exist in the world. if I receive dividends 13 . they are taxable). While he draws the same income as Ruben.000$ of expenses becomes 1. if you make a lot this year we will tax you a lot. and if next year you make a little than you will be taxed less.000. He writes his income at the end of the year (31/2012). lastly. inflation10. he opens his books twice a year. thus his 500. he has no taxable income (because by going with the oncoming year’s inflation rate. because the money that the doctor is making at age 50 is compensation for working hard for the past 30 years.000$ in expenses and thus he has no taxable income!).g. each one making the exact same income. so if it’s a year where there is 100% inflation. )מע"מ 10 See next paragraph 14 . Regarding the aforementioned disadvantage of inflation.)מיצועTo explain the concept of averaging he gave an example of a doctor that invested 30 years of his life trying to become the great doctor that he became. On January 1st he writes income of 1.000$ in taxes! What we see from here is that you can have several tax payers. regarding his expenses he takes care of that on 30th of December. We than gave an example of Levi. than by playing this game.000$.000$ and he has expenses of 500. 1$ becomes 2$. It is an annual system. and how they play the game.000. with income tax there is no averaging ( . he explained that when there is inflation the tax system gets crushed ( . but each guy will pay a different amount of taxes.)מתרסקBasically what happens during inflation is that it creates advantages for savvy people that understand inflation while those that don’t loose out (e.000. and thus technically the tax system should divide his million dollar paycheck over 30 years! So we said that in this sense the tax system is not fair. so because of inflation his expenses will have become worthless thereby forcing him to pay the full 1. Ruben’s chargeable income ()הכנסה מחייבת for 2011 will be 500. In 2011 he is owed 1.Effy Stern Tax Law Prof. finally 30 years later after he becomes a great rich doctor. based on inflationary rates.000$. Yishai Beer 2011-2012 on stocks. and he writes his expenses on 31/2012. who walks in the door! The tax authority! From an economic ( )כלכליperspective it isn’t fair.000. Simon on the other hand is more sophisticated. (3) VAT – )מס צריכה/מס הוצאות. What this shows us is that the chosen tax structure looses its relevance during inflation. the million dollar paycheck reflects his years of handwork.000$. this example takes place during a time of inflation: Every January 1st Ruben receives all debts (accounts receivable) and pays all outstanding debts (accounts payable) to suppliers. by having VAT you open up a Pandora’s Box. He explained that it is regressive because the poor man is forced to buy the basic amenities (heat. VAT is paid on a monthly basis therefore the issue of inflation is less prevalent (because rates don’t change as drastically in the course of a month). So basically the court is kept busy dealing with such ridiculous cases.VAT ( . however he explained that it results in absurd cases coming to the House of Lords. So if taxes on basic amenities amount to 2k.)מע"מ This is a most efficient form of taxation because it’s easy to have everyone pay it.מס הוצאותWe began with value added tax .Effy Stern Tax Law Prof. He gave another example with the progressive tax idea in Israel where Eilat has no VAT and all that results in people going to Eilat to buy their products in Eilat. what comes out is that the store-owners become the tax collectors for the state. etc) and those amenities are taxable. such as the case regarding a mini-skirt which the store listed as a children’s garment (and thus it is exempt). so what happens is the remaining 100% of his meager income is taken away by taxes. We will get back to this tax and its applicability in Israel. In the UK they have a progressive VAT tax. Yishai Beer 2011-2012 We than went on to מיסוי צריכהor . (5) Estate tax or property tax – מס רכוש 15 . than the poor man is forced to pay all his income in taxes whereas the rich man has 98k leftover). Also unlike with income tax which is annual. whereas the percentage of the rich man’s income that is taxed is much less (example: if a rich man makes 100k and a month and a poor man makes 2k a month. (4) Purchase tax – ()מס קנייה This is the tax like we have in the US where you pay a tax every time you buy an item. He explained that for this reason there is a movement that is calling for a progressive VAT tax. Every time you buy something or you pay for a service you pay a tax and than the store-owner or service provider passes on the taxes to the tax authorities. and thus we see that in many instances. Under this tax basic items wouldn’t be taxed whereas luxury items would be taxed. because you only pay if you buy and if you buy than no matter whom you are you pay the same amount. water. The disadvantages of this system are that: there are those store-owners that play tricks. Furthermore VAT is considered a fair and equal tax. but a more significant disadvantage of VAT is that it is a regressive tax. whereas the tax authority claimed that it is an adults skirt. so I give him one room of the mansion each year)! He mentioned the case :))שפארShepar was one of the best lawyers in the country. The solution to this hole in the tax is that presents are taxable as well. An additional problem that comes up is that say Tim who is poor inherits a luxury apartment. The disadvantage with this is that there are ways around the system (in the example of inheritance tax. The justification for this tax is redistribution of wealth. Another problem with estate tax is that property tax needs to be appraised so that its value can be ascertained so that it can be taxed. (6) Business tax – מס עסקאות A transaction ( )עסקהmeans a transfer of wealth from A to B. This case ended up coming to the Supreme Court. now he is forced to pay a estate tax which he can’t afford to pay. because it could be that Joe financed the purchase of the 10 acres (it could that he owes more than he owns – Although Joe owns 10 acres of property it could be he owes the bank 50k for the property) thus we see that owning property itself doesn’t automatically mean that the owner is rich.g. I will simply give the money as presents to my children before I die). In the 90s they started taxing villas. whereas the tax authorities will always say its worth more. He explained how this is a bad tax with an example: Say Joe has 10 acres of property in Tel Aviv. and the court ruled that we don’t go by the registration ( )רישוםrather we go by the essence ( )מהותof the estate. He gave an example with inheritance tax. So he went and turned his villa into three apartments and listed his house as a condominium complex ( )בית משותףso that he wouldn’t have to pay the villa tax. say I want to bequeath my mansion to my kid. This in turn will result in his selling of the party. Yishai Beer 2011-2012 The logic behind this tax is if your rich (if you own property) than pay a tax on your property. so the owner will always claim that it’s worth less. the 10.000$ deposits a grandfather might put in his grandchildren’s accounts. in that it influences the decisions of the tax payer. The job of tax lawyers in these countries is to figure out ways to make big presents small (e. That doesn’t mean that Joe is rich. he had a fancy villa. 16 . Such transactions can be taxed. The problem with this solution is that once again the system becomes regressive (because the poor are also forced to pay taxes on presents) thus what these tax systems do is they come up with various compromises (such as presents up to a certain amount are not taxable) to make the system more progressive. Thus again we see a lack of neutrality of the tax structure.Effy Stern Tax Law Prof. if your poor (if you live in a tent) than don’t pay. this would be . Budgets are usually annual. If there is deadlock regarding a budget than the government collapses.)הכנסה מהון 4th Class 8/11/11 17 .הוצאות מס The tax system in Israel: (distinction between peyrot and etzim) Israel. For this reason most western countries began to add a column listed as . and you have elections. the (income) tax code still contains many similarities to the British system. and income from the tree (or . What this means is that the treasurer is forgoing a tax or in other words it is subsidizing a certain area. every year his trees provide him with fruit.הכנסה מאץThis is the (British) distinction between income from the fruits (income that repeats each year). This distinction ended being accepted by most of the western world. and therefore in the example with fruits and vegetables the amount that the state is forgoing because of this subsidy should be listed in the balance sheet (because that is money that could have possibly gone to something else). monetary policy – :מדיניות מוניטארית. like most of the former colonies of the British Crown. However In 1961 Israel established its own unique system. Nonetheless. and therefore in light of this absurdity (which was discovered by some Harvard Professor) the state should be obligated to add a third column to its balance sheet which deals with area that are exempt from tax.)מקור הכנסהIf he sells the field than he will receive a one time fee. inherited its tax system from the British. we gave an example: Joe had a field with fruit trees. The British system distinguished between peyrot and etzim (income that is derived from the etz and income that derived from the peyrot). Yishai Beer 2011-2012 Monetary policy is decided by the head of the bank. Since that point it has been revised many times. However if he sells the trees than he has no source of income ( . He gave an example: in Israel all products have a VAT besides for fruits and vegetables. He explained that budget ( )תקציבis presented by the executive. and is voted upon by the legislature. To better illustrate the distinction.הוצאות מסHe explained the absurdity that results from this concept. מדיניות פיסקאלית Prof. Fiscal policy is decided by the government.Effy Stern Tax Law Fiscal policy. The problem is that in normal western democratic country we would want the balance sheet of the state to list the liabilities and the earnings. Lastly he mentioned the concept of tax expenditure . it is not the peyrot itself) and thus it is not taxable. Different types of taxation (cont’d) Income tax – מס הכנסה In its raw form this tax was inherited from the British. for this reason it is important to discuss taxes though they may no longer be in effect. However if he sold the fish and the boat to the same guy for 102000$ than the whole transaction would be treated as honit and thus not taxable! We gave another example with a field owner. than the share is like a etz (it is the source of the peyrot. As we explained in a previous lecture. etc. say he sold the fish to Ruben for 2000$ and he sold the boat to Simon for 100. a dividend is peyrot of the stock. and thus it is taxable. The fish that he sells are the fruits of his labor (or the fruits of his fishing rod and boat) and thus they are taxable ( )הכנסה פירותיתwhereas if he decided to sell his boat than the money he makes would be considered like the tree ( )הכנסה הוניתand thus it wouldn’t be taxable. whereas with profits that come from the etz don’t have the ability to regenerate income. We explained that with peyrot (profit of the fruits) the profits have the ability to repeat themselves.Effy Stern Tax Law Prof. We gave an example of s shareholder that receives a dividend. Yishai Beer 2011-2012 Last class we mapped out the different types of tax structures that exist in the West. taxes that were once obsolete many times end up being brought back to life as a result of political reasons. In a previous lecture we mentioned the distinction between the etz and the peyrot.000$. We gave another example of a fisherman. Today we will discuss the tax regime of Israel. The tax result would be that the fish sale would be considered peyrutit and taxable whereas the boat sale would be considered honit and thus not subject to taxes. We will also discuss taxes that were once in effect but were repealed. Israel. However if a shareholder sells his share. but it has been revised many times since. We will discuss the different types of taxes that exist in Israel. Problems with the distinction between Etz and Peyrot: The aforementioned distinction between peyrotit and honit is problematic being that most income can be categorized as both peyrotit and honit! We illustrated this point with the previous fisherman example: We have a fisherman and he decides to sell his remaining fish and his boat. If he 18 . Similarly like to the examples above. Another example which demonstrates the problematic nature of the distinction between peyrot and etz would be with bond washing . if he sells both the fruit and the field to the same person than the whole transaction would be considered honit and thus wouldn’t be taxable11. the seller (or the taxpayer) can choose to sell to the same person or to two different people. Taxation in Israel (cont’d) Income tax – מס הכנסה Just to clarify: – הכנסה פירותיתtax on the yield of the business. the only difference is as far as taxes. Thus A is entitled to fifty thousand. 11 19 . So the bond is capital (hon) and the interest is peyrot. So he answered that the Afula mall (if I sell it in a few years) will be hachnasa honit whereas the cafeteria would be considered hachnasa peyrutit. We now have to decide which property to buy. A year passes. Yishai Beer 2011-2012 sells the fruits of the field to A and the field itself he sells to B than the fruit sale would be peyrutit and taxable. thus we see that from am economic perspective there is no difference. whereas the sale of the field would be honit and not taxable. 12 A bond is a loan with ( שיעבודinsurance – such as a mortgage on my house).Effy Stern Tax Law Prof. On the assumption that there is no change in the exchange rate or the rating of the lender. Or he will sell us the contract to the central mall of Afula (which is scheduled to be built by 2020). Regarding both properties we have all the information and statistics regarding how much we will make. If I sell a moment before the bond expires than one million fifty thousand is all capital. However. whereas if I sell it after the bond expires than it would be separate. either he will sell us the cafeteria of the IDC. What we see from all this is that the taxpayer can manipulate his assets to be considered honit or peyrutit and for that reason the distinction between honit and peyrutit is meaningless. A third problem with the distinction between peyrutit and honit can be understood from an economic perspective. the value of the bond (the loan) is one million.21כיבוס אגרות חובFor instance: A lends B a million dollars with 5% interest. – הכנסה הוניתthe sake of the profit-yielding apparatus. He explained by way of example: He offers us to choose between two different properties/assets. Betterment tax – מס שבח/מס שבק מקרקעין In addition to having peyrot and hon Israel also has a third category of taxation known as a betterment tax .Effy Stern Tax Law Prof. He explained that BL has tax aspects and insurance aspects to it. Social security – ביטוח לאומיBL Another tax in Israel is ( ביטוח לאומיBL). Corporate Tax – מס חברות Israel has a corporate tax and it is a relative tax. 31רווח הון על עסקות נדל"ןThis is a tax that is unique to Israel (capital (hon) in the form of real estate has a special tax). with BL they go according to how much you make. regardless of the risks imposed by your job. However unlike with insurance where they charge based on the individual risk of the person requesting the insurance.חוק מס שבח מקרקעיןHe explained that this tax was created out of sin/by mistake because in the 50s they wanted to tax real estate deals so they created the aforementioned law. In light of the Trachtenberg report the corporate tax will be raised to 26-27% (currently it is 24% of profits). In the 60s they passed the new פקודת מס הכנסהand the plan was to nullify the חוק מס שבח .מקרקעיןbut they never did. Employment tax – מס מעסיקים Until about five years ago there was also . Yishai Beer 2011-2012 Israel has income tax and it is a progressive tax (at the pinnacle the tax rate ( )מס שוליis 45%). In light of the Trachtenberg Report the מס שוליwill be raised to 48% plus a 2% tax on the tax. As time goes by this becomes more complicated as the two statutes have been taking on separate and distinct forms. So there is tax on הכנסת הוןand on hachnasa peyrutit which are both established in the tax ordinances ( פקודת מס הכנסהTO) and for real estate there is a tax which is established in .מס מעסיקיםThis meant that if you employed someone than the employer would have to pay a tax (which was a percentage amount of the amount that he 13 tax levied on the increase in the value of real estate from the time it is purchased to the time it is sold 20 . thus we see that its not a pure insurance. g. this was a dominant course of income for states. Another consumption tax is purchase tax ( )מס קנייהwhich is relevant to select products17 (e. Trachtenberg says that we should obliterate the customs tax regardless of agreements and treaties (e. customs) – )מיסוי צריכה )מע"מ.g.5%? 16 He explained that when we buy gas there are 3 taxes. the tax on gasoline16).5%15 of the salaries that it paid. purchase tax. The tax on financial institutions is in place of the מס ערך מוסףlevied on regular businesses. etc). cigarette and liquor).000 nis than the NPO would be exempt from paying this tax. insurance companies.g. Consumption tax (VAT. Payroll tax – מס שכר ורווח Prof. This tax is also levied on financial institutions (e. This tax is based on section 2(2) TO. banks. a century ago. 17 This is a tax that applies to certain items that are listed in the law (cars. Another consumption tax is excise tax ()בלו (e. So if he was paying the worker 100k and the e tax rate was 10% than he In Israel there is a payroll tax based on חוק מס ערך מוסףwhich is levied on non-profit organizations ( )מוסד ללא כוונת רווח – מלכ"רat a fixed rate of 7. At the time most of the fabric in Israel was manufactured in Israel.)כס Regarding customs. The reason why we (practically) don’t have a customs tax is because of liberalization and the various treaties and agreements that we have with other countries which call for a reciprocal relationship wherein they don’t charge us customs tax on condition that we don’t charge them. As of 2009 if the amount didn’t exceed 160.Effy Stern Tax Law would have to pay 10k taxes for the additional worker that he hired)14. מס קנייה.)מע"מThis is the tax paid on all products that one purchases (besides for fruits and vegetables. . מכס One such tax is VAT ( . 21 . and )חברי הבורסה לניירות ערך בתל אביבat a fixed rate of 16% of the salaries paid and the profits that it yielded. Yishai Beer 2011-2012 was paying the worker. pension funds. מס ערך מוסףand בלוwhich is a percentage that is paid on the gas purchase.g. At a certain point Israel came to the conclusion that it was more efficient to buy fabric from abroad and focus on areas of industry 14 15 He explained that there is a tax called מס ערך מוסףwhich still exists and it is similar to the .מס קנייה. It used to be that if you wanted to buy fabric from abroad you had to pay a high tax. Another form of consumption tax is customs duties מ ( .מס הכנסה Or is it 6. nowadays it isn’t. which are exempt from VAT. ))בנייהAs we said this tax no longer exists. than you are obviously rich and therefore we will tax you. etc. the problem of course with sending an industry abroad is that people of that given industry loose their jobs. Yishai Beer 2011-2012 where we have a comparative advantage. Another problem that would come up is that people had property that they didn’t build on simply because they didn’t get building permits היתר .מס רכושLast lecture we mentioned the advantages as well as the inherent problems with this tax. Other taxes (Travel tax and money exchange tax – )מס נסיעות Two other taxes that once existed in Israel were the travel tax and the money exchange tax.e.Effy Stern Tax Law Prof. Estate tax or property tax – מס רכוש As of the year 2000 there is no longer estate tax .g. fabric] abroad and we began focusing on technology. This was the debate regarding cottage cheese (we could get rid of the customs tax. The problem was that the state would assess the property at one value. In the 80s (early 90s) the travel tax (which was a tax paid with the purchase of an international plane ticket) was repealed. The questions than becomes if we want to do that). and it to was repealed. the state would say that it wasn’t). and than it would become cheaper to buy foreign brands of cottage cheese but that would obliterate the Israeli cottage cheese industry. Likewise there used to be a tax on exchanging money (if you changed your money into foreign currency). and many cases ended up in court (e. And thus we sent those industries [i. while the property owner would have the property appraised at a different value. the docks or the parking lot of a supermarket: the supermarket would say that it is part of the building. The tax was established in a way that if you didn’t build on a certain percentage of your acreage than you were taxed (this seemed fair in that if you have 10 acres and all you have is a villa on it. Transaction tax – מיסוי עסקות 22 . than it’s considered an עסקהand there is a purchase tax (this is despite the fact that there is no מס מתנהin Israel . Yishai Beer 2011-2012 This category of taxes includes inheritance tax ( )מס עיזבוןand presents tax ( . and them to theirs! 19 You have to pay a third of the amount that you have to pay if you bought it under regular circumstances. Another letter says that in light of cleaning that the city had to do we need to pay a tax for that.Effy Stern Tax Law Prof. 20 It would seem that according to this it’s always worthwhile for parents to buy the apartment for the children in that you will than pay a reduced מס רכישהrate!? 23 . He explained that parents that give their child an apartment.))מס רכישהThis is a progressive tax. Stamp Tax – מס בולים Every business needed to have stamps. If you buy a house or property than the buyer needs to pay a purchase tax ( . we need to pay a participation fee (דמי .)השתתפותWhat is the validity of these taxes? 5th Class 13/11/11 18 I disagree! What right does anyone else have to the money that I earned! I earned it and it’s my right to pass it on to my children.though it’s lower than the typical amount19)20. The tax was repealed in 2006.)מס מתנהAs we already mentioned the inheritance tax was nullified in the 80s. A third letter is from the ministry that’s says that in light of the fact that contractors (across the state) lost their jobs.g. and the tax was paid with the purchase of the stamps. One letter is from the municipality that says that you need to pay a fee ( )אגרהbecause of the construction for a parking lot at the IDC. Meaning that the more expensive the house the higher the tax rate. Beer claimed is a justified tax18. Purchase tax – מס רכישה This tax is still relevant and (e. which Prof. Trachtenberg wants to revive this tax. Also if this is your second property than you will pay more than if it was your first property. We ended the lecture with a case study: say you come home and there are three letters waiting for you. e.g. There are various other questions that can also be asked.מלוות חובהThis sort of loan was common in the early days of the state. The first concept which requires elucidation is compulsory loans . According to the constitutional regime we live in. nowadays it no longer exists. except that one pays more taxes and the other pays less taxes. They both receive the same gross salary. . can the Tel Aviv mayor send its citizens a letter obligating them to pay a cleanup fee)? To answer this question the first thing that needs to be checked is whether he had the (legislative) authority to do so. What is the validity of these taxes? Does the Mayor of a city (i. One letter is from the municipality that says that he needs to pay a fee for the construction for a parking lot at the IDC.)חקיקה ראשיThus with the aforementioned example of the municipality. Yishai Beer 2011-2012 גישת המקור Economics and Constitutional law regarding taxation – דינה החוקה הכלכלית ודיני המס We ended last lecture with an example of three letters that were waiting for Ruben in the mail. One is a guy one is a gal.תשלומי חובהwe are not dealing with voluntary taxes. This rule is stated in חוק יסוד משק המדינהwhich states that there can be no taxation without legislation ( . taxes can’t be imposed unless there is legislation that authorizes the state to tax. for instance: Two students finish law school and join law firms. The discipline that will deal with the issue of such a situation would be constitutional law. . מלוות חובהand . It would be in constitutional law that the victim of the discriminatory taxation will find the remedy. the municipality) have the right/ability to send such a letter asking Ruben to pay a certain fee in light of circumstances (e. in light of the mess on Rothschild Blvd. A third letter is from the ministry that’s says that in light of the fact that contractors (across the state) lost their jobs. He reminded us that we are dealing with tax. He explained that there are limits to how much 24 . Another letter says that in light of cleaning that the city had to do he needs to pay a tax.Effy Stern Tax Law Prof. it has no right to impose a tax unless there is legislation authorizing it to tax.אגרות. he needs to pay a participation fee. With that being said there are certain concepts that require clarification. however it (i.תשלומי חובהThis category of payment is also listed in the law.g. Nachomovsky was claiming that the mandatory fee is not 21 He pointed out that in reality this hurts the small people. 25 . the Basic Law) doesn’t specify which of the two types of compulsory loans it is referring to.e. the problem was that Israeli citizens were already taxed to the max. the state was paying you back a reduced interest rate. However the legislation doesn’t stipulate compulsory payments to whom! All it says is that compulsory payments require legislation. the big fish have ways to get out of paying [high] taxes. We looked at several cases: :נוחימובסקיThis case which took place in the 50s regarding the fee ( )אגרהthat you need to pay to open up a file in the court.Effy Stern Tax Law Prof. but at a reduced rate (at a rate less than the market rate).מלוות חובהThis basically meant that the state forced the citizens to lend it money. than we will pay the same interest that you would have received). Starting from the 50s the case law began dealing with this question. which basically means that it was charging you a tax (the money that you should have received) and raises the question whether the state had the legislative authority to do so! The Basic Law clearly states that compulsory loans require legislation. Unlike with taxes. So the government came up with something called compulsory loans . this is the type that the state used when it imposed compulsory loans. Regarding this issue there is no case law. (For instance in the 60s the מס שוליwas 80%21) When the Six Day War broke out and Israel was in desperate need of capital. The problem with the second type of compulsory loan is that besides for the fact that the state was forcing you to lend it money. Mr. If you would have deposited your money in the bank at the time of the loan and kept it there for five years. Yishai Beer 2011-2012 taxes the state can collect. with מלוות חובהthe government pays back the money that it took. The other type of loan is a loan where the state would return you the loan with interest. Compulsory loans There are two types of compulsory loans: one is where the state says that it will pay back the loan in five years according to market interest rates (e. . Another term requiring clarification is compulsory payments . but there is much academic writing. Thus in light of the failure of 92 as well as the limits imposed by the basic law.)תיקון מס' 22אלא אם נקבעו במפורש בחוק או מכוח סמכות מוגדרת בחוק ( 1975 -תשל"ה ((24 'תיקון מס 1976 -תשל"ו 26 . הנחות ממס או הקלות אחרות איסור מתן הנחות והקלות . went to court and claimed that there is clear legislation stating that the legislature won’t impose fees so how can you the broadcasting authority go ahead and impose a fee! The broadcasting authority claimed that this is not a fee rather it’s a tax (as we explained a fee is when the payer receives something in return. As a side note he mentioned that according to section 12 of the Basic Law: Human Dignity there is a limit on the state when it tries to impose emergence legislation. whether the payer receives of doesn’t receive anything is irrelevant). a מתרגלfor tax law. and a less dominant element). it is unlikely that this power of the state will be used. So in this case Mr. ולא יינתנו פטורים. This is stated in section 245 TO: Section 245 TO: . however the attempt failed). Kriv.542. One of the measures taken was a freeze on all fees. )א(לא יותרו ניכויים או קיזוזים. The court (Barak J. and being that there is no legislation authorizing it. and that is that the state has the ability to impose taxes in a situation of emergency . a politician can’t go ahead before the primaries and give tax breaks to appease his voters). :תקנת שעת חירוםHowever there is a caveat. whenever you receive a תשלום חובהand it seems strange than look to see who sent you the tax and if they were authorized to do so.g. Just like the state can’t tax without legislation. so to it can’t decide to remove taxes without legislation (e.) rejected this because as we explained fee has two aspects to it. 474/89 ( :)קריבThe background of this case was the financial crises of the 80s wherein inflation reached upwards of 400%! In light of the crises the legislature passed a series of draconian measures in the attempt to save the Israeli economy. here.תקנת שעת חירוםUnder a state of emergency the state has the ability to override the aforementioned constitutional regime that we live under (the last time the government tried this was in 92.Effy Stern Tax Law Prof. Yishai Beer 2011-2012 constitutional being inherently it is a tax. it should be abolished! The court responded that in this case the payment doesn’t require legislation! He pointed out that in light of this. a dominant tax element. Shortly thereafter the broadcasting authority ( )רשות השידורcame along and imposed a fee (a television tax). unless of course there was legislation stipulating that he can do so). והטליםbut not taxes. It was only with the passing of section 158A which obligated that these questions/answers be published for all to see. בלי שניתנה לנישום הזדמנות סבירה להשמיע טענותיו 1975 -תשל ה The state’s authority to tax (case law) 620/82 ( :)עיריית הרצליהIn this case there were bylaws ( )חוקי עזרauthorizing the municipality to impose fees. אגרות. תקרה לענין הטבות בשל חיפושי נפט .)ב( על אף האמור בסעיף קטן )א( רשאי שר האוצר.פורסמו ( )תיקון מס' 28)ג( )1( שר האוצר. )א( לא תיעשה שומה לפי מיטב השפיטה על פי סעיף 541 ולא יינתן צו נימוקים ( . 27 . The agriculture minister can’t go ahead and give tax exemptions to the agriculture sector. מעבר לתקרת סכום שקבע שר האוצר לאותה שנת . אולם תקפן יפקע בתום שלושה חדשים מיום פרסומן ובלבד ששר האוצר.)דמי השתתפות. ורשאי הוא לקבוע תקרות נפרדות לסוגי הטבות. claiming that he should pay his share 22 So you will see “in light of pre-ruling 152 you can do X. באישור ועדת הכספים של הכנסת.מס It states that the legislature can’t give tax-breaks unless there is clear legislation stipulating that it can (e. say it’s a bad farming year. באישור כאמור. Section 158A TO: ומתן שמיעת טענות 851א. In this case a busy road was constructed in front of the guys house (which needless to say wasn’t in his interest) to make matters worse the municipality than sent him a bill. He mentioned the pre ruling system in the US which is a system wherein all questions and answers sent by tax payers to the IRS are published in a volume which is opened to the public (to provide transparency22). but it wasn’t published. Yishai Beer 2011-2012 . רשאי לקבוע לכל שנת מס 1990 -תש"ן תקרה להטבות מס שיינתנו לפי סעיפים 02 ו-02א בשנת המס.)תיקון" מס' 22לפי סעיף 251.תיקבע לאחר התייעצות עם שר האנרגיה והתשתית )2( לא יותקנו תקנות ולא יינתן אישור לפי סעיפים 02 או 02א בשנת מס פלונית. אם יש בהם כדי להגדיל את סך כל הטבות המס הניתנות באותה שנה מכוח הסעיפים האמורים. באישור ועדת הכספים של הכנסת . In Israel we also had a dialogue going on between the tax payers and the tax authorities.Effy Stern Tax Law Prof.להתקין תקנות למתן הקלות כאמור. there are areas which are ambiguous.g. רשאי להאריך את תקפן עד תום שנת המס שבה . Pre-Ruling: Although you can’t give tax breaks unless there is legislation. and participation fees ( . )תשלוםIf after checking if the municipality is authorized we come to the answer that it was. So the court went and checked to see if the municipality was authorized to impose the payment (( . the municipality is in charge of ensuring the quality of the meat. Again like in the aforementioned fire truck example it wouldn’t make sense to have separate facilities in each city to ensure the quality of the meat. so being that no one paid the legislator said that from now on everyone has to pay a tax regardless of whether they gave a radio or not. He pointed out that most people didn’t pay the tax based on the fact that this was a voluntary tax only for people that had a radio (and of course everyone claimed that they didn’t have radio’s). because this.Effy Stern Tax Law Prof. They said that any meat that is brought in to the Gush Dan is obligated to this payment. than we can ask the question whether it is constitutional (fair) or not). and the municipality is not authorized to impose a tax. this meant that if a truck was merely passing through the Gush Dan than it would have to pay the fee! The supermarket chain SuperSal said it was not willing to pay. Say there is a fire or a flood. of Ramat Gan which cuts through Ramat Gan. Here there is no dispute regarding the legality of the law in the 23 As a side note he mentioned that according to the law if the state wants to build a highway right next to someone’s house than it could take up to 40% of the property without compensation.חוק איגוד עריםOriginally there was a section that said that when one sells meat you have to pay for the check. 5503/94 ( :)סגלIn this case the claimant was arguing against the fact that along with the annual fee that you have to pay for your car (“Test”) there was also a fee that you had to pay for a car-radio. A while later the urban union of Gush Dan came along and changed the way things were done. and an urban union was established to ensure the quality standard of the meat in the relevant cities. 28 . Yishai Beer 2011-2012 of the road23. was a tax.g. Anyways a change was made to the . what happens is that the municipalities unite). obviously the Ramat Gan fire truck won’t stop the moment he hits the section of the street that is Givatayim. and Bnei Brak. Givatayim. they claimed. The court accepted the claim of SuperSol. So the same was true regarding certain veterinary standards of meat. The court came to the conclusion that the municipality had the authority to impose the tax. For that reason there is חוק איגוד עריםwhich authorizes the municipality to impose payments ( )תשלומיםfor the functions that the legislature obligated it to do. Take Ben Gurion Blvd. 154/83 ( :)שופרסלAs a way of background he explained the concept of urban union ()איגוד ערים which is when several municipalities unite so that they can maximize the power authorized to them by law (e. Questions that arise with these examples are whether this is considered chargeable income ( ?)הכנסה מחייבתWhat is the international position ( )מעמד הבינלאומיof Mary? And who is considered the tax payer ( ?)נישוםIf they receive one million every January. Section 36A TO: זיכוי לאשה . However Cheshin J. He gave another example. (min) said that instead of checking constitutionality let’s check the first question that we need to ask is whether the state was authorized to impose this tax. at one point do they get taxed (?)עיתוי Question 1 – what type of tax – מה סוג ההכנסה 29 . But Mr. Mary and her daughter were in the US on vacation and they got into a car accident. The majority checked the case via the tests of the basic law (proportionality. בחישוב המס של אשה תובא בחשבון 2/1 נקודת זיכוי ((108 'תיקון מס 1996 -תשנ"ו So in this case both of them work the same and receive the same salary yet as a result of taxes she walks away with more money in the bank. Regarding the question that was raised in the beginning of the lecture concerning the two lawyers. one male and the other female. etc) and came to the conclusion that the fee was reasonable. of an Israeli that went to the US and won the lottery wherein she receives one million annually for the rest of her life. to which they were indemnified two million dollars by the insurance company of the tortfeasor. Segel came along with a constitutional claim (the inviolability of private property – )אין פוגעים בקנייה של אדםbased on the fact that the state is taking money from him for no reason. Class 6 15/11/11 :הכנסה מחייבת – בירור ההכנסה לפי הפקודה He began with an illustration. So he mentioned that this could possibly raise a constitutional issue. Yishai Beer 2011-2012 sense that the Knesset authorized the tax via legislation. and the female pays less taxes: He mentioned section 36A TO which says that a woman gets a certain tax discount.Effy Stern Tax Law Prof.63א. The American approach is the .גישה פרסונאליתAccording to this approach we don’t look at the territory but rather we look at the persona. thus if you made money outside of the state (in the case of Israel. 30 . Yishai Beer 2011-2012 The law is isn’t clear: it states that income is obligated in tax according to section 6 TO. This was Israel’s approach up till 2003. Thus we see that it’s important to identify who is the tax payer ( . He gave an example of another Israel-US treaty which says that if a Professor from the US comes to Israel or vise versa for less than two years than they receive a gross salary from the University that they are visiting and than have to pay taxes in the mother country. The British approach is the territorial approach which says that you are only obligated to pay taxes on income made within the territory of the state.)זהות הנישוםThe case law will provide us with tools regarding how to check. 24 In light of various treaties and agreements between states such as Israel with the US. Question 3 – regarding international standing – מעמד הבינלאומי :גישה פרסונאלית/גישה טריטוריאליתRegarding the question of the מעמד בינלאומיthis is a complex topic. In addition there is section 2A which obligates a lottery winner to pay taxes. if you live in Israel you don’t have to pay taxes twice being that in Israel you pay higher taxes (however if Israel’s taxes were less than in the US than you would in fact be obligated to pay taxes to the IRS). After 2003 Israel adopted the US approach. section one defines income in accordance with Sections 2 and 3 of the TO.Effy Stern Tax Law Prof.‘who is the tax payer’ – שאלת זהות הנישום This question is important because we have progressive tax.6 ] ]שנת מס The question is which sort of income is obligated in taxes. Section 6 TO: . Another question that could come up is if with the lottery example.המס לכל שנת מס יוטל על הכנסתו החייבת של אדם באותה שנה 6 . For instance if you are an American you have to pay (report) taxes on income no matter where you live in the world 24. There are two approaches the British and the American. Question 2 . the lottery winner had a company and she claimed that it wasn’t she that won but rather it was the company that won. thus it will make a difference whether you say the money belongs to the mother or whether you say that it belongs to the daughter. if you made money in Egypt) than you wouldn’t be obligated to pay taxes. whether it’s better for him to take the money now or later. Thus we see that the question of עיתויis a strong question and there is much case law on the topic.The question of timing ()עיתוי Prof. If next year he knows he will be on vacation and thus the firm will make less money (this year it did well and thus it was on the highest bracket) than it would be worth it for him to push off paying the taxes till next year (being that as a result of making less money next year he will be in a lower tax bracket).מבחן המסחריThis test says that if I provided you with a product or a service and you are obligated to pay me. than whether you actually paid me or not. Thus we can’t say that you should be taxed for the whole amount in the beginning. (He gave an example to illustrate the complications that arise regarding :עיתויBank Leumi has many outstanding loans to borrowers that invested in US real estate. It would depend on what ( מס שוליtax bracket) he is in. The issue of עיתויraises several questions: He explained by way of example: A lawyer is owed a million dollars from a client and he has the choice to receive the money today or he can ask the client to pay him after January. In light of this he explained that as a result of the Trachtenberg report that wants to raise the מס שוליmany lawyers and the like are asking their clients to pay up now (so that they could 25 We will discuss later on the aforementioned issue of checks that may bounce or customers that won’t end up paying. we will count that as money received or more specifically as money that is taxable25). Regarding the question. how much the Bank really profited off its loans is hard to say! Even in a simple grocery store you can’t say with a certainty how much you’re earned because maybe one of your customers won’t pay or possibly a check will bounce).מבחן או הבסיס המזומניםHe explained that the מבחן המזומניםis a bad system because if there was a period of time that I invested a lot but didn’t reap a profit. it depends. In response to someone’s question (the question was why can’t you just say that you pay taxes the moment you receive actual money and likewise count expenses only once money leaves your pocket – he called this the . 31 .Effy Stern Tax Law Question 4 . Yishai Beer 2011-2012 :בסיס מזומנים/בסיס מסחריHe explained with the aforementioned example: Say they were supposed to receive ten million over ten years than it wouldn’t be fair to tax them for the full ten million because they don’t have the full amount yet! Another problem is that it’s possible that over the course of ten years the insurance company will go bankrupt and won’t end up paying. than the tax I would have to pay wouldn’t reflect reality. and with the market the way it is. Therefore the correct test is the . Now he has to 32 Ruben (pays on time) .125 net. and they will also want to pay taxes in a way that serves their interests. Thus he ends off with Simon (pays 2 years late) 52. deals will be made (e. Ruben and Simon make the same amount of money (100k annually). again 50% The bank pays him interest (10%) tax on that and he ends up with being that the money was in the 2.000.000.000/2) = sitting in the bank he will have 50. 5. Of course this goes both ways. According to the Companies Law the corporate tax was supposed to be lowered by 2016) but in light of the summer protests the trend has been broken and now we are headed towards increased tax rates.625 and thus he ends up with bank. meaning that the clients have their considerations regarding the tax system as well. As a result of this.500. He deposits the money.000. The interest amounted in 55.g. He begins with 100.000 in unlike Ruben he deposits the full interest and thus he will have a 100.Effy Stern Tax Law Prof. Back to the aforementioned example with the lawyer that is considering whether to pay taxes now or later. He mentioned an article by Prof. Both are in the same tax bracket (50%). The only difference between them is that Ruben pays taxes on time. After a year he receives total of 121. However Here he will make 11.000. made 5. As a side point he mentioned that until Trachtenberg the tax system was going on a downward trend (taxes were being lowered.g. the lawyer will say that if you pay me now than I will knock off ten percent). whereas Simon finds a legal way to push off paying his taxes for two years at an interest rate of 10%. Yishai Beer 2011-2012 pay the current rates). Brown who said that not only is the choice to push it off smart but we can also measure the value of the decision.000 and than After two years of the money he pays 50% tax (100. he said that the wiser thing is to push off the tax payment till next year.250 interest.000 and than he had to pay 50% tax on the interest which means 2. He explained that pushing off tax has an affect of exemption ( )פטורfrom the tax on the interest that accumulates on the ( קרן המסe. The following will be the difference after two years have passed: Year 1 Year 2 He begins with 100.500. Levi doesn’t pay tax on interest.000. Question 5 – what is the chargeable income – ?הכנסה מחייבת :עיקרון המימושThis issue is discussed my many scholars.000 in interest.625 more than Ruben).000 110. economists Simons and Haig (1960s) stated that "Personal income may be defined as the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question”. He than reminded us what Prof.500! (Thus he ends up doesn’t pay taxes till two years are with 5. He pays He deposits 55.’אפשר לקמת את המס בריל טיים We than introduced Levi to the aforementioned example: Levi is like Ruben in that he pays in real time. up). It’s as if Simon gave himself a tax exemption.000 on the interest and thus according to this חישובhe also ends up with 60.000. From an economic perspective. Thus he is left with year he receives another 5000 50. the next 50%. Levi Year 1 Year 2 He deposits 100. you compare the difference and that is how 33 . As we see from here (and this is true all the time) it is always worth it to push off paying your taxes.Effy Stern Tax Law Prof. 50% of 121. thus he ends up with pay 50% tax.000. In other words they said that you calculate the expenses of a person as well as the change of wealth of a person from January 1st compared to December 31st. ‘. it’s as if he arranged his own tax system for himself. However unlike Ruben. What we see from these examples is that pushing off tax has an affect of exemption ( )פטורfrom the tax on the interest that accumulates on the קרן המסfrom the pushing off of paying the taxes.500 just like Simon. on the principal ( )קרןand 500 Thus he is left with 55.000 (on the interest he also is 60. Brown said. Yishai Beer 2011-2012 10% interest. plus 5. In simplest terms you calculate how much of the “pie” each person needs.62)עיקרון המימושAgain income is created only when there is !מימושFrom a practical perspective this makes sense because take a typical student as an example: He may have tons of possessions.Effy Stern Tax Law Prof. you won’t be affected by that until the point that you decide to sell. section 2 – 2 'סעיפי המקור. ס 26 Infra at 70 34 . Yishai Beer 2011-2012 much taxes he should pay. cell phone. let’s say the tax of your property rises annually. According to this model in order for an income to be chargeable it needs to be explicitly written in the law that that form of income is obligated in taxes (this is called the .g. because when it comes to taxation we don’t tax unless there is realization (( )מימושe. and than you calculate the change in wealth of that person in the given year. Class 7 20/11/11 Legislative source for taxation. Chargeable income ( – )הכנסה מחייבתthe American model He explained that in the West there are two different accepted approaches regarding how to categorize . He explained this theory has no relevance to tax law. etc. and actually sells it ( )מימושuntil that point he wouldn’t have to pay tax and he wouldn’t realize any changes in tax rates should there be any. Chargeable income ( –)הכנסה מחייבתthe British/Israeli model ()גישת המקור The other approach is the British as well as the approach used in Israel. This is called the realization principle ( .)גישת המקורSo in the aforementioned example of the mother and daughter that won the lottery/insurance claim in the US in order for them to be obligated in taxes there would have to be specific legislation regarding income earned from insurance claims/lottery from the US. laptops. This approach says that any income is מחייבתunless there is a law that says that this specific form of income is exempt from tax. He will only pay income tax on that property provided that he decides to open a store and sell all his property.הכנסה חייבתOne model is the American model. Yishai Beer 2102-1102 . במישרין או בעקיפין. ריבית. והפרשי הצמדה הפרשי הצמדה או דמי נכיון. בזרעים או בחיות.Last class we mentioned the two different models of taxation. בעבודת אדמה. באישור ועדת הכספים של הכנסת. או בעד מכירת זכות יוצרים על ידי היוצר. חקלאות )8( השתכרות או ריווח שמקורם בחקלאות. מלוג או אנונה. )תיקון מס' 22( תשל"ה.2002 השימוש ברכב או ברדיו טלפון נייד שהועמד כאמור לרשות העובד. אם הומצאה האמצאה או נוצרה היצירה שלא 53 . על הכנסתו של אדם תושב ישראל שהופקה או שנצמחה בישראל או ( תשס"ב. אך למעט תשלומים כאמור המותרים לעובד כהוצאה. או מעסקה או מעסק אקראי בעלי אופי מסחרי. תשלומים שניתנו לעובד לכיסוי הוצאותיו. על פי הסכם שנעשה בשעת ההשכרה או לפני כן.5791 גימלאות )5( קיצבה. יראו את הקונה כאילו קיבל הוא ביום הקניה דמי מפתח או פרמיה באותו סכום. ולרבות חלק ברווחים המתקבלים מן השימוש כאמור.5791 תיקון מס' 921(( החזקת רכב או טלפון.2002 ביגוד. פטנט וזכות-יוצרים )9( תמורה המתקבלת בעד מכירת פטנט או מדגם על ידי הממציא.בית לצרכי מקורות ההכנסה האמורים בפסקה זו. נסיעות לחוץ לארץ או רכישת ספרות מקצועית או תשס"ב. לרבות שוויה של תוצרת המתקבלת בשל השימוש בהון.income which allows for repetitive peyrot) is the most common and basic of the forms of taxation :It is listed in section 2 TO :Section 2 TO ) מס הכנסה יהא משתלם. income tax (which we explained as a source of . ריבית )4( דיבידנד. בייעור או בגידולי קרקע. פרמיות ורוחים אחרים שמקורם באחוזת-בית או בקרקע או בבנין תעשייתי: בנה אדם אחוזת-בית והשכירה וקיבל בעד ההשכרה דמי מפתח או פרמיה ואחר ההשכרה מכר אותה אחוזת- בית לאחר. נכסים אחרים )7( השתכרות או ריווח שמקורם בכל נכס שאינו אחוזת-בית ולא קרקע ולא בנין תעשייתי. תיקון מס' 921(( )ב( שר האוצר. תמלוגים.Effy Stern Tax Law Prof. אחוזת בית וקרקע )6( דמי שכירות. ממקורות אלה: עסק ומשלח יד )1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן כלשהי. שוויו של שימוש ברכב או ברדיו טלפון נייד שהועמד לרשותו של העובד. As we mentioned. )תיקון מס' 31( )3( )בוטלה(. בנכס. בכפוף להוראות פקודה זו. בין שניתנו לעובד במישרין או בעקיפין או שניתנו לאחר לטובתו. לרבות תשלומים בשל תשל"ה.8691 דיבידנד. נעשתה הקניה תוך שנה לאחר ההשכרה יראו זאת כראיה לכאורה שאמנם היה הסכם כאמור. בשיעורים מקורות הכנסה ]52. יקבע את שוויו של תשס"ב.בין שניתנו בכסף ובין בשווה כסף. ])1 תיקון מס' 231(המפורטים להלן. תשכ"ח.2002 מחוץ לישראל ועל הכנסתו של אדם תושב חוץ שהופקה או שנצמחה בישראל. והכל . לכל שנת מס. לרבות דיבידנד המשתלם מתוך רווחי הון של חברה. דמי מפתח. עבודה )2( )א( השתכרות או ריווח מעבודה. the American and the British model We explained that Israel follows the British approach which states that there is no taxation without (specific) legislation. כל טובת הנאה או קצובה שניתנו לעובד )תיקון מס' 22( ממעבידו. ” We will discuss the seeming contradiction of section 2(2) in that it seems to go against what we said above (no tax unless without specific legislation). In other words the question was if arbitration 27 The value of the tax was configured according to the rental value. section 2(3) was repealed. אך לא הוצא מהם בפירוש ולא ניתן עליו פטור בפקודה זו או בכל דין אחר מקורות אחרים We reviewed the sub-sections of section 2: section 2(1) deals with business and vocation. This raises the question of what is meant by a vocation. and linkage differentials. and land. or narrowly in that a professor’s profession is to teach and nothing more (this is no longer relevant because of the change in Israel’s approach to international taxation issues – persona rule!). 36 .Effy Stern Tax Law Prof. had the person decided to rent out the apartment.)פס"ד גבריאלה שלוThis case dealt with Prof. We mentioned two cases that dealt with this question: 134/92 ( – )מחאג'נהThis case dealt with a janitor (whose job was to clean stairwells). and section 2(10) deals with “other sources. He claimed that cleaning stairwells is not a vocation and thus he is not obligated to pay taxes according to section 2(1).או מעסקה או מעסק אקראי בעלי אופי מסחרי עסק ומשלח יד משלח ידmeans vocation. section 2(5) deals with benefits. interest. The court ruled that it is considered a vocation and thus he is obligated to pay taxes according to section 2(1).בתחום עיסוקם הרגיל של הממציא או היוצר ) השתכרות או ריווח מכל מקור אחר שאינו כלול בפסקאות ) 1( עד (10) . Shalev that taught abroad and was also involved in arbitration. section 2(9) deals with patents and copyrights. section 2(2) deals with employment. section 2(8) deals with agriculture (husbandry). It dealt with taxation on one’s apartment27. property. 2308/08 ( . section 2(6) deals with house. section 2(7) deals with “other assets”. based on the times were agriculture was the primary form of employment. section 2(4) deals with dividends. Yishai Beer 2011-2012 .9(. the question was whether being a professor should be interpreted widely to include anything within the ability of the law professor.)1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן כלשהי . Section 2(1): Business or vocation – עסק או משלח יד . As we will see this is an anachronistic clause. by supplying the information (blueprints. or by his ability to enter contests for tenders. Shalev’s vocation and thus taxable according to section 2(1). 609/68 ( :)משולםThis case dealt with an architect that won a prize for an architect contest. and than in fact he receives the prize.עסקHowever in 2308/08 it would indeed have made a difference [at the time] because the section regarding income from abroad differentiates between עסקand . we check to see what skills are necessary to create the income. and because these tenders require a lot of preparation on the part of the architect.משלח יד Section 2(1) Business and vocation and section 2(10) “other sources” Today we will discuss what is הכנסה מעסקand we will discuss the connection between sections 2(1) and 2(10) which as we mentioned above seems to contradict one another. etc) that architects provide. In this case Meshulam came in third place. and won a prize. because 2(1) states that this is the source for what can be taxed. and than 2(10) comes along and says that this list is not exclusive. Thus the court ruled that prize money in this case is considered “Business” income and is taxable according to section 2(1). and therefore 37 . than as we said they would be obligated to pay taxes according to section 2(1). To sum up: In both cases the court was trying to figure out if the job they did was via their profession. Regarding a professor or a writer that wins a prize (for his work) according to the previous court ruling we would say that they only won the prize based the connections and capabilities enabled to them by their profession. He explained that it is customary for architects to join tenders. if yes. those offering the tender usually offer a prize for those that came in second and third place. Thus we see that there is an offer. He pointed out that this question is mainly academic because even if we say that it is not their profession (in 99% of the time) they would be obligated to pay taxes because of the other word in the section – “( ”. The Supreme Court ruled that it was.)משלח ידSo in short. (and thereby win prizes). Thus we would say that it is part of their profession. Meshulam accepts the offer and a contract is signed. Yishai Beer 2011-2012 should be included as part of Prof. and if income was generated by way of those skills than we will say that we are dealing with vocation – . He claimed that he shouldn’t be obligated to pay taxes on the prize money.Effy Stern Tax Law Prof. The court said an architect can generate income in either of two ways. and winning the lottery which is purely coincidental! Thus technically according to what we said a lotto winner. he would be obligated to pay taxes because the appointment was based on his profession.g.Effy Stern Tax Law Prof. Is the million dollars she received considered taxable income or not30? As background he explained that a gift (e. For that reason we say that it’s only fair that we tax him at a reduced rate. 30 [if I’m not mistaken he said that the court ruled that it wouldn’t be taxable] 38 . wedding present) from ones employer could be considered as taxable income (in certain circumstances). 28 He explained (not responsible) that the reason is because unlike say with income tax. it doesn’t make a difference if he demonstrates that this is not his profession or that this labor has not chance of repeating itself. there is no connection to a person’s profession or connections built by their profession.g. Two months later the girl receives a million dollar check from the lady. 136/67: With regards to labor that is a one-time thing (e. someone without legal expertise that is appointed as an executer of an estate29) (in the example he gave he stressed that the chances of him receiving this employment again is nil) the court has ruled (136/67) that for this reason we have section 2(10). So here the legislature stepped in and actually switched things around.000 on lottery tickets (for a 1 million win) yet we still wouldn’t allow him to write it off. Universities used to pay TAs in the form of prizes) than it is obligated to taxes under section 2(1). so it could be that a person spent 500. Yishai Beer 2011-2012 taxable according to section 2(1). which is purely coincidental. The rule of thumb is that there can’t be outside influences influencing the gift. He than presented us with example of a girl (that happens to be in Magen David Adom) that sees an old lady fall on the street and goes and saves her. in order for the gift to exempt from taxes it needs to be a pure gift. Regarding a lottery winner. and thus it is taxable. As a side note he pointed out that when your given a prize for work (E. The legislature said that if you win the Israeli prize or the Nobel Prize your exempt from paying taxes whereas if you win the lottery than you are obligated to pay a tax (albeit at a reduced rate28). he is obligated to pay tax according to 2(10). we don t allow them to write off expenses. The executer that receives a fee is not receiving a present. 29 If the person appointed as the executer was a lawyer than it wouldn’t be a question.g. a person has the ability to write off expenses. shouldn’t be taxed. it is a fee for work done. The prizes we were discussing above were real prizes. However with lottery winners. or he wouldn’t have had the opportunity to help her had he not been a cab driver). he happens to here that Ruben wants to buy and the Simon wants to sell. If I got involved in a deal in Africa and I had to bribe off an official their. This case dealt with a psychiatrist that for a fee gave soldiers exemptions. 32 He pointed out that if the girl was a professional nurse or doctor than its more complex and we will discuss this when we discuss the tip received by waiters. so long that the job itself is a job with income (peyrot) we will apply section 2(10). the court applied section 2(10) and said that the income was taxable. Regarding the woman who helped the lady on the street. The tax authorities came along and said that he is obligated to pay taxes (because he wouldn’t have been able to help her. it doesn’t make a difference that it won’t repeat itself. When the lady died she gave him all her inheritance. I can’t go ahead and request to write off that expense). 597/75 ( :)ברנשטייןThis case dealt with a teller of a bank that (as a side job) brokered deals between clients (e.g. it won’t view the money as income. and thus he is not obligated to pay taxes.g. and thus from than until her death he took care of her. so he connects the two). 31 As a side note he pointed out that with income achieved illegally you can’t write off expenses. Either which way. for the obvious reason of market overt . The cab driver realized that this lady has no family.Effy Stern Tax Law Prof. Similarly in the case with the girl. and whether she has an obligation to pay taxes on the present she received.תקנת הציבורSo for instance you can’t write off bribery as an expense (e. The court ruled that being that it is clear that the cab driver was helping her simply out of the kindness of his heart. As an aside He referred to those that claim that by taxing illegal income you are giving legitimization to such activity. In this case the odds that the deal would have repeated itself were slim. However the court ruled that the moment that we have an income. he answered with an actual case that came to the court :פ"ד סמוIn this case there was a cab driver that drove an old lady to her home. See infra at 119. 39 . she would be exempt from taxes because it’s clear that she wasn’t motivated by profit (the lady was unconscious so she would never have known who helped her) but rather by the goodness of her heart32. During the ride the lady cried to him about all her problems. Firstly the court establishes that illegal income is taxable31. Yishai Beer 2011-2012 13/82 ( )פרומקיןprovides yet another example of the courts employing section 2(10). because it could be that he is selling a house that he lived in for the past 30 years (in which case the sale of that house wouldn’t be obligated in income tax! Thus as we said it needs to be integral to his business. reason being that lottery tickets is an “integral” part of his business and thus he is obligated to pay taxes. we also discussed the term עסקand what it means. Not necessarily does that mean that every house he sells is integral to his business. We will discuss this at length in a later lecture when we will discuss ( שינוי ייעודinfra at 87). The court ruled that the storeowner is different than the regular person. Now we see that either one of those conditions alone is sufficient to make an income taxable34. So back to the architect case: we said that there are two conditions. (e. Class 8 27/11/11 עסקת אקראי בעלת אופי מסחרי Last lecture we discussed the difference between sections 2(1) and 2(10). 1) Ruben bought sweaters for 20$ and than a while later (when they are already out of style) he decides to sell them for 100$. but it got to receive the winnings if there was one. tell them to put money in the cash register (despite the fact that it is their own register! [he pointed out that unlike with contract law. As a side note: if you wanted to give advice to the aforementioned lottery store than you would suggest them to by the tickets privately.Effy Stern Tax Law Prof. Yishai Beer 2011-2012 To sum up: We began with the case of the architect and there the court said we need two conditions to be met: a service must be given and that the service was an integral part of the business (e. so long that a service was given we will say that it is taxable. Thus it seems that the first condition is sufficient. So regarding the question of whether the second condition can also satisfy the conditions to make an income taxable we mentioned the case 1264/64 ( :)מזל טובIn this case there was a store that sold lottery tickets. 40 . participation in tenders is an integral part of the business of an architect). In other words. As we saw in several cases. The deal was that if it had leftover tickets than it has to pay the lottery ticket company ( )מפעל פיסfor those tickets. The question was if the storeowner who wins (in this case he won) is the same as a regular person on the street that wins the lottery (a regular person was exempt from paying taxes on a lottery winner33). He gave another example of a contractor who builds houses for a living.g. with tax law a person could buy from himself]) And buy the tickets. He than asked if the intent to earn a profit is a necessary condition ?לקיומו של עסקHe gave several examples to illustrate the point.g. 33 34 Now the law has changed and lottery wins are taxable. בשיעורים . ממקורות :אלה עסק ומשלח יד )1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן .g.עסקLikewise Chabad of Thailand that gives out free meals wouldn’t be considered a . The question is what is an incidental transaction ( )עסקת אקראיand what types of transactions are within its scope? As a side point he mentioned that the concept of incidental transactions ended up in our statute by mistake. which dealt with a missionary society that had a book store. than we won’t consider it an . the difference between them remain vague.עסקת אקראי בעלת :אופי מסחרי In section 2(1) it states: ) מס הכנסה יהא משתלם. symbolic price (wherein they made no profit).עסקHowever if there is no intent to market and you are loosing money without any intent to make a profit. Would this be considered an ?עסקWe mentioned the landmark British case. They wanted to tax the Missionary society for the Bibles that were sold. it’s possible that you could be loosing money and it will still be considered am . The case came to the House of Lords and it ruled that it’s possible to have an עסקeven if it is loosing money or to put it differently. such as with these missionaries. but either way it’s in the statute and thus it must be understood.עסקLikewise if Aroma opened up a restaurant which gave out free meals (or meals at a symbolic price) to the needy it wouldn’t be considered an .עסקSo if the coffee store or the sweater store is giving out merchandise and there is no way to make profit out of the situation than we won’t consider it a .עסק Section 2(1) cont’d – Incidental transactions of commercial character . or from any incidental transaction or deal of a commercial nature. בכפוף להוראות פקודה זו. על הכנסתו של אדם תושב ישראל שהופקה או שנצמחה בישראל או ( 2002 -תשס"ב מחוץ לישראל ועל הכנסתו של אדם תושב חוץ שהופקה או שנצמחה בישראל. לכל שנת מס.כלשהי. Lastly he 41 .Effy Stern Tax Law Prof. He pointed out that the difference between a transaction ( )עסקand an incidental transaction is imprecise and though we will learn various tests applied by the case law came up with regards to incidental transactions. is subject to taxes. או מעסקה או מעסק אקראי בעלי אופי מסחרי Section 2(1) states that the wages or profits from any business or vocation exercised for any length of time. In addition to the store missionaries would be sent out to sell Bibles on the street for a discounted. 2) A café decides to give out free coffee free (5$ value) as a marketing scheme. Yishai Beer 2011-2012 Would this be considered a ( ?עסקe.25] מקורות הכנסה 1)] תיקון מס' 231(המפורטים להלן. g. Ruben went in to the supermarket and there was a sale on red wine. E.מבחן טיב הנכסThe logic behind this test is that there are assets ( )נכסיםthat are usually held for commercial purposes and there are assets that are usually held by private persons (an apartment is an example is a capital asset ( )נכס הוןwhich in most cases is a personal investment not a commercial one. Yishai Beer 2011-2012 pointed out that though the case law provides several tests (to test whether something is a incidental transaction or not) it is not a closed list. in the same example. he had no intent to sell when he bought the wine. Ways to test for an incidental transaction: Our case law on the subject of incidental transactions is very similar to the case law in the England on the matter.)מסחריHe than gave another example from the case law: ( :)פ"ד אמידThis case dealt with a French oleh (a teacher) that bought a container of carpets (from France) and sells them. and he buys out the whole store (but he bought it for personal purposes). in that case the court used the מבחן הכמותand said that it was . Seemingly this would smell like an incidental transaction in light of the commercial nature of the transaction and in light of the quantity that he sold. the two mentioned and משלח ידand . if Ruben was a wine connoisseur. Later his neighbor stops by and she needs wine. two bottles for 100$. and thus at the end of the day we look at accumulation of all the tests and which ever direction most of the tests point to that is how we will categorize the transaction. In this case we wouldn’t say that Ruben is a wine salesmen because this was a one time transaction. However. so in this case because he bought many bottles ( )מבחן הכמותwe would say that it is for commercial purposes (e. The first test that the case law mentioned is the .עסקת אקראיThus according to her there are four categories. and than goes and sells the same neighbor a bottle.Effy Stern Tax Law Prof. However this was a case where though the person sold in bulk it was not for commercial purposes. etc. (He pointed out that there was a district judge in ( )פס"ד ברנרthat made a distinction between עסק אקראיand .2. he mentioned the case in England where before the break out of WWII a guy bought a million rolls of toilet paper and than sold them for a profit.עסקWe will not deal with the added distinction that she made). so he sells her one bottle for 100$ (he profits 50$).g. The reason why he 42 . He also pointed out the income tax assessor ( )פקיד שומהwill be the one that will want to say that it’s a incidental transaction because he will want to claim that the transaction was an עסקהin the form of incidental transaction and thus he can tax the person an income tax in accordance with section 2(1). Commodities trading and hedging: He explained that there are some people that purchase commodities in the hopes of selling at a profit. lives there for two months and than sells. So when a person buys bonds the court tends to look at it as a private matter.Effy Stern Tax Law Prof. But because of the volatility of the coffee market. he was able to provide the court with compelling reasons as to why he sold each time that he did (e. in the first apartment there was no elevator. So to sum up. and than there are real estate deals that are in the middle – incidental transactions. and than his back started hurting. whereas with a person that buys and sells stocks (though it may be a side job) the court will view it as a commercial transaction ( . it will be able to provide the coffee at the prices that it established). Other people buy for the sake of hedging ()גידור (e. We mentioned the case ( :)פ"ד אסלIn this case the fellow sold his apartment five times in ten years. In that case the court ruled that in fact it wasn’t a . etc. than in the second apartment. They tend to view bonds as safe and therefore they categorize them as personal investments (personal items) whereas stocks tend to carry higher risk and therefore are categorized as commercial35. bonds involve risk (albeit less than stocks) as well! As can be seen with the Greek or Italian bonds which recently plummeted! 43 . Beer stressed that this categorization by the judges is a mistake. so the guy switched his capital for carpets and this way he was able to get his money out of France.עסק He reminded us what we said above that with regards to most people an apartment won’t be considered a commercial transaction ( )עסקhowever of course there are apartments which are built and sold commercially (e. According to the ( )מבחן התדירות this would (possibly) be considered an incidental transaction. Thus at the end of the day the court will look at the individual circumstances of each case and decide whether or not it is an incidental transaction. they moved out because he went bankrupt. sells it after three months. Elite buys in bulk at a certain price to ensure that despite possible fluctuations. there are real estate deals that aren’t considered commercial transactions (regular people) than there are real estate deals that will be considered commercial transactions (contractors).)עסקIn the case 35 Prof. a company like Elite has contracts with super market chains for the next year. Michelangelo buys an apartment. Yishai Beer 2011-2012 sold carpets was because at the time people leaving France weren’t allowed to take their capital with them.g. He explained that judges don’t seem to understand this.g. (E. etc) the court ruled that in fact it wasn’t an incidental transaction.g.g. However. contractors). buys a new place. Effy Stern Tax Law Prof. Yishai Beer 2011-2012 35/82 ( :)מזרחיthe tax assessor said that Mizrahi was obligated to pay (income) taxes (he said that it was an incidental transaction according to section 2(1)) on the stocks that he owned. So Mizrahi than went and proved to the court that he didn’t know the first thing about stock trading, and thus the court can’t view him as a stock trader. The court responded to this claim by saying that hiring an agent (that is knowledgeable on the matter) is enough to make it considered an incidental transaction. 264/6436 ( :)בן ציון ומיריוןIn this case there were two real estate lawyers that were involved in a real estate deal. Though they weren’t real estate brokers, as real estate lawyers they knew a lot about the real estate market. The court ruled that in such a case if they use their knowledge to buy a house for their personal use (despite the fact that they are using their professional knowledge) than it won’t be considered an incidental transaction. However if they engage in a profitable real estate transaction, though they aren’t brokers it will be considered an incidental transaction. Back to the case 35/82 ( :)מזרחיThe court ruled that ידע באחריות שלוחיתis problematic; because this claim can always be made (e.g. say I want to buy a house for personal use and I hire the services of a lawyer). We gave another example of a diamond dealer that buys a unique diamond for a high price and gives it to his wife as a gift (thus at this point it seems like a private transaction). Two months later he sells (or she sells) the diamond for a profit. At this point we would say that it’s an incidental transaction. However if the circumstances were such that (the diamond dealer can demonstrate that) he needed the money (e.g. his wife got sick and they needed the money) than it would not be considered an incidental transaction. Another test is ( אופן המימוןhow the transaction is financed). E.g. a long term mortgage on a house usually signifies a private transaction, whereas a short-term loan usually signifies commercial transactions. But once again, it’s all dependent on the circumstances of the transaction (e.g. 202/65 (.))חיימובסקי 36 He switched around the case a but for the sake of the example 44 Effy Stern Tax Law Prof. Yishai Beer 2011-2012 Another test that court will use is – משך החזקהthe amount of time you held on to the item. The idea is that if it’s commercial than the point is to sell quickly, and thus if you sell quickly than it would signify a commercial transaction (but than again as we saw in the aforementioned diamond example, its possible that in light of the circumstances the court will consider it a private transaction). Another test the court may use is the :מבחן השבחת הנכסhe gave an example of two fishermen in Jaffa (this case came to the House of Lords). Every Thursday night these guys go out fishing and than they sell their fish – that is their .עסקOn the weekends these guys tinker with their old yacht. If they go and sell the yacht for a profit, technically they shouldn’t have to pay tax according to 2(1) because you don’t pay taxes on hobbies. But in this case the court will look at various things such as the fact that they were proficient in ship building ( )מומחיותin deciding whether to categorize it as a transaction or not (he gave another example with a car collector, its possible that we would treat a collector that is also a mechanic different than we would treat a doctor that is a car collector. At the end of the day we will need to look at the circumstances) in the fisherman case the court ruled that it was a commercial transaction (it fit under the category of )עסקand thus the income earned on the sale of the yacht was subject to taxation. 115/97 ( :73)צבי ברנרBrenner was involved in future contracts .חוזים עתידייםHe made sixteen such transactions (he bought and sold sixteen futures) and he lost money. Brenner was a teacher not a broker. In this case Brenner told the tax authorities that it is an incidental transaction (It was in his interest to claim that it was an incidental transaction, this way he could write off the losses. It’s fair to assume that had the transaction been profitable Brenner would have claimed that this was a personal/private transaction) the court looked at the circumstances and ruled that it was a private transaction. In Summary: the tests for incidental transactions 1) 2) 3) 37 מבחן טיב הנכס מבחן הבקיאות מבחן משך החזקה He changed around the case a bit 45 Effy Stern Tax Law 4) 5) 6) מבחן השבחת הנכס 83מבחן סעיף המטרות שבתזכיר 93מבחן ייעוד התמורה Prof. Yishai Beer 2011-2012 The reason why it’s important to know if a transaction is or isn’t an incidental transaction is because if it is incidental than it will be viewed as income taxable according to section 2(1).40 Class 9 29/11/11 הכנסת עבודה, הכנסה מעסק או משלח יד Section 2(2) Employment - הכנסת עבודה It’s always important to categorize the income that we are dealing with, because different sources of income have different tax laws that apply to it. Some of the ramifications of categorizing a source of money as income under section 2(2) are: You [may] have to pay employment tax (מס ;14)מעסיקיםwithholding tax at the source ( ;24)ניכוי מס במקורsetting off losses ( ;)קיזוז הפסדיםand issues of international taxation ( .34)מיסוי בינלאומיThese are some of the consequences of categorizing a source of income as employment, but there are more. Tests to help decide whether we are dealing with employment income (Section 2(2)) – הכנסת עבודה We will discuss ways in which we can tell if there is employment income (i.e. if there is a situation of employer/employee – .)עובד/מעביד 38 You check the memorandum of the company to see if the transaction was in anyway related to the stated goals of the company. Another test is to check the registration of the asset in the balance sheets of the company. 39 This test is no loner relevant. 40 * Ask him: with regards to מס שוליif say I have one business that is successful and one isn’t, will I pay the same מס שוליon both? Do you need to pay tax if you lost money? In light of the ambiguity of incidental transactions, is it considered a felony if someone is caught not paying taxes on an incidental transaction? 41 42 Supra at 22 When you receive your pay certain [additional] things are taken off automatically such as .ביטוח לאומיHe was explaining how each [big] company has one person that is in charge of taking off these amounts. 43 Questions that deal with a person that went to New York and earned money, it will make a difference if we categorize his income as הכנסה מעסקor .הכנסה מעבודה 46 What we see from this case is that if there is employee/employer relationship in the way that this case ruled than there is employment income. but in giving him money via the company she is doing so at the expense of the tax authority. We than took a closer look at the cases. and receives a monthly salary of 8000$. Another intern under the same circumstances received 10000$. If she wants to give him money than she could privately give him allowance.g. Moreover the players follow the commands of the boss. secondly what is the rule regarding a payment that someone gets that is not from his boss (e. The questions that arise out of this ruling are: will any payment that the employer pays will be considered employment income.מס מעסיקיםThe claim was that they are not employees.Effy Stern Tax Law Prof. this way she gets to write it off as an expense – this she can’t do. and during the year he gets marries and she gives him an apartment. Yishai Beer 2011-2012 5378/90 ( :)הפועל תבריהIn this case they didn’t pay . Shamgar J. Thus there is an employer/employee relationship and therefore we are dealing with employment income and thus there is an obligation to pay employment tax. With regards to the first case the mother is allowed to give a gift (to her son) so long that it’s not on the account of someone else. a waiter). With regards to the first question he gave several examples: A) Ruben is a law student. In this case she pays her son (a disproportional amount of money) via the firm. explained that at the end of the day the players aren’t working for free. who works by his mother’s firm two hours a week doing administrative work. Whether or not we should look to Labor law to establish whether a situation of employee/employer exists. B) A law intern gets married during her internship and she invites her boss to the wedding and she receives a present from him of 100$. The commonality between all these cases is that there is a payment from the employer to the employee. So in this case with regards to the question of whether this is employment income we would have to separate the 8000$ that he received into the amount that he should have reasonably 47 . C) Levi works at his mothers firm as an intern. Shamgar leaves as an open question. it’s not that simple. in such a case it would be considered employment income.Effy Stern Tax Law Prof.g. We gave an example of a lawyer that slips and is hospitalized and receives money from an insurance policy that she has on accidents that result in loosing out on work. The court first looked at the going rate for renting such equipment. and both of them rented their own personal equipment to their own company for a very high price (100. In general. Yishai Beer 2011-2012 received (say 200$) and that would be considered employment income and the rest would be not be considered employment income rather money that she gave in her private capacity (and thus it wouldn’t be counted as a work expense).g. and from there it was able to establish that the additional amount didn’t reflect the going rate. gifts up till 200$ will be considered employment income and deductible. we need to first ask under which circumstances (“under which hat”) did he give the gift (say the intern a friend of his 44. 48 . For this reason when a worker receives a gift from his employer for holidays it is considered employment income45. one received 100$ and the other received 10000$). With regards to the intern that received 10000$. or say a person goes for military 44 45 In which case we would say that it was given privately So if you receive a toaster from your boss for the holidays than you need to pay taxes on it (in practice the employer rights it off as an expense and basically he takes care of the tax issues). The one that received 100$. With regards to the second example (the interns that received gifts from their employers.g. a gift) than we will deduct the amount of the gift and the remainder will be considered employment income. Back to what we mentioned in the case 5378/90 ( )הפועל תבריהwe see that not only do we look at the employee/employer relationship but we also look at what the payment was for. gifts amounting to more than 200$.000$). or were there possible business reasons for his giving her or him such a handsome amount). However. for there are situations (e. If however part of the payment can be attributed to something else (e. a waiter)). ( :)פס"ד ליבנהIn this case there were two brothers that were the controlling shareholders of a company. With regards to the second question that we asked based on the case 5387/90 (( )הפועל תבריהwhat is the rule regarding a payment that someone gets that is not from his boss (e. will be viewed as a private expense. the owner of a big company – each time an employee has an event he sends them 100$. it wouldn’t be deemed employment income. why he or she received the payout. He mentioned the British case that dealt with the soccer game in 1966 between Germany and the UK. the money she receives from the insurance company will be considered employment income. In all these cases there is a payment from a third party ( )'תשלום מצד גthe money is not coming from his employer but rather from a third party. We gave another example of the emergency room at 2am.Effy Stern Tax Law Prof. In this case we would say that though it is obligated in tax it is not a situation of employer/employee (he received the payment not from his employer – the hospital – but rather from a third party – the patient that slipped him the money) Its clear that 20000$ is not a every-day type of transaction (on the other hand there is no way to consider it a gift). it would seem that it’s a gift because the patron gives it 49 . The players claimed that it was a gift. The court ruled that in this borderline case (on the one hand it seems like it was מתן שירותto the fans (the third parties) on the other hand you can argue that it wasn’t being that they weren’t obligated to give them the gift) in this case the court ruled that they were exempt from taxes. So the way to categorize this payment is by substituting the payment for what you would have received had the (insurance or BL) policy not been invoked. Waiters – tips With regards to the waiters he explained as follows: According to the law a waiter is supposed to receive a salary (and the salary needs to be at least minimum wage) on that salary employment income would apply. Regarding tips. So again. He went on to give an example of a doctor in the Kupat Cholim. At the eve of the game. On the evening of Rosh Hashanah a patient stops by and brings him a box of chocolate. when there is a payment by a third party. Sure enough they won and the players received the gifts. Yishai Beer 2011-2012 reserve duty and receives money from social security (BL). the British team was told that if they won they would receive significant gifts. etc: If it can be established that it was a pure gift than it wouldn’t be taxable. we need to ask. the costs of the gift. The tax authorities claimed that the players should have reported it. There are many people waiting on line and one of the waiting patients slips the doctor 20000$. We need to try and establish what the motivation for the gift was. likewise with the lawyer that slipped. So if one receives BL because they are in reserve duty than the BL payment will be considered as his salary and thus it is considered employment income. בכפוף להוראות פקודה זו. But because he didn’t have a salary reported.השימוש ברכב או ברדיו טלפון נייד שהועמד כאמור לרשות העובד Class 10 46 47 She was a widow and the court felt bad. לכל שנת מס. שוויו של שימוש ברכב או ברדיו טלפון נייד שהועמד לרשותו של העובד. The court ruled (that in light of the circumstances46) that the tips would be considered employment income (in accordance with section 2(2))47. At some point he drowned while trying to save someone.25] מקורות הכנסה 1)] תיקון מס' 231(המפורטים להלן. We looked at section 2 TO: ) מס הכנסה יהא משתלם. it was a negligible amount).Effy Stern Tax Law Prof. However if the situation is categorized as 2)2) ))הכנסת עבודה than the employer is responsible to make sure that the tax is reported. ממקורות :אלה עסק ומשלח יד . The case law says that towards the employer there is labor relations (and thus there is employment income in accordance with section 2(2)) and the tips are considered his vocation ( ( )משלח ידand thus taxable according to the relevant section (2(1)). Prof. 50 . Yishai Beer 2011-2012 voluntarily.שניתנו לאחר לטובתו ((129 'תיקון מס )ב( שר האוצר. כל טובת הנאה או קצובה שניתנו לעובד (22 ')תיקון מס ממעבידו. Again a difference between looking at a situation as הכנסת עבודהor משלח ידis that if its משלח ידthan the individual needs to make sure to report the taxes. Beer explained that this ruling was given under specific circumstances and it is not clear how this will affect the general law regarding waiters. והכל .או מעסקה או מעסק אקראי בעלי אופי מסחרי עבודה )2( )א( השתכרות או ריווח מעבודה. על הכנסתו של אדם תושב ישראל שהופקה או שנצמחה בישראל או ( 2002 -תשס"ב מחוץ לישראל ועל הכנסתו של אדם תושב חוץ שהופקה או שנצמחה בישראל. לרבות תשלומים בשל 1975 -תשל"ה ((129 'תיקון מס החזקת רכב או טלפון. תשלומים שניתנו לעובד לכיסוי הוצאותיו. בשיעורים . on the other hand the tip is given because of the service ( )מתן שירותthat the waiter provided.)1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן כלשהי . בין שניתנו לעובד במישרין או בעקיפין או . אך למעט תשלומים כאמור המותרים לעובד כהוצאה. he (his widow) wasn’t entitled to BL (or if he was it entitled. We mentioned the case 2105/06 ( :)אסתר כהןThis case dealt with a waiter that didn’t report taxes. באישור ועדת הכספים של הכנסת. נסיעות לחוץ לארץ או רכישת ספרות מקצועית או 2002 -תשס"ב ביגוד.בין שניתנו בכסף ובין בשווה כסף. יקבע את שוויו של 2002 -תשס"ב . we wouldn’t tax Levi for the helmet. because at the end of the day the firm is not doing it for the worker rather it is doing it for clients (i. In all these cases the motivation for the employer is for the benefit of the employer and thus we don’t tax the employee. it is worth it for him to fly the intern.Effy Stern Tax Law 04/12/11 Prof. A law firm sends all of its employees to Turkey for a relaxing weekend. So even though in comparison to Ruben. again in a situation where the employee charges clients 100$ an hour for the interns services. Judah and Issachar are flown to Eilat to hand over judicial documents. One approach (the Israeli approach) is to check the motivation of the employer. we won’t say that he has to pay a tax. Simon is receiving much more. 51 .אופציות Imputed/conceptual income – הכנסה רעיונית To explain the concept we gave several examples: Ruben works in a law firm. etc) we won’t tax the worker. he works near an oven.e. Levi works in a factory that makes iron. Yishai Beer 2011-2012 הכנסה והוצאה רעיונית . Because in both of those cases the motivation of the employer is to cover himself with regards to the safety of the employee (or in the case of the police uniform) the employer wants all police officers to look the same. The other approach (British approach) says we evaluate the value of the stipend/item (. but basically their approach will be quicker to say that שווה כסף is like כסףand thus taxable. Simon works in a firm where the conditions are superb. and thus once again (in this case) it would be to the benefit of the 48 We didn’t discuss the English approach at length.)שווי השוק של ההטבה According to the Israeli (motivation) approach. With regards to all these situations there are two approaches in how to deal with it with regards to taxes. The office is shabby and lacking in amenities. With regards to the flight to Eilat. The commonality of all these cases is that there are employee/employer relationships. Likewise we wouldn’t tax a police officer that receives a uniform. and he receives from his employer a set of special cloths and a helmet: Two interns. when a fancy law firm provides (Simon with) first class facilities (fancy office. Similarly. Zebulon’s boss tells him that he needs to buy a fancy new suit on the firm’s tab. it is doing it for itself) 48. rather when the employer gives out the bottles to all the workers than he has to write off the tax (off of the employees paycheck). than I will see a tax on my paystub? 52 . For instance an agora is a legal form of tender and thus if you owe someone a million shekels (and you don’t like them) than you could pay them in agorat.שניתנו לאחר לטובתו ((129 'תיקון מס )ב( שר האוצר. Similarly with the suit. Similarly. אך למעט תשלומים כאמור המותרים לעובד כהוצאה. With regards to the flight to Turkey. its not that the worker would have to go and pay taxes on the bottle of wine. 51 * Does this mean that if I receive a prize for employee of the month.בין שניתנו בכסף ובין בשווה כסף. According to the aforementioned section (see underline) any benefit whether cash or cash value would be considered for tax purposes. 49 50 See infra at 116 regarding deducting expenses. שוויו של שימוש ברכב או ברדיו טלפון נייד שהועמד לרשותו של העובד. if it is for the employer than it won’t be taxable and if it is for the employee than it would be taxable51. we would say that the dominant aspect to the trip is to the benefit of the employee. בכפוף להוראות פקודה זו. The way to judge each case is to look at what is the dominant motivation or trigger of the benefit given. נסיעות לחוץ לארץ או רכישת ספרות מקצועית או 2002 -תשס"ב ביגוד. Likewise if a company gives a prize for the best worker of the month.25] מקורות הכנסה 1)] תיקון מס' 231(המפורטים להלן. So in the example with the gift of wine.…………… (1) עבודה )2( )א( השתכרות או ריווח מעבודה. כל טובת הנאה או קצובה שניתנו לעובד (22 ')תיקון מס ממעבידו. Section 2(2) TO: Employment ) מס הכנסה יהא משתלם. לרבות תשלומים בשל 1975 -תשל"ה ((129 'תיקון מס החזקת רכב או טלפון.השימוש ברכב או ברדיו טלפון נייד שהועמד כאמור לרשות העובד He mentioned the term ( הילך חוקיlegal tender) which says ‘what is the form of payment that a debt can be collected’. it would be considered for the benefit of the employer (in this case!49). תשלומים שניתנו לעובד לכיסוי הוצאותיו. בין שניתנו לעובד במישרין או בעקיפין או . In response to someone’s question he reminded us that with income tax we pay מס במקורmeaning that the employer is the one that pays income tax. באישור ועדת הכספים של הכנסת. לכל שנת מס. ממקורות :אלה עסק ומשלח יד . than that would be considered for the benefit of the employee and thus it would be taxable. Yishai Beer 2011-2012 employer (but each case needs to be judged on a case to case basis!). בשיעורים . והכל . if El Al gives all its workers a bottle of wine. על הכנסתו של אדם תושב ישראל שהופקה או שנצמחה בישראל או ( 2002 -תשס"ב מחוץ לישראל ועל הכנסתו של אדם תושב חוץ שהופקה או שנצמחה בישראל. than the worker is obligated to pay tax on it 50.Effy Stern Tax Law Prof. יקבע את שוויו של 2002 -תשס"ב . He gave another example: (the example is similar to the case law we read for week 5). rent and the building of an additional floor. if the lawyer treated 10 clients that day plus the mechanic than when he reports taxes for that day it should say that he dealt with 11 clients. However with regards to tax purposes we will pierce the veil and treat the situation for what it is (i. and we said that the added value that she brings is in fact imputed income. So in this case we have two transactions occurring.)שווה כסףHe reminded us of the example of the computer engineer that has the choice of either to go home and clean the house. and the same would be for the mechanic. When he goes to pay. Or the husband that complains about his “idle” housewife. He pointed out that the rule (mentioned in 2(2)) that payment in cash is the same as payment in kind also applies to section 2(1)54. . Ruben is a student and he rents an apartment for free however the contract requires him to put in a new electric system. 52 53 Supra at 12 He reminded us that we are not dealing with a situation of gifts (pro bono.)שווה כסף Say Ruben rents Simon a villa for ten years for free. He presented another example of imputed income: Ruben is a lawyer and he brings his car to the shop. In both these cases we explained that in fact there is a value to their work of a housewife.)רימון 53 . Though there is a value to the work of say a housewife or the engineer that goes home to clean. or a wedding gift) those types of situation is dealt with elsewhere. and the landlord is receiving the appliances/systems for free. We explained that it is a fault in the tax system in that it doesn’t count such incomes.g. but when Simon returns the Villa he returns it with an additional floor (the renter builds an additional floor). The contract also stipulates that at the end of the year the renter is obligated to give the appliances/systems he bought to the landlord. This is a transaction done in kind (. The mechanic than goes to Ruben and asks him for legal services and Ruben provides him with services free of charge. So in the example of the lawyer in the mechanic. Yishai Beer 2011-2012 We explained that imputed income is a benefit given in kind ( . In such a case again we see two transactions. From a contractual perspective there is no obligation for Ruben to provide the mechanic services and the neither was the mechanic obligated to provide free services. or stay at work and hire a cleaning lady52.e. the mechanic tells him that it’s on the house. So in this case we have two transactions being done in kind. Here we are dealing with קיזוזwhere A gives B something at value X and B gives A something at the same value X.Effy Stern Tax Law Prof. The renter is receiving free rent. 54 See the case law for this topic (week 5 syllabus – e. a transaction)53. the tax system doesn’t count such income. so whenever you see someone getting a ‘seemingly’ free lunch we have to ask ‘why is it that he is receiving a free lunch’. which is ‘why would he waive this amount!’ So the answer is because this is an עסקת עבודהin the sense that the employer is trying to hold on to the employee and thus he is willing to take the hit on the loan. He reminded us that with every conceptual transaction ( )עסקה רעיוניתthere are two transactions. Class 11 06/12/11 As we said income in paid in kind ( )שווה כסףis treated just as if it were paid in currency for as we said there are no free lunches. here the two transactions are. Than we ask the obvious question. Based on the same logic we also explained that a loan given by an employer to an employee is also taxable. than we add on 5% to the salary of the employee)55. Once we add on these amounts than we will tax them accordingly (with regards to this we will discuss the רימוןcase next class). בין שניתנה לו במישרין או בעקיפין או 55 ()ט Just to reiterate: with this עסקת הלווהthere are two transactions.לווה מלווהThe value of the transactions is the interest that the employer is paying the bank for the loan. ובעת המימוש היה הפרש בין המחיר המשתלם כרגיל בעד אותו נכס או שירות לבין המחיר ששילם אותו אדם65.משכורת רגילהand . הכנסת עבודהand . The employer goes to the bank and takes out a loan for the worker and gives it to the worker. if the employer had to pay the bank 5% interest for the loan. Yishai Beer 2011-2012 :הלווה מוטבתHe explained this concept with an example: There is a worker that is an asset to the company. So what this couple does is it buys a אופציית רכישהwherein they pay a certain premium and than they 54 . Section 3i TO: )1( מימש אדם זכות שקיבל בעבר לרכישת נכס או שירות.עסקת הלווהWith regards to the עסקת הלווהthe worker borrows and the employer lends (he lends to the borrower at the market value (5%) and the borrower borrows from the lender at market value). .g.Effy Stern Tax Law Prof. Bottom line is that there is no such thing as a free lunch. או קיבל אדם הלוואה. The employee therefore is considered to be receiving the interest that the employer is paying for the loan (e. He comes to the employer and asks for a five million dollar loan. He gave an example of a call option :אופציית רכישהa couple gets married and they are wondering whether to by an apartment. the parents of the girl say that prices will go down so they should wait. interest free. The parents of the boy tell the children that prices are going to go up so they should by now. In this case the reason why the employer did this was because he wants to hold on to this employee and it is for that reason that he gives him the interest free loan (there are no free lunches!). The couple is unsure what to do. 56 This is referring to an option. רבית אחידהHe explained that its only called רבית מסובסדתif the interest on the loan is less than 4% + . מחברה שבשליטתו .Section he explained that dividends can be received either in cash or in . 58 He said that this is dealing with . יראו את ההפרש )א( בזכות או בהלוואה שניתנו בקשר ליחסי עובד ומעביד .מי שמחזיק או זכאי לרכוש.כהגדרתו בסעיף 67)ד "בעל שליטה" . אחד מאלה .מדדIF it’s the same or more than this than its not considered . למעט אחד מאלה . או שהיתה נכס קבוע בידי המלווה במועד החל בתקופה שמיום כ"ג ) בטבת התשס"ח )1 בינואר 8002( עד יום כ"ח באדר א' התשס"ח 5 במרס 8002(. אופציית מכירהis the same idea from the vantage point of the seller.)1(%5 לפחות מהון המניות שהוצא .עבודה 60 ..61שסיפק )ג(26בזכות או בהלוואה שפסקאות משנה )א( או )ב( אינן חלות עליה שקיבל בעל שליטה.כהכנסה לפי סעיף – 2)4(.כהכנסת .שווה כסףHe than gave us an example Ruben and Simon have a company called Ruben Simon Inc.)1( עסקה בין-לאומית כמשמעותה בסעיף 58א )2( הלוואה שניתנה עד יום כ"ח באדר א' התשס"ח )5 במרס 8002(.)ב( בזכות או בהלוואה שקיבל אדם ממי שהוא מספק לו שירותים כהכנסה לפי סעיף 2)1( זולת אם הוכיח שניתנו ללא קשר עם השירותים . וההלוואה היא ללא ריבית75 או בריבית נמוכה משיעור שקבע לענין זה שר האוצר85 באישור ועדת הכספים של הכנסת בין דרך כלל ובין לסוגי 59 – הלוואות או להלוואות למטרות שונות.)2(%5 לפחות מכוח ההצבעה בחברה . and each of them takes an interest free loan from the company.אופציית רכישה 57 This refers to a ( הלווה מוטבתwe mentioned this term in a previous lecture). Once again we say here that there is no such thing as an interest free loan (no free lunches) and thus we say that the interest free loan was given in stead of cash for the services that were provided. שהיתה נכס קבוע בידי המלווה לפי חוק תיאומים בשל אינפלציה. The סיפה of the sub section ( ). ביום כ"ב בטבת התשס"ח )13 בדצמבר 7002(.Effy Stern Tax Law Prof.זולת אם הוכיחis saying that the transaction is taxable unless it was proven that the loan given in the private sphere 62 As an intro to this sub. לענין זה . A home owner is unsure whether to sell to he buys an אופציית מכירהwherein they pay a premium to someone that is willing to buy the house in X amount of years at today’s price.מסובסד 59 The section presents three alternatives: 60 הלווה מסובסדת 61 Here the section is discussing a scenario not of an employee/employer rather it is dealing with an interest-free loan in exchange for services. than once again we would refer to this as imputed dividends (( )דיווידנד רעיוניthis is the זילברשטיין ומינץcase in the syllabus). או קרובו.)4(זכות למנות מנהל – לענין סעיף קטן זה :"הלוואה" – לרבות כל חוב. לבדו או :ביחד עם קרובו. Yishai Beer 2011-2012 לאחר לטובתו. במישרין או בעקיפין. אילו הוראות חוק תיאומים בשל אינפלציה היו (66 ')תיקון מס 1985 -תשמ"ה (67 ')תיקון מס 1985 -תשמ"ה (67 ')תיקון מס 1985 -תשמ"ה ((185 'תיקון מס 2011 -תשע"א receive the right to buy the apartment (in x amount of years) at today’s price..(1)("קרוב" . section 3 )ט )רישה deals with . 55 .)3(זכות לקבל %5 לפחות מרווחי החברה או מנכסיה בעת פירוק . Yishai Beer 2011-2012 . (c) if a right or loan to which subparagraphs (a) or (b) do not apply was received by a controlling member or by his relative from a company under his control – income under section 2(4). 56 . (b) if the right or loan was received from someone to whom its recipient provides services – income within the meaning of section 2(1).2( וכן את דרך חישובו של כל נתון הנחוץ לצורך זה . The section goes on to say The tax on the differential in realizing the aforesaid right shall.Effy Stern Tax Law Prof. as is the number of years from the day when the right was conferred until it was realized.g. Simply put section 3i deals with the taxation of options and it deals with three potential scenarios: (1) An employee that receives an option (e. unless he proves that it was not given in connection with the services he provides. If the CEO realizes this option he will be taxed according to section 2(2)). and if that loan was free of interest or bore a lower rate of interest than the Minister of Finance set for this purpose with approval by the Knesset Finance Committee – either in general or for particular categories of loans or for loans for specific purposes – then the difference shall be deemed – (a) if the right or loan was given in connection with an employee/employer relationship – work income. but not more than six years that end with the year of realization.לרבות הפרשי הצמדה )2( לפי בקשת הנישום יחושב המס על הפרש במימוש זכות כאמור כאילו היה הכנסה שנתקבלה בחלקים שנתיים שווים שמספרם כמספר השנים שמיום מתן . the CEO of a contracting company receives an option to buy an apartment at half price. on the assessee’s application be calculated as if that differential were income received in a number of equal annual installments. or if a person received a loan."ריבית" .1כהגדרתה בסעיף 46א (66 ')תיקון מס 1985 -תשמ"ה ((164 'תיקון מס 2008 -תשס"ח ((185 'תיקון מס 2011 -תשע"א Section 3i states that If a person realized a right received in the past to acquire an asset or service.חלות לגבי אותה תקופה . whether given directly or indirectly to him or to another for his benefit. and if at the time of the realization there was a difference between the price normally payable for that asset or service and the price that person paid.הזכות ועד למימושה אך לא יותר משש שנים המסתיימות בשנת המימוש )-)3( שר האוצר רשאי לקבוע את דרך חישוב ההפרש האמור בפסקאות )1( ו .()4( )נמחקה )5( הוראות פסקה )1()ג( לא יחולו על הלוואה שקיבל בעל שליטה שהוא חבר בני אדם שאינו חברה משפחתית כמשמעותה בסעיף 46א או חברה שקופה . g. If he realizes this option he will be taxed according to section 2(1)).זילברשטיין מינץ 57 . The problems with clause 3i: Originally taxation was organized in section 2. than in the 80s the legislature came along and tried to straighten things out by adding section 3i. the contractor. If he realizes the option he will be taxed according to section 2(4) – income from dividends63. however clause 3i only focuses on the receiver.g. interest that is lower than the rates set by the minister of finance) than if it’s a worker he will be taxed according to section 2(2) if it’s a situation of משלח ידthan he will be taxed according to section 2(1). Yishai Beer 2011-2012 (2) A בעל משלח ידreceives an option (e.Effy Stern Tax Law Prof. 533/89 ?)זילברשטיין ומינץ (1/98 :)דרThe third problem with 3i is that it results in double taxation. a lawyer receives an option from his client. it is discussed in the case 533/89 . He explained that when you get a gift from your boss.g. and if it’s the majority shareholder than he will be taxed according to section 2(4). to buy an apartment at half price.e. with the aforementioned examples of the supermarket or the mechanic that provides free service to the lawyer in exchange for his services).)מדדHowever in reality there is no set interest rate. The next part of section 3i states that if a person received a loan interest free or a subsidized loan (i. thereby baffling the courts regarding how to tax the giver! (533/89 :)זילברשטיין ומינץThe second problem is that section 3i gives a very arbitrary definition of what is considered a subsidized loan (based on the interest rates set by the minister of finance – 4% + . the time that the transaction takes place (the time that the transaction is obligated in taxes) is not when you use the gift (say you got a gift certificate) rather it’s when 63 This option was added later on. But instead of clarifying things in only brought about confusion! The first problem is that until now when the courts interpreted transactions according to section 2 it focused on both the receiver and the giver of the benefit (e. (3) The majority shareholder of a company receives an option (as in the aforementioned examples). for different people are charged different rates based on their risk status and other such factors! So what happens with a subsidized loan that isn’t mentioned in section 3i? What is its market price? (e. In other words being that he used the money to buy a house he can’t write off any expense.000. (and thus it seems that you need to pay taxes twice – this is the question dealt with in the case 1/98 (. With regards to the הלווהthe lawyer is paying imputed interest of 50. When Rimon gave in its tax statement to the tax authorities it stated its earning (which was all the commission that it earned from its clients) but it didn’t report the interest earned on the aforementioned ‘interest-free loans’ from the parent company.000 for the loan and than he gives it interest free as a loan to the lawyer). Rimon used to collect money from the clients and than he would transfer the money to the parent company that he worked for. So basically we have a situation of an interest free loan between an employer and an employee.000 – meaning the client went to the bank and took out the loan and he pays the bank 50. With this intro we moved on to the case 32/86 ()רימון 32/86 ( :)רימוןRimon was an insurance agency that received הטבה ברביתfrom the parent agency that it worked for.))דר If all we had was section 2 than the law would be as follows: E.000 ands the client is paying 50. the commissions would be taxed according to section 2(1) and the interest would be taxed according to section 2(4)). The parent company used to allow Rimon to hold on the money for about a month till he handed it over to them. However section 3i seems to say that it’s when you use the gift.עסקת הלוואהWith regards to עסקת שכרthe lawyer is receiving an imputed payment of 50.))בית אררט He explained that if you take a loan for the sake of business than the interest can be written of as a business expense.g.Effy Stern Tax Law Prof.000 as money he received for the service he provided for his client. than he will have to pay tax on the full 50.000. But the tax authorities wrote Rimon that he forgot to report the 58 . This enabled him to invest the money during that month. and the client is lending 50. So in the aforementioned example if he used the money to buy a villa. (According to section 2. we would break down this case into the two transactions that it really is עסקת שכרand .000 (again this is in a world where there was only section 2 in accordance with the cases 247/63 ( )שפרand 375/59 (. So according to section 2. Yishai Beer 2011-2012 you receive the gift (from your boss). Say a lawyer received a loan from a client of one million dollars interest free (the price of the interest is 50. Effy Stern Tax Law interest in accordance with 3 ט 64 Prof. Also some details were changed for the sake of clarity 59 . 66 He substituted the names of the case. Yishai Beer 2011-2012 meaning that he had a double tax obligation on the loan. it should still be written off because he used the money as an expense. או קרובו. 533/89 :זילברשטיין ומינץIn this case Ruben and Simon66 had a company and took out an interest free loan. However according to section 3i the District court said that they are exempt from taxes because interest free loans are not listed in section 3i (again. on the other hand they realized that the ruling of the District court that said that Rimon should pay taxes twice is unacceptable! Being that the court didn’t know how to reconcile Sections 2 and 3 טit simply ruled that you can’t be taxed twice65. לענין זה (66 ')תיקון מס 1985 -תשמ"ה (67 ')תיקון מס 1985 -תשמ"ה Option 3 of section 3i states: (c) if a right or loan to which subparagraphs (a) or (b) do not apply was received by a controlling member or by his relative from a company under his control – 64 65 Basically the authorities said that he has an obligation to pay taxes both in accordance with Sections 2(4) and 3 . Option 3 of section 3i )ג( בזכות או בהלוואה שפסקאות משנה )א( או )ב( אינן חלות עליה שקיבל בעל שליטה. Thus we have a conceptual loan הלווה רעיוניתas well as a conceptual expense הוצאה רעיוניתand they should cancel each other out. מחברה שבשליטתו . Therefore Rimon is saying that while it’s true that he received an imputed loan. and all he should have to pay tax on is on the commissions and that’s all! The court didn’t understand the claims of Rimon. So according to section 2 we would pierce the veil and we see that there is a loan with interest and thus the transactions would be taxable.ט If I understood correctly than he said that the court could have reconciled the conflict between the Sections using the arguments presented by Rimon. at this point the 3rd option wasn’t yet added to 3i).כהכנסה לפי סעיף – 2)4(. he can write it off as a business expense (as we said above a the interest on a loan taken out for the sake of business investment can be written of as an expense). both in accordance with 2(4) and 3 !טRimon claimed that (in light of what the court ruled in the case 247/63 ( )שפרwe should pierce the veil) and in light of what we said above being that he used the money he received from the parent agency to invest. The question that arose was how to we relate to a shareholder that takes out an interest free loan (at the time of this case the 3rd option in 3i wasn’t yet added). this was the first time that the court fully and completely dealt with imputed/conceptual income ( . said that we should move back to basics (247/63 ( ))שפרand thus she says that in order to tax Zilberstein and Mintz you don’t need section 3. than for each year 2% will be deduced and the rest will be given to the inheritors). Class 12 11/12/11 We continued with the אלישעcase: we explained the way the transaction was done (imputed/conceptual rent based on the monthly rent. they received dividends (imputed dividends) and thus you could base the tax on section 2(4). In addition they leave a deposit ( )פיקדוןfor the apartment/room that they receive. so if I gave a deposit of 1.שכר דירה רעיוניתand )הלוואה בריביתwith regards to the שכר דירהthe renter is paying conceptual rent and the home is receiving conceptual rent. We than mentioned the case 533/89 ומינץ זילברשטייןwhere the court finally said that section 2 includes conceptual income . Yishai Beer 2011-2012 income under section 2(4. So while they pay a monthly fee. there is also that additional 2% that the home receives. We than mentioned the case 32/86 ( )רימוןcase and we saw the court had no clue what was going on. So we started with section 2 than we added section 3i and it confused everything. and Dornor J. Additionally there is also the imputed/conceptual interest that they aren’t receiving.הכנסה רעיוניתHowever the court wasn’t willing to recognize conceptual expenses . The way it works is that each year they take off 2% of the deposit (e. monthly reduction of the collateral.g. and waiving of interest). The way these homes used to be run was as follows: A retired couple calls the home.)הכנסה רעיוניתThe court pierced the veil and said that there are two transactions here ( . and the couple moves in and pays a monthly rental fee. Likewise the renter is receiving 60 . With regards to the third element (the waiving of interest) he explained as follows: Firstly.000$ and than I die ten years later.הוצאה רעיונית 8131/06 :אלישעElisha was an Old age home. Usually when you receive back a deposit you receive it along with the interest that it produced.Effy Stern Tax Law Prof. The case came to the Supreme court.000. if you are a contractor and you build a thousand apartments and each is sold for two million.)יאיר דרIn this case. ובעת המימוש היה הפרש בין המחיר המשתלם כרגיל בעד אותו נכס או שירות לבין המחיר ששילם אותו אדם. Section 3i: (cont’d) )1( מימש אדם זכות שקיבל בעבר לרכישת נכס או שירות. וההלוואה היא ללא ריבית או בריבית נמוכה משיעור שקבע לענין זה שר האוצר באישור ועדת הכספים של הכנסת בין דרך כלל ובין לסוגי הלוואות – או להלוואות למטרות שונות. Yishai Beer 2011-2012 conceptual interest and the home is paying conceptual interest67. and thus now (at the time that דרwants to make use of the options) he wants to get his money back from the tax authorities. If I win a plane ticket. או קיבל אדם הלוואה. and (in ’דרs claim) 3i also established the time of taxation ( )זמן עיתויwhich is at the time of the realization of the benefit! So in this case דרwas taxed when he received the benefits. there is merit to the claim of the tax authorities as supposed to the claims of . However section 3i seems to say that the time of taxation is the time that the benefit is realized! 1/98 ( . and than two days later the car is stolen. obviously I wouldn’t be able to go to the tax authorities and demand that they give me my money back [the money I 61 . this very issue came up! Dar tried to claim that as we learned in 533/89 זילברשטייןthe court ruled that section 3i is supposed to provide the guidelines for section 2. but the contractor is given the ability to buy four apartments for one million – that would be considered . יראו את ההפרש ( ()תיקון מס' 22)ט 1975 -תשל"ה For instance. regardless of when he realizes that benefit (e. But on the other hand. but a while later the options went down in value. Regarding the 67 68 The relevant section for this obligatory tax is section 17(1) (infra at 110) The court uses the words ""הוצאה בשווה כסף 69 As we already learned in the רימוןcase. In Response the tax authorities claimed that Sections 2 and 3i are autonomous and function separately69.Effy Stern Tax Law Prof. The home than claimed that though it’s true that there may be imputed/conceptual income ( )הכנסה רעיוניתit also had conceptual expenses! For the first time the court accepted this claim (that by recognizing conceptual income we must also recognize conceptual business expenses. בין שניתנה לו במישרין או בעקיפין או לאחר לטובתו.g. Thus conceptual expenses can be written off68).דרHe gave an example: say I receive a benefit in the form of a car. than I pay when I receive the prize not when I decide to use the ticket).מימש אזם זכותWe explained that in accordance with section 2 the time of taxation is the time that the person receives the benefit. this claim is problematic for several reasons including the problem of double taxation. Yishai Beer 2011-2012 contradiction or the double taxation issue that results. ואולם אם לא השיב פקיד השומה בתוך 09 ימים מיום קבלת ההודעה. בישראל. הכנסות פיננסיות לסוגיהם With regards to options given to workers as an incentive we mentioned section 102: Section 102 TO: Share allocation to employees – הקצאת מניות לעובדים – 201. לרבות כל זכות המוקנית מכוחן. דרreceived the options when he did.)2( חברה שהיא בעלת שליטה במעביד או שהמעביד בעל שליטה בה . שהוגשה 03 ימים לפחות לפני מועד ההקצאה )3( תכנית ההקצאה והנאמן אושרו על ידי פקיד השומה.התכנית. So section 2 establishes the rule and section 3 טestablishes the exception. אם אישר זאת המנהל )לענין זה ((147 'תיקון מס 2005 -תשס"ה . 70 A regular stock is appraisable at the time it is received you simply look up its value on the stock index. the court ruled that options are taxed at the time that they are received (in accordance with section 2) and there is no double taxation (meaning you aren’t taxed again at the time that you realize the benefit). ובלבד :שהעובד אינו בעל שליטה בה במועד ההקצאה או בעקבותיה והתקיימו בה כל אלה ((132 'תיקון מס )1( המניות. )א(בסעיף זה הקצאת מניות לעובדים תיקון מס' 231("בחירה" – בחירה של חברה מעבידה באחד משני מסלולי מיסוי להקצאת מניות לעובדים ( 2002 -תשס"ב . The purpose of section 3i is for cases where the value of the benefits can’t be realized at the time that they are received (e. יראו את תכנית ההקצאה או . 71 * What if post factum I realize that I valued the benefit wrongly? Does that mean that we would be able to apply section 3i? 62 .נאמן עד תום התקופה לפחות 2002 )2( החברה הודיעה לפקיד השומה על בחירתה במסגרת בקשתה לאישור .g. כמאושרים :"חברה מעבידה" – כל אחד מאלה ((142 'תיקון מס )1( מעביד שהוא חברה תושבת ישראל או חברה תושבת חוץ שיש לה מפעל 2004 -תשס"ה – קבע או מרכז מחקר ופיתוח. הופקדו במועד ההקצאה בידי -)תיקון( תשס"ג . מסלול הכנסת עבודה או מסלול רווח הון . and thus he was taxable at the time that he received it! However we need to resolve this with section 3i and the issue of double taxation.(המעביד .(9)32 "בעל שליטה" – כהגדרתו בסעיף " הקצאת מניות באמצעות נאמן" – הקצאת מניות של חברה מעבידה לעובד.באמצעות נאמן.Effy Stern Tax Law Prof.את הנאמן לפי הענין. Say my boss gave me options in a company that hasn’t been established yet 70)71.)3( חברה שאותו אדם הוא בעל שליטה במעביד ובה paid them in taxes]! We don’t care what happened to the benefit after you received it! So to in this case. Yishai Beer 2102-1102 "מועד מימוש" – )1( לגבי הקצאת מניות באמצעות נאמן . אך למעט בעל שליטה. יראו את חלק שווי ההטבה בגובה ממוצע שוויין של מניות החברה בבורסה בתום שלושים ימי המסחר שקדמו להקצאה. או בתום שלושים ימי המסחר שלאחר הרישום למסחר כאמור.תקופה של 21 חודשים מיום תשס"ה. )2( בחרה החברה המעבידה במסלול רווח הון. או מניה בחברה שמניותיה נרשמו למסחר בתוך 09 ימים ממועד ההקצאה. יראו את הכנסתו של העובד כרווח הון בסכום שווי ההטבה. בניכוי ההוצאות. ובלבד שהסכום שנקבע כהכנסה לפי סעיף 2)1( או ) 2( כאמור. " שווי ההטבה" – התמורה או השווי במועד המימוש. כולן או חלקן. ויחולקו במדד יום ההוצאה. )3( במכירה שלא מרצון כהגדרתה בסעיף 301 .5002 "מניה הרשומה למסחר בבורסה" – לרבות מניה בחברה שמניותיה. תיקון מס' 741(( )2( בחרה החברה במסלול רווח הון . )ג( )1( הכנסתו של עובד מהקצאת מניות שאינה הקצאה באמצעות נאמן. )ב( הכנסתו של עובד מהקצאת מניות בחברה מעבידה באמצעות נאמן לא תחויב במס בעת ההקצאה ויחולו במועד המימוש הוראות אלה: )1( בחרה החברה המעבידה במסלול הכנסת עבודה. בחרה החברה במסלול רווח הון ומועד המימוש תיקון מס' 231(( )תיקון( תשס"ג- חל לפני תום התקופה. תחויב 36 . תשס"ה. לרבות עובד.5002 המניות והופקדו בידי נאמן. ועד למועד המימוש. לפי הענין. לפי הענין. והנאמן החזיק במניות עד תום התקופה לפחות.תקופה של 42 חודשים מיום שבו הוקצו תשס"ה.מועד מכירת המניה לרבות מכירת מניה שמקורה בזכות לרכישתה. לענין תיאום ההוצאות שהוציא עובד ברכישת המניה המוקצית.מועד מכירה כאמור.מועד העברת המניה מהנאמן לעובד או מועד מכירת המניה על ידי הנאמן. כהכנסה לפי סעיף 2)1( או )2( לפי הענין. לפי הענין. ואת יתרת שווי ההטבה כרווח הון החייב במס בשיעור של %52. בניכוי הוצאות שהוציא העובד ברכישת המניה כשהן מתואמות מיום ההוצאה ועד למועד המימוש. )3( על אף האמור בפסקה )2(. "נאמן" – מי שפקיד השומה אישרו כנאמן לצורך סעיף זה. וכן הוצאות שהוציא העובד בשל המכירה. לפי הענין. "תום התקופה" – כל אחד מאלה: תיקון מס' 741(( )1( בחרה החברה במסלול הכנסת עבודה .5002 שבוהוקצו המניות והופקדו בידי נאמן. יראו את הכנסתו של העובד כהכנסה לפי סעיף 2)1( או )2( לפי הענין. והוא יחויב עליו במס בשיעור של %52. והכל יתואם מיום ההקצאה או הרישום. )4( על אף האמור בסעיף זה. "עובד" – לרבות נושא משרה בחברה. )2( לגבי הקצאת מניות שלא באמצעות נאמן . רשומות למסחר בבורסה בישראל או מחוץ לישראל. יוכפלו הוצאות כאמור במדד יום ההקצאה או יום הרישום למסחר. יראו את הכנסתו של העובד כהכנסה לפי סעיף 2)1( או 2002 )2(.Effy Stern Tax Law Prof. לפי המוקדם מביניהם. ( תיקון מס' 741("מניה" – לרבות זכות לרכישת מניה. לא עלה על שווי ההטבה במועד המימוש. בסכום שווי ההטבה. היתה המניה המוקצית מניה הרשומה למסחר בבורסה. תשס"ח. כולם או מקצתם. גם אם נמכרה המניה לפני תום התקופה כאמור בסעיף קטן )ב()4(. הכנסתו של עובד מהקצאה של זכות שאינה רשומה למסחר בבורסה לרכישת מניה שלא באמצעות נאמן. חברה לא תהיה רשאית לבחור אחרת אלא אם כן חלפה שנה לפחות מתום השנה שבה היתה ההקצאה הראשונה שנעשתה לאחר הבחירה הקודמת. ועל כל הקצאת מניות שבוצעה בשנה שלאחר תום השנה שבה היתה ההקצאה הראשונה ואילך. )2( הוראות לגבי חיוב העובד במס כשלא נתמלאו לגביו התנאים שנקבעו בסעיף זה או לפיו. לא תחויב במס במועד ההקצאה. 2002 )ז( בחירה לפי סעיף זה תחול על כל עובד אשר לו הוקצו המניות. לפי הנמוך. הוצאת שכר בשל הקצאה כאמור בגובה הכנסת העובד לפי סעיף 2)1( או )2( או בגובה סכומי ההשתתפות שבהם חויבה בשל התחייבותה לחברה המעבידה המקצה. )2( על אף האמור בפסקה )1(. ( תיקון מס' 241()ח( המנהל רשאי לקבוע כל אחד מאלה: תשס"ה.Effy Stern Tax Law Prof. )2( לא תותר לחברה הוצאה במכירת מניה שלגביה בחרה החברה המעבידה במסלול רווח הון. כהגדרתו באותו סעיף. )5( כללים לניכוי מס במקור ולהגשת דוחות על ידי החברה המעבידה והנאמן וקביעת מועדים להגשתם. בשל מימוש מניות במכירה שלא מרצון. בכל אחד מאלה: )1( בהקצאת מניות באמצעות נאמן שלגביה בחרה החברה במסלול הכנסת עבודה. He explained that in certain instances the employer wants to provide incentive to the workers so what he does is that he pays them a small base and he gives them a small partnership in the upside 46 . לגבי תקופת עבודתו בישראל. והכל בשנת המס שבה נוכה המס בשל הכנסת העובד והועבר לפקיד השומה. תותר בניכוי. כהכנסה לפי הוראות סעיף 2)1( או )2( לפי הענין. )ד( )1( בהקצאת מניות כאמור בסעיפים קטנים )ב()1( ו-)3( ו-)ג()1(. שיעור המס שיחול על חלק הרווח החייב בידי עובד )ו( שחדל להיות תושב ישראל.4002 )1( תנאים לענין ההקצאה.8002 )4( כללים לענין הקצאת מניות לעובד שהוא תושב חוץ. תיקון מס' 461(( )3( )נמחקה(. יהיה לפי שיעור המס הקבוע בסעיף 121. ובמועד המימוש תחויב במס כהכנסה לפי סעיף 2)1( או )2(. על אף האמור בסעיף 001א. ובמועד המימוש . כל עוד לא בחרה החברה אחרת. לחברה המעבידה שהוא עובד בה. לפי הענין. )2( בהקצאת מניות באמצעות נאמן שלגביה בחרה החברה במסלול רווח הון ואולם המניה מומשה לפני תום התקופה. תיקון מס' 231(( )3( בהקצאת מניות שלא באמצעות נאמן שעליה חלה הוראת סעיף קטן )ג() )תיקון( תשס"ג- 2(.כהכנסה כאמור בחלק ה או חלק ה3 לפי הענין. Yishai Beer 2102-1102 במס במועד ההקצאה. )ה( הוראות סעיף 3)ט( לא יחולו על הקצאת מניות לעובדים בחברה מעבידה לרבות על התחייבות להקצאה כאמור. Either way with section 102 the worker potentially ends up with two benefits. The point of this system is to give the worker a feeling of being a part of the company72. but not if they go down. What section 102 comes to do is to try and bypass section 2 (because if the workers would be taxed now it would destroy the whole incentive mechanism. על הכנסתו של אדם תושב ישראל שהופקה או שנצמחה בישראל או ( 2002 -תשס"ב מחוץ לישראל ועל הכנסתו של אדם תושב חוץ שהופקה או שנצמחה בישראל. not the downside. 65 . and than at whatever time you decide the fiduciary transfers the money to the worker. in the מסלול הוניthe trustee needs to hold on to the benefit for minimum of two years73. Yishai Beer 2011-2012 (or in the equity – basically he gives them a share in the company). 74 And as we explained in a previous lecture. because at this point they didn’t make any money yet!). בכפוף להוראות פקודה זו. linkage differentials. לכל שנת מס. being that they were only partners on the upside. postponement of tax is actually a monetary gain to the one that received the postponement. Without section 102. According to the capital gains course: If the employer wishes to waive his right to write off the income as an expense. He pointed out the obvious problems that could result. we would have taxed this sort of benefit at the time that the worker received the benefit (according to section 2). The reason why the employer does this is because he wants to hold on to the employee. and than at that point you pay (income) taxes (and the employer writes off the income paid to the worker as an expense). interest. ריבית.)מסלול פירותיthe next third you would get after the third year.)מסלול רווח הוןRegarding the work income course the section says that an employer that wants to give his workers benefits in the form of options as mentioned above and you don’t want them to be taxed at the time that you give them the option than what you (need to) do is you transfer the benefits to a fiduciary ( )נאמןof the tax authority. בשיעורים . 73 A typical contract in the high tech field will divide the benefits as follows: one third you get after a year (thus that would be within the . than the worker can receive the benefit as ( הכנסה הוניתwhich serves to his benefit with regards to taxes). ממקורות 72 He explained that partners on the upside of a company gain if things go up.הכנסה הונית Section 2(4): Dividends. Section 102 offers two options of taxation for share allocation to employees through a trustee – the work income course ( )מסלול הכנסת עבודהor the capital gains course ( . and two is the fact that the benefits that the employee receives (if the employer wishes) could be considered . והפרשי הצמדה.25] מקורות הכנסה 1)] תיקון מס' 231(המפורטים להלן.הוניWith regards to the מסלול פירותיhe explained that the trustee needs to hold on to the benefit for minimum of a year. one is the fact that the obligation to pay tax is delayed74.Effy Stern Tax Law Prof. and the final third you would get after five years. ונכיון ) מס הכנסה יהא משתלם. The first course is referred to as the מסלול פירותיand the second course is referred to as the מסלול . discounts – דיבידנד. such as with banks in the US where partners didn’t care if the banks took risks. The court has ruled that even with involuntary transactions. The case law on section 2(4) deals with the term interest ( .Effy Stern Tax Law Prof. לרבות דיבידנד המשתלם מתוך רווחי הון של חברה. insurance companies and other financial institutions. because from an economic perspective you are returning exactly what you borrowed (and thus in light of this logic a linkage differential transaction shouldn’t be taxable! Again.הפרשי הצמדה או דמי נכיון דיבידנד. The next exception that was made was with regards to suppliers` credit (. ריבית . So if you sell a bond for less than its face value (( )ערך נקובe.ערך הנקוב 76 This case took place before the legislation of section 2(4) 77 The numbers are arbitrary 78 This means that you buy on credit (he gave an example of 60 + )שוטף 66 . the interest is obligated in taxes. or even in a case of involuntary interest it would be obligated in taxes (say after ten years of legal proceedings regarding an accident between A and B. linkage differentials would be taxable because that is how they make their money. We looked at the case 167/58 ( :67)סיגריות לודIn this 1000$ was borrowed and in light of inflation the borrower was forced to return 2000$77 and thus the claim (of the borrower) was that he should be able to deduct the 1000$ as an expense! The court ruled that it’s not an expense. and/or discounts ( .)ריביתThe case law dealt with the question if only (voluntary interest) ריבית רצוניתis obligated in taxes according to section 2(4). It’s also possible that the risk didn’t change and the bond value would go down to 90$ if interest rates changed. Already in the 1960s the court ruled that with regards to banks. this was before the legislation of section 2(4). Regarding linkage differentials it isn’t self evident that it should be taxed. bond that you paid 100$ and sell for 90$) than that is considered discount ( 57נכיוןi.g. Premium is when you pay an amount in addition to the .87)אשראי ספקים Here the case law ruled (this was in the 1960s) that businesses where credit is a major part of the 75 As a side point he pointed out that premium is the opposite. B is finally told to pay A x).)נכיוןHe explained the concept of discounts with an example: Say Ruben sells Simon a bond for 100$ and a year later its market value is 90$. linkage differentials. The reason why a bond would go down is because trust in the ability of the borrower to pay back the loan has gone down. in other words the risk has gone up. ריבית והפרשי הצמדה (22 ')תיקון מס 1975 -תשל"ה This section deals with income based on interest.)4( דיבידנד. dividends. so in this case the דמי נכיוןwould be 10$).e. Yishai Beer 2011-2012 :אלה . they added the section with regards to linkage differentials.חשבונותיו או חייבים ברישום כאמור . The court accepted the .הוראות פסקה זו לא יחולו על נכס שהוא חשבון בקופת גמל . The problem that this created was that if in fact linkage differentials are a החזר הקרןin real terms. In this case the result as far as taxes are concerned would be that all of it (20%) would be considered income. "הפרשי הצמדה . Thus it is clear that the tax result (regarding linkage differentials) is illogical. This test was discussed with in the case 239/69 ( :)אחים רביבIn this case the [contractor] didn’t want to be taxed in light of the aforementioned exception (if it’s a major part of your business) and thus they deposited money in the bank and asked the bank to give the buyer (borrower) credit (thus the contractor tried to cut himself off ניתוקfrom the credit). Thus in 1975 after the Ben Shachar Commission. (b) a nominal loan that is not indexed plus -5%. than the new amendment is problematic! For this reason section 9(13) was added which provides a (tax) exemption on linkage differentials to an individual that provides a loan.חריג הניתוק Another situation that could come up is where both parties realize that there is inflation and the forecasted inflation is the actual inflation (1%) and the borrower offers the lender one of two options: (a) he will lend him the money index-linked ( )צמוד למדדplus 5% . than it to will have to pay taxes on linkage differentials. לענין זה. as well as a corresponding section (17(1)) with regards to expenses. ובלבד שהתקיימו כל אלה (13) )1( הפרשי ההצמדה אינם הפרשי הצמדה חלקיים.Effy Stern Tax Law Prof. Yishai Beer 2011-2012 way the business is run.)2( היחיד לא תבע ניכוי הוצאות ריבית או הפרשי הצמדה בשל הנכס )3( הפרשי ההצמדה אינם הכנסה לפי סעיף 2)1( ואינם רשומים בפנקסי .in other words interest at 20% (including 15% inflation). The next exception that was recognized by the case law was the חריג הניתוקwhich says that we check to see whether it is possible to disconnect the linkage differentials of the business from the private business.חלקיים" – כפי שקבע שר האוצר באישור ועדת הכספים של הכנסת . Section 9(13) TO: Exemptions :פטורים ממס :הפרשי הצמדה שקיבל יחיד בשל נכס.9 ] ]הכנסות פטורות 8 הפרשי הצמדה על פיקדון בנקאי או על תכנית חיסכון ((147 'תיקון מס 2005 -תשס"ה Class 13 67 . In such a case the result as far as taxes in concerned in that given year would be 5% income/expense. We mentioned the ( מבחן הניתוקwhich was the trick that contractors came up with where they would have a third party (e.Effy Stern Tax Law 13/12/11 Prof. "הפרשי הצמדה 1975 -תשל"ה ((147 'תיקון מס (37 'תשס" מס .או על (22 ')תיקון מס תכנית חיסכון )1( הפרשי ההצמדה אינם הפרשי הצמדה חלקיים. bank) provide the loan to the buyer.g. linkage differentials. All this brought us to 1975 where the legislature changed the law and added linkage differentials to the TO. and discounts. We explained the concepts of interest. ובלבד שהתקיימו כל אלה (13) 1975פיקדון בנקאי תשל"ה.9 ] ]הכנסות פטורות הנשיא . We mentioned the historical reason for the change. the ‘integral test’ is a product of the pre-1975 case law).……… (2) גמל ומוסד ציבורי (21 ')תיקון מס הפרשי הצמדה על :הפרשי הצמדה שקיבל יחיד בשל נכס.-רשותתשמ"ח מקומית קופת . According to the new legislation linkage differentials are obligated in tax. Yishai Beer 2011-2012 We were in middle of discussing section 2(4). which are listed in section 9: 8 :פטורים ממס .חלקיים" – כפי שקבע שר האוצר באישור ועדת הכספים של הכנסת 2005 -)תיקון ה 1980 -תש"ם ((133 'תיקון מס . לענין זה. The problem is that this is illogical79! To deal with this the legislature introduced a list of exemptions. We explained how linkage differentials was added to the TO in 1975. this was an integral part of his business. dividend.……… (1) (76 ')תיקון מס 1988. We also mentioned that in the 60s the case law ruled that suppliers` credit ( )אשראי ספקיםis also obligated in taxes (because it is an integral part of their business). which is important because the case law prior to 1975 is still relevant (An example where would be apply pre-1975 case law would be: Say Ruben rents an apartment (than the source would be 2(6) unless.)2( היחיד לא תבע ניכוי הוצאות ריבית או הפרשי הצמדה בשל הנכס 2002 -תשס"ג הפרשי ההצמדה אינם הכנסה לפי סעיף 2)1( ואינם רשומים בפנקסי חשבונותיו או חייבים ברישום כאמור At what point do we tax linkage differentials/interest – שאלת העיתוי הפרשי הצמדה/ריבית בסיס המזומנים – בסיס המסחרי 79 See above 68 . and the court ruled that in this case we would say that providing credit is not a major of the business of contractors and thus linkage differentials would not be obligated in tax. g. a shoemaker) could go according to the . whether you are going to pay back this year. Ruben takes out a five year million dollar loan. or in five years. and the interest as well as the loan needs to be repaid at the end of five years: If we go according to what happens in practice than we should say that the transaction takes place at the end of the five years.בסיס המזומניםAs we explained previously. In other words if you owe someone money. However private persons (e. because the transaction happened now! 81 Supra at 32 82 Again we are dealing with a person/company that is going according to the . For this reason many such firms will go according to the . right now. annual) and we don’t wait until the end of five years (even though it may be a loan that you need to repay in several years). But being that interest accumulates from the very beginning. We now went on the next step – linkage differentials.g. For this reason the court has ruled ( )פס"ד אלקטרוניקהthat with regards to the question of timing ( )עיתויwe go by the period ()תקופתי (in this case.Effy Stern Tax Law Prof. next year. there are many mega law firms that choose to go according to the . we look at each year individually.בסיס מסחריthe reason for this is because at the end of the day the בסיס מסחריreflects reality (if one lawyer brought in one million to the firm but that million was only going to be paid to firm next year than according to the בסיס מזומניםit wouldn’t be counted when it comes to dividing the cake amongst the partners. In Israel wherever they have trading stock מלאי עסקיthey are supposed to go according to the ( בסיס מסחריbecause that is how they generally do business). Yishai Beer 2011-2012 With regards to timing עיתויwe mentioned in a previous lecture two approaches – בסיס המזומניםand the :08בסיס המסחריWe mentioned that the problem with the בסיס המזומניםis that it doesn’t reflect reality81. or in other words next tax cycle) the question that this raises is when is income considered to have been generated. or in Feb 20012? So according to the בסיס מזומניםthe income would be in 2012 if we go according to the בסיס ( מסחריget correct name of test!) it would be 2011. it doesn’t make a difference.)בסיס מסחרי This raises the question. but I only plan on paying for them in two moths from now (Feb 2012. The other test. the ( בסיס מסחריwhich says that we look at the time that the actual transaction took place) is more reasonable. With regards to tax on linkage differentials and how it accumulates82 (reminder: post-1975 and thus linkage differentials are obligated in tax) the court has ruled that the correct way is בסיס תקופתי (annually). there is a monetary advantage in postponing payment. 80 Say I receive merchandise today. from an economic perspective it would be incorrect to say that the transaction took place at the end of the five years. With that being said. how does a person report taxes on interest according to the ?בסיס מסחרי E.בסיס מסחרי 69 . Two of those reasons are correct. Levin J. so I mortgage the plot to the bank for a loan.g. so long that he doesn’t sell it because of the realization principle which states that so long that you don’t use (sell) the land we won’t tax it. (which is another way of saying that money was lent to the bank). and thus I gain without having to pay taxes.84.Effy Stern Tax Law Prof. went on to say that we are in a period of high inflation and thus we know before hand that the rates will go up. even if there is no problem in evaluating how much the value of the land went up from year to year. there is still a problem of liquidity ( )נימוק הנזילותwhich says that (if) Ruben wouldn’t have the money to pay the tax. he reminded us of the realization principle ( . This took place during a period of high inflation and thus the value had just gone up.)עקרון המימושwhich states that you aren’t tax until you realize the right83 (e. Yishai Beer 2011-2012 At what point do we tax exchange differentials– שאלת העיתוי הפרשי שער With regards to exchange differentials ( )הפרשי שערwe mentioned the decision of the court in 510/80 :דפוס המרכזHe pointed out that in this case the court erred.)נזילותIf the court would have stopped here than everything would have been fine. Thus the question that came to the court is how do we deal with exchange differentials? So at first glance we would think that we should apply the מבחן תקופתי (annual). Another reason why we don’t tax Ruben on this lot of land (which may have appreciated in value over the years) is because. Before explaining how. Back to the case. he wouldn’t be taxed. Another reason given by the court is that there is no problem for the taxpayer (in this case )דפוס מרכזto go to the bank and ask them to transfer the dollars into the checking account (in other words there is no problem with .) is that it’s easy to find out the value of the dollar at the end of the year and thus there is no problem to appraise/evaluate how much money the rates went up over the course of the year (in other words there is no problem with – כימותappraising). in this case a person deposited money in the bank. if Ruben’s grandmother had a plot of land. The problem is that the court gave three reasons for why it came to this conclusion. and thus I didn’t use the land yet I manage to gain from its appreciating value. and than she passed it on to his parents who passed it on to him (and thus has been holding on to the land for 100 years). 70 . From a legal perspective this is wrong because your intentions (and the fact that you knew from the 83 84 Supra at 35 He pointed out that many people use the עקרון המימושto ‘trick’ the tax authorities. by taxing him you would inevitably be forcing him to sell. In fact this is what the court ruled. so that he could pay the tax. but the problem was that the court went on to give a third reason. one of them was erroneous. The first reason given (Levin J. For instance say I have a plot of land that is going up in value. The company in which Mr. and generally reports their taxes according to the בסיס מזומניםshould report according to the . or annuity – קיצבה מלוג או אנונה 85 See previous lecture for explanation of מלוות חובה 71 . The question that arose was how to tax the profit. Prof. He explained that at the time there was a law that said that it was illegal to trade in such loans. for in fact the case was a situation of discount fees (. After several years passed Lidor cashed in on the bonds and received the profit. Lidor was a majority shareholder was obligated to loan money to the state. Lidor). however the loan wasn’t scheduled to receive full interest and linkage ( )הצמדהin return. The company needed liquid and the bonds weren’t scheduled to expire for several years. Beer said that the justification given by Shamgar (that it was taxable based on linkage differentials and interest) was incorrect. usufruct. While the ruling was correct.)מס רווחי הון ומרווחי פירותIn the דיון נוסףShamgar J. Yishai Beer 2011-2012 beginning that you would profit) is irrelevant. The majority opinion said that it should be exempt from tax ( .)תיקון מס' 45כשהדיווח הוא על בסיס מזומנים ( 1982 -תשמ"ב At what point do we tax discounts fees – שאלת העיתוי דמי ניכוין 16/82 ( :)לידורRegarding discount fees we mentioned the case 16/82 ( :)לידורThis case dealt with mandatory loans ( )58מלוות חובהthat people of certain tax brackets were obligated to give to the state. said that there is linkage differentials as well as interest and therefore it’s taxable according to section 2(4) TO. So despite the fact that bond trading of this sort was illegal.)דמי ניכיון אנונה Section 2(5) Benefits – pensions.e. but under the table they were in fact traded.Effy Stern Tax Law according to the results not the intentions (!)מה שקובע זה התוצאה Prof. it went ahead and sold the bonds to the majority shareholder (i. as we learned when it comes to taxes you are taxed He mentioned that the with regards to exchange differentials the legislature added section 8c which states that someone that has a dollar account.בסיס מסחרי Section 8c TO: של מועד החיוב 8ג. הכנסתו של אדם מהפרשי שער תיחשב כהכנסה בשנת המס שבה נצברה גם הכנסה מהפרשי שער . you can’t say that some payments are repayment of the principal and the later payments are interest. Section 9(22) TO: דמי מזונות שמקבל יחיד ממי שהיה נשוי לו או ממי שהוא נשוי לו וחי (22) בנפרד ממנו. the payments were fully taxed (e. section 9(22) states that it is exempt from taxes. Yishai Beer 2011-2012 Usufruct ( )מלוגrefers to child support ( .1972-)הבטחת תשלום(.אנונה 72 . With annuity the main consideration that an annuity provider considers is the 86 Within an annuity there is the ריביתand the קרןso why does the section state that we need to pay on the whole . usufruct. while it would seem from here that it is taxable. we will begin to tax the monthly installments). When you repay a mortgage. ודמי מזונות שמקבל יחיד בעד ילדיו מההורה האחר. This solution states that according to section 2(5) we tax income annuity.g. if anything all he should be obligated to pay taxes on is on profits (interests earned. meaning that you only have to pay tax on the income part of the annuity but not the principal. rather each payment includes both). מהמוסד לביטוח לאומי על פי חוק המזונות .)קרןand than once the principal is repaid. In light of this the actuary system was implemented. בשבילו או בשביל ילדיו. At the time that the payments cover the amount that he paid for the policy. The obvious question that arises is how to configure the amount of the interest? In the US they used to have a linear system.)הסדרי מזונותWith regards to child support. או תשלום שמקבל יחיד. A person buys an annuity policy and he begins to receive monthly payments. meaning first you paid back the principal ( . why should a person to be obligated to pay on the whole annuity. He explained the economic fallacy in this system in that in reality each payment reflects part principal and part interest (e. התשל"ב דמי מזונות (77 ')תיקון מס 1988 -תשמ"ח With regards to annuities he mentioned the question that asks. We were in middle of discussing section 2(5) which deals with pensions.Effy Stern Tax Law Prof. We explained how taxation of annuities is problematic because of the fact that part of the annuity payments that one receives is the ( קרןthe money they paid for the policy)! One solution to this problem relies on interpretation. etc)86? Class 14 18/12/11 Today we will conclude the subject of section 2 and hachnasa peyrutit. and annuity.g. The issue raised in these cases is that the monthly payments the woman received is technically annuity and thus taxable. In Israel as we said the law says that annuity is taxable. in 322/69 . We will obviously have to understand how to configure the annuity policy and how to distinguish between the principal and the interest. He mentioned that the law in Israel doesn’t state whether we should follow the linear system or the actuary system when configuring taxes on annuity. 87 In this case the woman legally had a percentage of the רכושand she and her husband reached an agreement. instead of taking their share of the business they compromised and were willing to receive monthly installments instead). In the aforementioned case 322/69 . but it’s really 50% hers only that she is receiving it in installments (if she took it at once it would ruin the business) which means that we have !מכירת נכס בתשלומיםSo if we understood section 2(5) in the formal sense than being that this is סדרת תשלומים בהסכםit is annuity and thus taxable! To resolve this issue the judges try to separate between the principal & the interest (see Vitkon J.שטרןMani J. The problem is. he actuated her life span!) tried to distinguish between the principle and the interest (so that the woman wouldn’t unjustly be forced to pay taxes on the principle). 73 . So in the US.e.Effy Stern Tax Law Prof. Yishai Beer 2011-2012 assessment of the life-span of the person. did all that he could to avoid such a harsh solution. The case law as well as academia offers various solutions. The various cases we looked at dealt with settlement issues between divorced couples. the property was technically רכוש משותף and they made a compromise where he kept the business and she received payments.)78שטרןIn the cases that we looked at the common denominator of all of them was that the party receiving the annuity paid for the ‘policy’ in kind (( )שווה כסףi. you separate each payment into the principal and interest and the way to do this is by looking at the actuation report and configuring how much is principal and how much is interest. Vitkon J. thus all the money that the women receives is taxable! As we mentioned Vitkon J.e. actually ruled that that the law is the law and the law says that annuity is taxable. The second solution to understanding this legislation is by saying that we will tax the annuity but we will also consider the expense ( )הוצאהthat was spent on the policy. wherein she received monthly installments. we already mentioned one solution to understanding this legislation by saying that the law only means to tax income annuity. (who went against all the rules of evidence law – he opened up the correspondence between the parties. the business) and than promised to pay the woman monthly installments. where the man received the assets (i. key money.3791 ( תשל ג 3791 תשל"ט.great costs incurred on the employer.0002 תשס"ז. property and land (rent. תגמולים. )א(לענין סעיף זה – המשתלמת מאת מעביד או קופת גמל "קיצבה" – קיצבה המשתלמת מאת מעביד.pension funds :Sections 9A & 9B TO פטור לקיצבה 9א. קיצבה שחלק ממנה הוון . או המשולמת בידי קופת גמל לקיצבה אחרת שהוקמה אחרי יום כ"ט בטבת תשנ"ה )1 בינואר 5991(.חלק מקיצבה המשולמת על ידי קופת גמל לקיצבה המנוהלת בידי תש"ס.5791 תיקון מס' 52(005. land or industrial buildings מפתח. This form of pension is disappearing because of the .9791 )תיקון מס' 06The law states that it’s a reduced tax rate. תמלוגים.Effy Stern Tax Law Prof. תשל"ג.4891 תיקון ) תשמס' 021(.8791 )תיקון"מס' 43בסעיף 9א)א( או שמקבלים שאירים ואיננה קיצבה כמשמעותה בסעיף 9א)א( – פטורים תשל ג.אותו חלק מהקיצבה או מסך כל הקיצבאות שמקבל אדם ושאינו עולה על תשל"ה.7002 חברת ביטוח.economic rather it is for social welfare purposes – to allow more money to remain with the person "ס. פרמיות ורוחים אחרים שמקורם באחוזת-בית או בקרקע או בבנין תעשייתי: בנה אדם אחוזת-בית והשכירה 47 אחוזת בית וקרקע . )2( סכומים שהפקיד מקבל הקיצבה. הנובע מתשלומים פטורים. Sections 9A and 9B deal with how to tax . דמי – )derived from house. סכום המתקבל עקב היוון קיצבה פטורה לפי סעיף זה – פטור ממס. premiums and other profits דמי שכירות.) there are two kinds of pensionsקצבה( : Lastly. property. with regards to pensionsקצבה – Pensions . "תשלומים פטורים" – )1( סכומים שחויבו בתשלום מס כאמור בסעיף 3)ה3(.0002 Section 2(6): House. ( תיקון מס' 12("קיצבה מזכה" . פרמיות ורווחים אחרים שמקורם באחוזת בית או קרקע או בניין תעשייתי )6( דמי שכירות. Nowadays the latter form of pension plan is more common )In this form of pension plan every month the employee and the employer pitch in to a (savings fund and whatever you pay that is what you receive.9791 ת"ט)תיקון"מס' 43ממס. He explained that the reason for the reduced rate is not ( תשמ"ד. או המשתלמת מאת קופת גמל וכן קצבה ולקיצבה המשתלמת על פי ביטוח מפני המשתלמת על פי ביטוח מפני אבדן כושר עבודה.תבוא בחשבון לענין זה הקיצבה ( 7791 תשל"ז-' 92(שהיתה משתלמת אילולא ההיוון. The first refers to pension plans that obligate (the employer) to pay theפנסיה צוברת andתקציבית person monthly installments till their death.3791 תיקון מס' 351( ( תיקון מס' 021(("קיצבה מוכרת" . כהגדרתו בפסקה )3א( להגדרה אבדן כושר עבודה )תיקון מס' 81( "הכנסה מיגיעה אישית" שבסעיף 1. royalties. דמי מפתח. ואשר לא היה זכאי בעבורם לניכוי כאמור בסעיף 74.8791 לקיצבה אחרת פטור)תיקון מס' 339ב. %53 מההכנסה לפי סעיף 2)5( שמקבל אדם בהגיעו לגיל פרישה כמשמעותו ( תיקון מס' 81( )תשל"ח.9791 )תיקון מס' 53( תש"ם.21 לירות לחודש. Yishai Beer 2102-1102 פנסיה . לענין זה. ( תשל"ט. ( תיקון מס תשל"ח. Effy Stern Tax Law Prof.חוזים מפוצליםHe explained that at the time זכות במקרקעיןwas (in )חוק מיסוי מקרקעיןconsidered such that if you rented a property for over ten years than it would be taxable not according to מס הכנסהbut according to ( חוק מס שבחan example of a difference between the two forms of taxation would be that with חוק מס שבחyour obligated to pay purchase tax ( . 88 89 This is similar to what we said with regards to Sections 2(4) and 2(1). 90 He explained that they were charged as such because the shenanigans were pulled off not for economic reasons but rather for the sake of evading taxes. In light of these events the law was changed and any rent contract over twenty-five years would go under . Yishai Beer 2011-2012 -וקיבל בעד ההשכרה דמי מפתח או פרמיה ואחר ההשכרה מכר אותה אחוזת בית לאחר.מס שבח With regards to taxes according to section 2(6). במישרין או בעקיפין.שאמנם היה הסכם כאמור One of the situations this section deals with is regarding a person that rents out his property (this sub-section is not dealing with a person whose profession is renting out property. He explained that (say they wanted to rent the property for 30 years) the reason why they couldn’t set up 3 consecutive contracts wherein each one was 9 years and 364 days (thereby they side stepped the 10 year מס רכישה issue) is because there is a specific section in the חוק מס שבחwhich states that such a stipulation (where the renter has an option to continue the contract) than it is considered as one long contract. and for each contract a different subsidiary received the contract. יראו את הקונה כאילו קיבל הוא ביום הקניה דמי מפתח או פרמיה באותו סכום. One is the מדירת מגורים חוק מס הכנסה פטורת מס הכנסהwhich puts a ceiling up till which rent won’t be taxable (the amount today is 4. meaning that if you rent an apartment for under 4.800 it isn’t taxable).)מס רכישהIn this case being that these people didn’t want to pay purchase tax every ten years (again we were dealing with mega property owners such as supermarket owners which are usually rented for long term contracts89. and thus they thought that they would be able to avoid consecutive ownership (in the end they were all arrested on the charges of tax evasion90). He mentioned the event that took place several years ago where two lawyers and mega property owners (supermarket owners) were arrested because of .790. 75 . they set up consecutive contracts and they created subsidiaries. Such a person would be taxed under section 2(1)88). על פי הסכם שנעשה בשעת ההשכרה או לפני כן. there are two laws that ease the legislation. נעשתה הקניה תוך שנה לאחר ההשכרה יראו זאת כראיה לכאורה . 76 . בייעור או בגידולי קרקע.בנין תעשייתי נכסים אחרים An example of this would be say I rent out my car or my patent as a one-time-thing (If the business model was to rent it out than it would be taxable according to section 2(1)). בנכס. Profits derived from husbandry received its own section because the TO is a copy from the British Tax Ordinances. section 2(8) states that someone involved in husbandry.Effy Stern Tax Law Prof. Section 2(8): Agriculture (gains or profits derived from agriculture.בית לצרכי מקורות ההכנסה האמורים בפסקה זו. rather he is taxed an annual global sum. in other words if Ruben cleans his own house than he wouldn’t be taxed for it. בעבודת אדמה. Section 2(7): Other assets (gains or profits derived from any asset other than house. than you could pay 10% and by this get off the hook91.g. and a century ago. לרבות שוויה של תוצרת המתקבלת בשל השימוש בהון.92. ולרבות חלק . He reminded us that there is no tax on services that one does for themselves. is taxed for personal use of his farm93. However. However if say a lawyer has a hobby of raising chickens and he decided to use the chickens for personal use he would not be taxed. husbandry was a significant if not primary source of income. afforestation. say you have three [personal] apartments that you are renting out for 5000 each.ברווחים המתקבלים מן השימוש כאמור חקלאות This section is anachronistic being that it could technically have been included in section 2(1). (E. 91 If you had to pay according to section 2(1) than you would have to pay according to the מס שוליwhich could (potentially) be much higher than 10%! 92 According these two exemptions why would anyone charge 4800 (or 4900) if they could charge 4789 and by this not to have to pay taxes at all? 93 In practice the farmer is not taxed for each glass of milk that he milks from the cow. land cultivation. Yishai Beer 2011-2012 Another exemption with regards to 2(6) says that you can pay 10% of the annual proceeds of the rent and with that you can be יוצא ידי חובas a renter. or crops) – הכנסה מחקלאות )8( השתכרות או ריווח שמקורם בחקלאות. land or industrial buildings) – נכסים אחרים )7( השתכרות או ריווח שמקורם בכל נכס שאינו אחוזת-בית ולא קרקע ולא . property. בזרעים או בחיות. what happens when the legislature changes the way taxes are to be reported. וההוצאות שהוצאו בשנות מס ( 1982 -תשמ"ב שלאחריה בייצורה של הכנסה לפי ההוראות האמורות יותרו בניכוי מכל מקור בשנת המס שבה הוצאו.40% תשל"א-' 61(עיסוקם הרגיל.951א This section states that income according to sections 2(6) and 2(7) should be included in the chargeable income of the given tax year according to the ( בסיס מזומניםe. או בעד מכירת זכות יוצרים על ידי היוצר. ואולם לא תחול בשל כך חובת תשלום ריבית והפרשי הצמדה על פי סעיף . ואת השומה לשנה האמורה יראו כמתוקנת בהתאם לכך.in other words he receives a discount94. או ממכירת זכות יוצרים על ידי היוצר.Effy Stern Tax Law Prof. לא יעלה שיעור המס על 1971 (18 ')תיקון מס 1973 -תשל"ג With regards to at what point we tax the transaction ( )שעלת העתויwe mentioned the בסיס מימוש and the . If Ruben reports his 94 Why didn’t we ask the same question according to a person that rents a patent as a one-time-thing according to section 2(7)? 77 . על אף האמור בסעיף 121 הכנסה שנתקבלה ממכירת פטנט או מדגם על ידי 'מכירת פטנט וכו ]ד הממציא. כשההמצאה או היצירה היו שלא בתחום [29 ( תיקון מס .בתחום עיסוקם הרגיל של הממציא או היוצר פטנט וזכות-יוצרים As we mentioned with regards to previous Sections of the TO. Yishai Beer 2011-2012 Section 2(9): Patent & Copyright – פטנט וזכות-יוצרים )9( תמורה המתקבלת בעד מכירת פטנט או מדגם על ידי הממציא. על שיעור המס 521. if the persons profession was selling patents than the relevant section would be section 2(1) this section is dealing with a one-timesituation where a person sells his patent. ובלבד שאם לא ניתן לנכות את ההוצאות בשנת המס שבה הוצאו הן יותרו בניכוי בשנת המס שבה נתקבלה ההכנסה. הכנסה לפי סעיף 2)6( או )7( תיכלל בהכנסתו החייבת של הנישום בשנת המס לפי 7 ) (6 2 סעיף ) )תיקון) מס'או45שבה קיבל אותה בפועל גם אם היא הכנסה מראש. He mentioned section 8B: Section 8B TO: Income in advance דינן של הכנסות 8ב. אם הומצאה האמצאה או נוצרה היצירה שלא .g. A question that is asked in the case law is if a person sells a patent than it should be considered a capital asset ((( נכסי הוןand thus not taxable according to section 2!)? We didn’t mention the answer however section 125 TO offers a hint in that it states that a person that is taxes on a patent is taxed at 40% .בסיס משכריHe than asked us. Yishai Beer 2011-2012 taxes according to the . 95 96 I think he said that this only applies to business loans. than according to the בסיס מסחריRuben would divide the money into five annual segments and each year he would report the relevant amount accordingly. Double check! He mentioned that its usually the upper classes that tend to posses capital assets (.פירותNetanyahu’s government position is along the lines of the aforementioned Republican policy.שנה ( ()תיקון מס' 12)ב 1975 -תשל"ה Class 15 20/12/11 Capital gains tax . In Israel of 2011 הכנסה פירותיתis taxed at about 45%.בסיס מסחריand today he received rent money from a tenant for the next five years. than that debt shall be considered part of his income for that year. והחוב נובע מהוצאה שניכויה הותר בבירור הכנסתו החייבת. Section 3(b) TO: )1( אדם שבשנת מס פלונית נמחל לו חוב או חלק ממנו. Ruben has to declare income-in-advance ( )הכנסה מראשaccording to the בסיס מזומנים in the year that he received it. or at least we should apply a reduced tax rate.מיסוי רווחי הון The question that needs to be asked is whether capitals gains ( )רווחי הוןshould be taxed differently than the way רווחים על פירותare taxed. there is much dispute 96. יראו את החוב כחלק מהכנסתו באותה . whereas capital gains are taxed at 20%! With regards to why this so. Thus Ruben would have to declare the whole amount when he receives it. We mentioned section 3(b) TO which states that if a debt or a part of a debt was waived for a person in a given tax year ( .)נכסי הון 97 In the US the Republicans want נכסי הוןto be taxed at a reduced rate whereas the Democrats say that הוןshould be taxed just like . According to section 8b however. and thus taxable95. are. 78 .)מחילת חובand that debt rose out of deductible expenditure.Effy Stern Tax Law Prof. in fact capitals gains tax is the apex of the political debate both in Israel and in the US 97. Some of the arguments for why capital assets ( )נכסי הוןshouldn’t be taxed. we will see that the court decides that certain transactions are הון and others are פירותיתand the way it does this is [seemingly] arbitrary. (3) We want to encourage investment. He also mentioned that at the end of the day if you apply a reduced tax rate to capital assets than at the end of the day it serves to the advantage of the rich (because as we mentioned it’s the rich that tend to have capital assets)99. we want to encourage people to bring their assets to Israel. (6) The averaging problem ( )בעיית המיצועthis problem results in light of the fact that capital assets tend to be held for long periods of time– Say Ruben is holding on to a drycleaners store for forty years and than decided to sell it. The law in Israel stated that if you sold capital assets the capital gain ( )רווח הוניis attached to your הכנסה פירותיתand you pay tax according to your מס 98 He mentioned that in the case law we will read.Effy Stern Tax Law Prof.e. To encourage such investment we need to provide tax incentives (in the form of either no tax or at least reduced tax on capital assets (4) . which means the house was basically sold for the same price that it was bought! The Supreme Court didn’t accept the claim because in the tax system in the US isn’t nominal (basically we don’t look at the linkage differentials). (5) Efficacy – we want capitals assets to be in the hands of the persons that makes the most efficient use out it. etc) so that they can produce peyrot. 100 In 2010 there was another change but we don’t have to know it. Meaning that any transaction could be considered הוןor . than technically we should tax him proportionally to the profit that he made over the course of the past forty years. 79 .(( )נכסי הוןCapital assets are easily movable.פירותית 99 The Trachtenberg Report wants to raise the tax rates for ( נכסי הוןdouble check!). Yishai Beer 2011-2012 (1) Capital ( )הוןis usually a one time acquisition. specifically we want to encourage investment in etzim (profit producing mechanisms – i. and not vise versa. If you look at linkage differentials between the 1930s and 1990s than in fact 30k of the 1930s was worth 100k in the 1990s.g. Tax rates ( )שיעורי מסin Israel – before 2003 and after After 2003 there was a significant change in the tax rates. he explained as follows 100: Until 2003 capitals gains were tax progressively. (2) In light of inflation (linkage differentials) taxation would hurt the taxpayer (e. In other words most people by capital once in their lives and thus it shouldn’t be taxable. in the US a person that bought a house in the 1930s for 30k and sold it in the 1990s for 100k. businesses. factories. On the other hand it can be argued that in reality there is no proper distinction between capital ()הון and peyrot (in a previous lecture we gave several examples)98. For this reason a tax (albeit a reduced one) will be imposed to encourage the inefficient holder of capital assets to move them onward. This was relevant until 2003.Effy Stern Tax Law Prof.g.000 to the 100. if café Aroma decides to sell its franchise. and he earns 100. and the rest would be exempt from taxes. part of the price would be the מוניטיןand by doing that they will be able to pay the reduced rate of 10%). In 2003 there was a dramatic change in the tax rates ( . Lastly. Thus. In the Israel prior to 2003 if Ruben sold capital assets and incurred a profit of 1. In 1994 inflation skyrocketed. so 10% of that would be the rate that you pay). and as a result they changed the law and they said that there is no tax on linkage differential (profits) that were accrued from 1994 onwards (but any profits from linkage differentials that were accrued prior to 1994 would be taxable according to the aforementioned 10% tax rate.)מס שולי Another difference pre 2003 was as follows: Until 1961 capital gains were exempt from taxes. Yishai Beer 2011-2012 ( השוליe.000.000 as a teacher. he mentioned that prior to 2003 there was a reduced tax rate of 10% on property in the form of (reputation) . thus the government came to a compromise where it [only] taxed a fix rate of 10%) (E. than he would combine the 1.000. you add an additional percent (so in 1949 the maximum would be 13%).g.)שיעורי מסThey lowered the tax rates on capital gains ( )רווחי הוןto 25% and in 2005 they lowered it again to 20% (so we went from a tax regime where capital gains were taxed according to מס שוליfrom there it was reduced to 25% and 80 .000. This led to a dramatic rise in prices.g. Another difference was with regards to linkage differentials and profit from inflation (starting from 1975) there will be a fixed tax rate of 10% (as we mentioned above. logic would dictate that there shouldn’t be any tax on inflation. so if you sold property assets (נכסי )רכושthat accrued inflation profits ( )הפרשי הצמדהfrom 1990. than you would have to pay 10% on the years 1990-1994.מוניטיןUntil 2003 any contract would explicate the price for the reputation (e. the government said that people that bought property prior to 1948 would be taxed no more than a maximum of 12% and with each following year. In 1961 the government said that it is taxable. if you bought a property for 100 in the 1930s and you sold it for 1000 in the 1990s and the 100 of the 1930s is worth 800 in the 1990s than you really only profited 200.000 and he would pay income tax according to his . 000. For instance if you are an American you have to pay 101 As a side point he explained that this explains the gap between rich and poor in Israel. rising in increments of 1% each year (i. This was Israel’s approach up till 2003. Israel switched from the territorial approach (British) to the persona approach (US) 2005 (Section 89(b) TO).201מס שולי Time line of taxes in Israel Capital gains exempt from taxes Capitals gains are taxable. The American approach is the .1961 1961 - The international dimension of capital income – המימד הבינלאומי של הכנסה הונית With regards to the international aspect of taxes as we mentioned in a previous lecture there are two approaches the British approach and the American approach.Effy Stern Tax Law Prof. Regarding people that bought property prior to 1948. thus if you made money outside of the state (in the case of Israel.e. The court goes by a linear approach. because while we have a high ( מס שוליin the highest bracket it ends up at almost 60%). if you made money in Egypt) than you wouldn’t be obligated to pay taxes. But if you bought the property in 1970 and you profited 1.גישה פרסונאליתAccording to this approach we don’t look at the territory but rather we look at the persona. In 2005 the capital gains tax was reduced yet again to 20% Currently the tax on reputation is 25% 1948 . with regards to נכס הוןit is only 20%! 102 The case law has ruled this in light of the fact that the legislature doesn’t state what happens with regards to נכס bought prior to 2003. 81 . in other words we divide the profit into annual segments and than we impose the taxes accordingly. Yishai Beer 2011-2012 from that it was reduced to 20%!)101.000 than regarding the profit after 2003 you pay 20% and on the profit prior that was accrued prior to 2003 you would pay according to the . The British approach is the territorial approach which says that you are only obligated to pay taxes on income made within the territory of the state. In 2003 the capital gains tax was reduced and fixed at 25% (however capital gains that were accrued prior to 2003 would be taxed according to the old system). the tax would be 12%. someone who bought property in 1970s-1980s 1994 2003 1960 would be taxed 24%) Inflation profits (linkage differentials were taxed at a fixed rate of 10% Inflation tax is repealed (with regards to profits incurred after January 1st 1994) Prior to 2003 there was also a fixed tax on reputation ( )מוניטיןat 10%. So if you sell property ( )נכסin 2011 that you bought in 2004 than you would apply the reduced rate of 20%. someone that bought property in 1949 would be taxed 13%. Basically whenever you have international tax issues you need to check the tax ordinances as well as any relevant treaties. We looked at section 89(b): Section 89(b) TO: רווח דין תמורה ודין 98. say an Israeli lawyer travels to NY as an arbitrator (or any other mission that is similar to his vocation) than it would be considered as a regular part of his income (שיטת . Yishai Beer 2011-2012 (report) taxes on income no matter where you live in the world. והכל הון תיקון מס' 6(בשינויים המחוייבים לפי הענין ובאין פירוש אחר מפורש או משתמע מהוראות חלק זה או ( 1965 . With regards to capital income ( 103 This seems to demonstrate a territory approach? 82 .))פרסונאליHe mentioned that if an American buys a business (i.התמורה הנובע מהרכוש הנמצא בישראל He explained the section as follows: if a Swiss company owns shares in an Israeli enterprise and an American goes and buys the Swiss company than according to this section the transaction would be subject to Israeli taxes.הרכוש(. In response to someone’s question He reminded us of the treaty between Israel and the US which states that if an Israeli works in Israel for under two years or vise versa than the tax goes to the home country (if you are in the other country for three years than for the first two years you would be taxed by the home country and on the third year you would be taxed by the host country). it would be subject to taxes in Israel103. לענין זה. לנכס. במישרין או בעקיפין. )3( ו-)4( להגדרה " אזרח ישראלי" בסעיף 3א. שהוא תושב .e. After 2003 Israel adopted this approach (e. Various concepts Deduction at the source ( :)ניקוי במקורWith הכנסה פירותיתan employee ( )עובד שכירpays taxes.Effy Stern Tax Law Prof. "תושב ישראל" – לרבות אזרח ישראלי כמשמעותו בפסקאות )1(. )א(דין תמורה כדין הכנסה לפי סעיף 2 ודין ריווח הון כדין הכנסה חייבת. but the obligation to deduct the taxes is upon the employer. או למלאי או שהוא זכות בעקיפין לזכות במקרקעין או לנכס באיגוד מקרקעין הנמצא בישראל ) בסעיף זה .g. )נכס הוןin Israel and than sells it for a profit.אזור כהגדרתו בסעיף האמור )ב( הנכס הנמכר נמצא מחוץ לישראל והוא בעיקרו זכות. לענין חלק .1תשכ"ה-231(חלק ה ( 'תיקון מס 2002 -תשס"ב ((132 'תיקון מס )ב( )1( תושב ישראל חייב במס על רווח הון שנצמח או שהופק בישראל או מחוץ ((147 'תיקון מס 2002 -תשס"ב 2005 -תשס"ה לישראל. (קטנים )א( עד )ו Section 97 lists several exemptions for capital gains tax ( .ניתנה בתום לב ובלבד שמקבל המתנה אינו תושב חוץ . 105 It used to be six years. 104 He referred to this as a . Prof. Yishai Beer 2011-2012 )הכנסה הוניתit’s the opposite.97 פטור ממס ((6 'תיקון מס (13 ')תשכ" מס 1965 -תיקון ה 1968 -)תשכ"ח (22 'תיקון מס ((132-תשל"ה 1975 'תיקון מס -)תיקון( תשס"ג 2002 He explained that in fact this is not an exemption rather its a postponement because inherently what is happening is we consider it as if the child takes over the mother. It will depend on the nature of the transaction (he didn’t elaborate). Section 91(g) TO: )ז( המס שיחול על ריווח הון בהפקעת נכס הוא מחצית המס המתחייב על פי סעיפים . As we mentioned above with regards to reputation ( )מוניטיןtax there used to be a reduced rate of 10%. now the tax for reputation is fixed at 25%. Section 97 TO: :)א( ריווח הון יהיה פטור ממס אם הוא נובע מאחד מאלה )5( מתנה לקרוב וכן מתנה ליחיד אחר אם שוכנע פקיד השומה כי המתנה . We mentioned section 91(g) TO which states that the tax rate on capital gains of expropriated property is half of what it had been had you sold voluntarily.הוצאות פירותיותWe will also discuss capital gains ( )רווח הוניand capital losses ( .Another exemption is when you sell to a relative. in other instances it will be on the buyer. but that was changed. 83 . thus when the child [eventually] sells he will have to pay on the accrued profits from the day that the mother bought the property (obviously if the child doesn’t sell but passes on the property to his kids than again the tax will be postponed).)הפסד הוניWhen discussing רווח הוןthere is a [limited] possibility to spread out the profit over the preceding four years105. with capital gains there is an obligation on the receiver to pay in Deduction of expenses ( :)ניכוי הוצאותWe will learn that there is a distinction between capital expenditure ( )הוצאות הוניותand .חיוב מקדמהIn some situations the חיובwill be on the seller.)מס רווחי הוןOne exemption is with regards to olim chadashim (for the first seven years upon their arrival).Effy Stern Tax Law advance104. According to section 88 movables used for personal use would not considered a capital asset (e.מגורים ולא לשם השתכרות או ריווח )4( זכויות במקרקעין וזכויות באיגוד כמשמעותם בחוק מס שבח מקרקעין.Effy Stern Tax Law Class 16 1/1/12 Prof. Yishai Beer 2011-2012 What is considered a capital asset (Section 88) – הגדרת נכסי הון Last lecture we discussed capital gains ( :)רווחי הוןWe now went over the normative status of capital gains: we looked at section 88: Clause 88 TO: "נכס" . as well as any vested right or benefit ( )זכותwhether they are in Israel or abroad entitlement (601)זכות is considered a capital asset ( . תשכ"ג-3691. He gave another example of a collectors car (missing an engine) 106 E. שעל מכירתם מוטל מס שבח או שהיה עשוי .)2( מלאי עסקי 1968 -תשכ"ח )3( זכות חזקה במקרקעין .בין שבדין ובין שביושר .g. Would that be considered movables for personal use or would it be considered a capital asset in accordance with section 88? The answer is that we would look at the circumstances. וכן כל זכות או טובת הנאה – ראויות או מוחזקות. בין מקרקעין ובין מיטלטלין.כל רכוש. personal lap top). והכל בין שהם בישראל ובין שהם מחוץ לישראל.האישי של בני משפחתו או של בני-אדם התלויים בו ((13 'תיקון מס .g. and we would need to evaluate if it was indeed used for personal use.המשמשים לצרכי . and not for profit (4) real estate rights and association rights. However things could get more complex with expensive items such as a Picasso painting that you sell after it was hanging on your wall for two years. whether in law or in equity.להיות מוטל אילולא הפטור לפי החוק האמור The section states that an asset (with regards to this section) includes property (real or movable). of real estate used for residential purposes. a זכות תביעהwould be considered a capital asset 84 . למעט )1( מיטלטלין של יחיד המוחזקים על ידיו לשימושו האישי או לשימושם .)נכס הוןHowever it excludes (1) movable property held by an individual for personal use of members of his family (2) trading stock (3) a right of possession. within their meaning in the Land Appreciation Tax. g. So (to use an extreme example) if your car was stolen.)והוצאות He than mentioned the term of תמורהwith regards to :מס רווח הון ( תיקון מס' 31("תמורה" – המחיר שיש לצפות לו ממכירת נכס על ידי מוכר מרצון לקונה מרצון כשהנכס 1968 -תשכ"ח . For instance."מכירה" – לרבות חליפין. the tax authorities will tax this 107 What about a yard sale? In a yard sale you are selling items that were used for . משכנתה. וכן כל פעולה או 1968 -תשכ"ח תיקון מס' 741(אירוע אחרים שבעקבותם יצא נכס בדרך כל שהיא מרשותו של אדם. כי המחיר בעד הנכס נקבע בתום לב ובלי שהושפע במישרין או בעקיפין מקיום יחסים מיוחדים בין המוכר לקונה – ובמקרקעין גם בתנאי שהמכירה נעשתה בכתב – תהא התמורה המחיר שנקבע. אך למעט הורשה He explained that the definition given is a very wide definition. והכל בין במישרין ( 2005 -תשס"ה . או זכות אחרת הבאה להבטיח תשלום ( 2005 -תשס"ה אולם אם פקיד השומה שוכנע. being ‘that the car was taken out of your possession’ it would be considered a sale! Another example would be a forced sale (e. יראו את הפרשי . בפדיון איגרת חוב או נייר ערך מסחרי. הסבה. ויתור. Yishai Beer 2011-2012 sitting in the driveway. say the average price for a four room apartment in Herzliya is 1. If Moshe sells his apartment in Herzliya for 800. We looked at the term מכירהin section 88: Section 88 TO: ( תיקון מס' 31(. מתנה.שימוש אישיbut on the other hand you are holding a sale? 85 .5 million (based on the sale of the last hundred apartments). פדיון. The section says that the exception is looking at the subjective price.ההצמדה כחלק מהתמורה Here too the definition of the section is not what you would expect (you would expect that תמורה would mean whatever you received for the sale). הענקה. והכל בניכוי הוצאות המכירה שהוציא הנישום באותה מכירה. than according to this clause. העברה.Effy Stern Tax Law Prof. expropriation).שימוש אישיAnd once we categorize an item as שימוש אישיthan selling that item would not be taxable107. He said that this doesn’t mean that in the example of the car you would actually be taxed.000.תיקון מס' 741(נקי מכל שעבוד הבא להבטיח חוב.ובין בעקיפין. we will discuss this later when we discuss deduction of losses and expenses (ניכוי הפסדים . in general we look at the objective price. which Jim bought for 1000$ and than sold it for a profit. So again in this case if Jim was not a collector than it would be considered . אח. ב-%52 לפחות באחד או יותר מסוג כלשהו של .כל אחד מאלה . Lastly with regards to the term ( קרובrelative) (in section 88) it says as follows: Prof. But it puts the ( :תיקון מס' 741("קרוב" – כל אחד מאלה 2005 -תשס"ה )1( בן זוג. There are many cases that deal with the distinction but at the end of the day.(2)-1( ו He stressed that when checking of someone is a relative. etz) it could have just as easy been categorized as peyrot and vice versa. However the section allows for an exception. in reality this distinction is problematic.אמצעי השליטה )4( נאמן כהגדרתו בסעיף 57ג. שינוי יעוד. הבחנה בין הכנסה הונית לבין הכנסה פירותית. צאצא וצאצא של בן זוג.Effy Stern Tax Law burden of proof on Moshe to prove that he sold at this (low) price in good faith. ובן זוגו של .5 million. Indemnity – :פיצוייםWith regards to how we would classify indemnity we mentioned the English case of the fellow who drove the ship into the barge causing damage to the barge (etz) as well as loss of business being that the barge was forced to close for several months (peyrutit). אחות. מוניטין With regards to the previously mentioned distinction between the etz and the peyrot. as we said. we need to check of they are a relative according to section 88. לבד או יחד עם אחר. עיתוי. הורה הורה. The 86 . it seems arbitrary and it seems that many cases where the court decides that it is הון (i. ואח או אחות של הורה )3( חבר-בני-אדם שבהחזקת אדם או קרובו. אדם המחזיק בו וחבר-בני-אדם המוחזק בידי אדם המחזיק בו. לגבי היוצר בנאמנות תושבי ישראל או בנאמנות הדירה וכן נאמן לגבי נהנה בנאמנות נהנה תושב חוץ או בנאמנות לפי .צוואה ) ואולם לענין פטור ממס לפי סעיף 79 יראו כקרוב רק את המנויים בפסקאות . הורה. Yishai Beer 2011-2012 transaction according to 1. "החזקה" – במישרין או בעקיפין. לענין הגדרה זו.e.)2( צאצא של אח או של אחות. e. the publisher also needs to indemnify Gordon for breaching his copyright. etc). He gave an example that came up several times with regards to privatization – when the state privatizes certain industries and to ensure the cooperation of the workers remunerates them. thus this money is simply . How do we treat the payout? On the one hand. if the lawyer’s license wouldn’t have been suspended he would have been earning the money. The agreement was breached. the court decided to categorize it as capital (.)הוני 24/72) :)סולרThis case dealt with a lawyer whose license was suspended. The agreement with the publisher was that they needed to sell a certain amount of copies. With regards to taxation the court ruled that one must The law states that a person that is fired is entitled to one month of pay per year of employment. He mentioned several examples from the case law: 171/67) :)גורדוןGordon wrote a commentary on the Bible. Yishai Beer 2011-2012 barge received two heads of damages. there are those that would argue that its peyruti because it is an integral part of business (that industries are privatized and sold. Severance pay – פיצויי פיטורים Prof. and there are those that would argue that it is הוניbecause you are loosing a safety in your incomeproducing-mechanism. The court ruled that in addition to indemnity for breaching the contract.)הוניAs a side point he mentioned that technically we could have categorized it either as capital ( )הוניor peyruti. rather it is עובדן מקום . Here we could categorize this as peyrutit because it is money being made out of his vocation (( )משלח ידi. Thirty years later Ruben is fired and receives thirty months of severance. To ensure that he didn’t loose business (during the duration of the suspension) he handed over his cases to his associate and they agreed to divide the profits. he received the indemnity after he finished working. Here too. So if Ruben works at Bank Leumi.Effy Stern Tax Law distinguish between damages to damages to hon and damages to peyrot.העבודהOn the other hand. What we see from here is that the court treated the indemnity as capital (( . The bottom line is that most judges treat severance pay as hachnasa peyrutit. the result has been conflicting case law on the matter. thus it could hardly be considered income!). than both Ruben and the bank include in their calculations the possibility of needing to pay out severance pay.)עובדן משלח ידOn 87 . you could say that from the very beginning of Ruben’s employment severance pay was taken into calculation! This is a complex issue that has been approached differently by various judges. People more or less go to the station that is closest to them when they need it. Oliver. where the gas station near the bursa in Ramat Gan was sold and it listed a large portion of the sale [price] under reputation (in other words it charged a high price because of the hot location that it is located in.)נכס הוןUntil 2003 reputation was taxed at a fixed reduced rate of 10% (thus anyone who sold capital ( )הוןwanted to list as much as they could under reputation. so that it could enjoy the low taxes). The question that came to the House of Lords was if the money he received (not to play in any movies) was to be considered peyrutit or . A case similar to this actually came up. This case dealt with the actor. Lastly we mentioned the English case.הוניתThe House of Lords ruled that it was to be treated as . To better understand what is considered reputation for tax purposes. he gave an example: Abu Chasa is known to have the best chummas in Israel. When the reputation is not based on the person himself but rather on the enterprise.הוניתHe pointed out that once again in this case it could have easily have also been viewed as peyrutit! Taxation on reputation – מיסוי מוניטין As we explained earlier reputation is considered a capital asset ( . He put a different twist on the definition.)נכסי הוןThe court “arbitrarily” decides to categorize the event as ( הוניthat his work/money making mechanism was lost – עובדן )מקור הכנסהand taxes him accordingly. Shalom Horowitz has been dead for fifty years. The court ruled that you can’t apply reputation to such a transaction. Lawrence Oliver. but many high profile clients will procure the firms services based on its 108 What if there was more than one café on campus? 88 . and it listed part of the price under reputation.Effy Stern Tax Law Prof. Today it is still viewed as a capital asset (and capital assets are taxed at 25%) With regards to tax purposes the term reputation is defined by the law and the case law (e. He gave an example with the law firm S. On the other hand it wouldn’t be possible for the gas station in Ramat Gan to make a reputation claim (that says that it has the best gas station in Israel(.g. than for the sake of tax purposes he has a reputation claim. Horowitz. the accumulation of a client list). Yishai Beer 2011-2012 the other hand it could easily have be viewed as capital assets ( . In this case the producer signed the actor to a contract in which the actor was paid on condition that he wouldn’t play in any other movies for a period of a year and a half. Another example of a situation wherein reputation wouldn’t apply would be regarding the café on campus (someone wouldn’t come from Jerusalem to eat in the café) 108. mainly because of its location. Yishai Beer 2011-2012 reputation. 4/92) )שפריריThis case dealt with an accountant that sold his business. A basic service by Ruben will cost 1000$ and the same service by Simon will cost 10000$. but if the person is not dead yet. Ruben is the cheapest lawyer in town. it wouldn’t be accepted because the court has ruled ( )פס"ד בעניין דניאל בריילובסקיwith regards to a soccer player. it is clear that in that case it would consider reputation but the reputation is not separate from Simon and thus he wouldn’t be able to write of the 9000$ as reputation111. they indemnified the distributers. On the other hand a gas station is used. 89 . In such a case. They used to have a system where they had five or six distributers (now they have one central location) when they switched to the centralized method. Simon is the most expensive. that his reputation is part and parcel of his persona (and in order to consider reputation it needs to be separate from his persona). He gave a final example with big enterprises like Tnuva. He than gave an example where you have two real estate lawyers. So if you want to prove reputation you need to prove that the person will come regardless of whether the persona is there or not110. Class 17 03/01/12 Transferring assets – שינוי ייעוד 109 What about a hostile takeover where the company is bought not because of the existing clients. in that case Simon’s services would be procured regardless of Simon. In such a case the court ruled that it would be considered as if he is selling his reputation (the person that buys the business buys the business with the hope that the customers will stay in the business109. Ruben and Simon. how do you prove it? 111 See above question (what if Ruben and Simon were actually law firms. but because of the potential that the business may have to bring in more customers? 110 How do you prove this? You could only prove this if the person is dead. So back to the example of Simon the lawyer.Effy Stern Tax Law Prof. he asked us if Simon could claim that 1000$ should be taxed as הכנסה פירותיתand the additional 9000 for tax purposes is reputation (and thus should be taxed according to the discounted reputation rate)? The answer is that while factually Simon’s claim is true. just like with S Horowitz). There too it was ruled that we are not dealing with reputation because no one is buying their cottage cheese because of the reputation of the distributer. and there are tax manifestations. after twenty years he decides to sell the watch. Say Ruben wants one of the watches in his store for himself. it would be considered a private sale and thus not taxable! He gave another example of a person that owns a gallery (thus the painting would be considered מלאי . If a neighbor walks in the house and buys the painting for 100. from a legal contractual or property perspective nothing happened (Ruben didn’t have to ask anyone permission. He explained the dilemma as follows: Say Ruben has a painting which he inherited from his grandfather who bought the painting for 100$. because in such a situation we are dealing with two separate legal entities and thus there would be a clear cut transaction! Here. if he sells one of his apartments than clearly it is מלאי עסקיand it is taxable: But if he sells his private home than it wouldn’t be considered .נכס הוןIf the same owner has a painting hanging in his house for thirty years and a neighbor stops by and buys the painting off him. Say the contractor has offices where he conducts his business as well as a home which he lives in.מלאי עסקיLikewise if he decides to take one of the apartments (that he is selling) for himself to live in.000$ than being that it 112 From a contractual perspective this is illogical. If the same owner brought the painting to the store to sell it there.מיטלטלין בשימוש אישי 90 . However if the same storeowner brought the watch home and than sold it. The family has been holding on to the painting for eighty years. we are dealing with a private person that owns a private store. The seeming discrepancy represented in these cases will be the basis of today’s discussion. than it would be considered מלאי עסקיand it would be taxable113! He gave another example: Ruben is a contractor that sells a thousand apartments a year.)עסקיif the owner has a painting hanging in his office (to give prestige to the gallery) that is not for sale. he could simply take what he wants for after all it’s his store) but from a tax perspective a transaction did happen here! Because a business item was changed into a personal item. than the transaction ( )מיטלטלין בשימוש אישיwould not be taxable. than it would be considered שינוי ייעודand there would be tax ramifications114. but in the realm of tax law. You are considered a person that bought something from himself! 113 In response to someone’s question he explained that we are not dealing with a person that owns a corporation.Effy Stern Tax Law Prof. than it would be considered . The reason why a person would make such a transaction because if say Ruben has a watch store and sells watches than he pays tax according to ( הכנסה מעסקSection 2(1)). Yishai Beer 2011-2012 With regards to tax law it is possible for a person to sell something to himself and the transaction will be taxable112. In response to someone’s question he said that נכס הוןis everything other than . He gave an example of a person that owns a watch store and the store had an antique watch that is used as an attraction for the store but it is not for sale. In such a case the ייעודof the watch was changed from נכס הוניto נכס הכנסהand it would be taxable as a business transaction. or in other words what if someone works from his house? Say a person has a gallery in his house. how would he distinguish between the inventory that is for sale and the inventory that isn’t. such a transaction would be logical. 114 What if someone lives in his office. on the first period (the first eighty years when the painting went from one hundred to one million) the transaction would be exempt from taxes. However if the situation was the same only that Ruben brought the painting to his gallery. Wernher: For years the case law acknowledged the aforementioned problematic outcome. We said that in order to avoid an unjust outcome. and than brings it home and sells it.שינוי ייעודThe House of Lords recognized the שינויי ייעודdoctrine and the ability of a person to sell something to himself for tax purposes. This case dealt with . If we accept the שינוי ייעודdoctrine than. but if he sells it in his gallery than it would be taxable! In other words. and it was sold for a million two hundred. and now when he sells it we are taxing him (for all the years of appreciation when the painting was used for private use). On the day that he brings the painting to the gallery it is worth one million. we would have to recognize the concept of שינוי ייעודand the ability for a person to sell something to himself115. Yishai Beer 2011-2012 is מיטלטלין בשימוש אישיit would be exempt from taxes. in this case. for all the years that the painting was appreciating in value. the painting sat in the store for two years till it got sold. Sharkey v. it was exempt from taxes. He than added that. and thus the sale to the gallery would be exempt from taxes. we would have to say that it is considered that he sold the painting to the gallery and than it would be as if he sold the painting to his neighbor. trying to juggle between the unjust outcome on the one hand and absurdity of a concept where a person is considered to have sold something to himself. One of the first cases to deal with this was an English case Sharkey v. the sale would be exempt from taxes! Clearly. This doesn’t seem just! Because if Ruben would have sold the painting to Simon’s gallery. 91 . he sold it from his gallery! To put it differently. אדם קונה . We mentioned the case 115 He gave another example: Ruben had a painting in his house for eighty years. than according to the תחנה הסופיתdoctrine. and thus all the appreciation value of the painting would be exempt from taxes. and the only reason we are taxing him is because instead of being smart and selling it from his home. In Israel the case law dealt with this issue for years. if all we look at is the final stop (" . in order to resolve the aforementioned unjust outcome.)"תחנה סופיתthan if Ruben had a painting (for sale) in gallery for ten years. In order to avoid such an unjust outcome we would have to say that in the case where Ruben brought the painting to his gallery. than it would be considered מלאי עסקיand it would be taxable. when he brings it to his gallery it is as if he sold it to the gallery.Effy Stern Tax Law Prof. than the rise in value of the painting would be exempt from tax. such a doctrine doesn’t seem just.)מעצמוTo sum up what we said. Wernher. This explains why in the realm of tax law we could say that a person could sell himself something (לצורכי מס. whereas the additional two hundred thousand would be considered מלאי עסקיand thus it would be taxable (because when the painting came to the gallery it was worth one million and two years later it appreciated in value to one million two hundred thousand). The court ruled both in this case and in 217/65 ( )כהןthat in fact they should only be taxed on the value accrued later on. Regardless of whom he sold it to. and thus the tax authorities wanted to tax him on the transaction as if he sold . יראו מלאי עסקי במקרים מסויימים :)תיקון מס' 31שהיה שייך לאותו עסק במקרים האמורים להלן כנמכר בסכום השווי ( 1968 -תשכ"ח . but in this case (and similarly in the case 217/65 ( ))כהןChaim Ben-Tzvi became a contractor (during the time period that he had bought the property). ( שינוי הייעוד בחוקSections 85 & 100) Six types of situations of :שינוי ייעוד (1) From business/trade stock to a fixed asset ()מלאי עסקי לנכס קבוע (2) From business stock to private property ()מלאי עסקי לנכס פרטי (3) From fixed asset to business stock ()נכס קבוע למלאי עסקי (4) From fixed asset to private property ()נכס קבוע לנכס פרטי (5) From private property to business stock ()נכס פרטי למלאי עסקי (6) From private property to fixed asset ()נכס פרטי לנכס קבוע The section that deals with this is section 85 TO118: Section 85 TO: עסקי הערכת מלאי 58. Clearly.שינוי ייעודin the beginning the court didn’t want to accept this doctrine. if he would have decided to sell his private property to someone else than it would be considered a private transaction117.שינויי ייעודChaim Ben-Tzvi claimed that he should only have to pay taxes on the value that was accrued from the time that he became a contractor (just like in the aforementioned gallery example. where we said that only the final two hundred thousand dollars should be taxed). Yishai Beer 2011-2012 20/63 ( . 92 .)בן צביIn this case Ben-Tzvi a (a teacher) bought a peace of land in 1932 for one hundred shekels116. 118 He hinted that a problem with the legislation is that it doesn’t deal with all six alternatives. )א(בחישוב ההשתכרויות או הרווחים מעסק לענין פקודה זו. He lived there untill 1960 at which point the value of the property appreciated to one million shekels. but in order to do so the court would have to recognize the doctrine of . but ultimately in 217/65 כהןit did.Effy Stern Tax Law Prof.)1( מלאי עסקי השייך לעסק בעת שהופסק או שהועבר )2( מלאי עסקי שהוצא או שהועבר מהעסק שלא בתמורה או שלא בתמורה 116 117 He changed some of the details for the sake of abstraction.מלאי עסקי In other words the tax authorities weren’t willing to recognize . if he had it in his house for twenty years and than brought it to his gallery. שוכנע פקיד השומה שאדם העביר נכס שבבעלותו לעסקו כמלאי עסקי911 או שהפך עסקי :)תיקון מס' 31נכס קבוע בעסקו למלאי עסקי שבעסקו )בסעיף זה . the value when he bought it was 1 million. there is שינוי ייעודand thus the transaction is exempt from taxes (or in other words the appreciation in value of the painting over the twenty years will be exempt from taxes). וכן מלאי עסקי בעסק שהפכוהו לנכס קבוע באותו עסק However this section only seems to deal with the first two alternatives (i. With regards to option 3. Another example: if he bought the painting for 100$ and he had it in his house for ten years.Effy Stern Tax Law Prof.שינויי ייעוד Secondly. it postpones the tax until a buyer comes along. יראו את ההעברה כמכירה. and than he brought it to the gallery when it was worth 100000$. there would be שינוי ייעודand it would be exempt from taxes. The first sale is שינויי ייעודand thus exempt from taxes. for instance (option 5) if a gallery owner has a painting in his house. So according to option 3 we have two sales. being that he had it in his house for over four years. After ten years it worth 10 million. it states that when business stock is converted into fixed assets or private property it will be considered .e.יתרת המחיר המקורי כמחיר שעלה הנכס לנישום This section deals with alternatives 3 and 5 (from fixed asset to business stock or from private property to business stock). he gave the following example: Ruben owns a gallery. אולם הנישום לא יחוייב בתשלום המס עליה אלא בעת מכירת המלאי העסקי האמור. Two years later he manages to sell it to Simon for 35 million. If however four years didn’t pass than all 119 Alternatives 3 and 5 93 . Thus. a sale from Ruben to Ruben (i.מלאה.e. He has a painting hanging in his office for ten years (not for sale).)שינוי ייעוד Section 100 TO which also deals with :שינוי ייעוד Section 100 TO: העברת נכס למלאי 001. from fixed asset to trading stock) valued at 29 million and a sale from Ruben to Simon valued at 5 million.העברה(. and he decides to sell it for 30 million. ובלבד שאם מכר מקצתו.יהא חייב בתשלום מס בסכום העולה על התמורה שקיבל באותה מכירה (21 ')תיקון מס )2( לא חלפו ארבע שנים כאמור. Yishai Beer 2011-2012 . firstly it recognizes . לא . לא יראו את ההעברה כמכירה ויראו את 1975 -תשל"ה . כולו או מקצתו. It states that to recognize שינויי ייעודthe possessor of the asset needs have had the asset for a minimum of four years. The section provides (Ruben) with two benefits. יחולו הוראות אלה ( 1968 -תשכ"ח )1( חלפו ארבע שנים מיום שרכש הנישום את הנכס עד יום ההעברה. the second sale is considered revach peyruti and would be taxable. ))דנקנר Class 18 08/01/12 פרשנות דיני המס. With regards to whether )שינוי ייעוד )הלכת בן צבי/כהןapplies to alternatives 4 and 6 its unclear. :עיתוי של השינוי ייעודhe explained that usually it’s not clear when the שינוי ייעודtakes placed120 (examples of this were in.)קולand 105/86 (. One approach. this is legal. if it was sold as business stock than it would be considered peyruti). how the painting was sold. there is no case law on the matter.השתמטות ממסthe latter is considered illegal. An example of the latter is say when you pay the cab in cash. whereas the simple cab driver can’t afford such services and thus either he pays in full or resorts to illegal methods. the burden of proof is on them and thus if there is a doubt ( . The first includes all the legal loopholes that one finds in the tax system so that they could pay less taxes.)ספקthan it works in favor of the tax payer (המוציא מחבריו .)עליו הראייהThis is also based on the idea that there could no taxation without legislation. Interpretation of the Tax code – פרשנות המס Regarding interpretation of the tax code there are two basic approaches. 94 . 2/91 ( . the גישה . עסקה מלאכותית Artificial transaction ( Section 86) – עסקה מלאכותית He mentioned the distinction between הימנעות ממסand . He explained that what happens is that the tycoons that could afford it procure the best lawyers and accountants in town and are thereby able to pay less tax. If four years didn’t pass than we go according to the tachana hasofit – the last transaction (e. Yishai Beer 2011-2012 the profit will be treated as peyruti and thus taxable.Effy Stern Tax Law Prof.g.הישנהsays that when the tax authorities ask for money from the tax payer. On the 120 Not all cases are clear cut like in the aforementioned gallery examples or in the cases 20/63 and 217/65. etc. there were two parallel approaches taken by the court. Prof. the . He asked us. Section 86 says that the tax assessor can ignore an artificial transaction.)חצורBarak J.גישה חדשהwhich is based on Barak’s approach of purposeful interpretation ( .מס רכושHe than went to the tax authorities and said that he doesn’t have to pay . With this being said. explained this point. רשאי הוא להתעלם מן העסקה או מן ההסבה. what would have happened if we wouldn’t have had this section (e.אינן נוגדות את החוק . או שהסבה פלונית אינה [28] ( תיקון )תשכ" מס' 31מופעלת למעשה. up till the courts decision in Rubenstein (3415/97). and than and only than will we say that if there is still a doubt than it will work in favor of the tax payer. את מעסקאות מסוימות סכום המס המשתלם על ידי אדם פלוני היא מלאכותית או בדויה. בהתאם לסעיפים . )א(היה פקיד השומה סבור. in the decision of the court in 165/82) .מס רכושHe explained that at this time there was no section like section 86 in חוק מס רכוש (now there is).g. the courts have had no problem from ruling that עסקות מלאכותיותcould be ignored.לרבות פעולה 153-158 )ב( שום דבר האמור בסעיף זה אינו מונע מהשיג בערעור.לענין זה. its only after looking at the purposeful interpretation of the law. It said that if the assessor feels that it is an artificial transaction than he is 121 He mentioned that a while back we also didn’t have legislation like this.Effy Stern Tax Law Prof. He went on to see how section 86 has been applied by the courts. that is. He explained that there are similar peaces of legislation on other tax statutes ( .)פרשנות תכליתיתThis is more of a functional approach. He gave an example of a case (שפאר 271). So in this case שפארdid a מהלךand being that there was no legislation regarding עסקה מלכותיתand thus he tried to pull off this stunt. however it’s not automatic. או כי אחת ממטרותיה העיקריות של עסקה פלונית היא הימנעות ממס 1968 -ח או הפחתת מס בלתי נאותות.חוק מיסוי מקרקעיןetc). One approach was a narrow approach. הימנעות ממס או הפחתת מס ניתן לראותן כבלתי נאותות אפילו . Section 86 TO: סמכות להתעלם 68. During that period if you have a villa you needed to pay . או העלולה להפחית. "עסקה" . Beer explained that even according to Barak’s approach there is an element of doubt which could serve in favor of the tax payer. והאדם הנוגע בדבר יהא נישום לפי זה. כי עסקה פלונית המפחיתה.)המהות גובר על הפורמליסטקהLikewise in England where there is no legislation like section 86. In the case law.(על החלטתו של פקיד השומה בהשתמשו בשיקול דעתו שניתן לו בסעיף קטן )א This section gives authority to the tax authorities to ignore a artificial transactions that were done merely for the sake of evading taxes. in England they don’t have this clause)121.מס רכושThis lawyer listed the house as a בית ( משותףand not a villa) and thus he didn’t have to pay . We ask questions on the macro level – what is the law trying to achieve. nothing stopped the court from ruling that the tax assessor was able to ignore the transaction (the מהותoverrides the formality . Yishai Beer 2011-2012 other hand there is the newer approach. 95 . both these approaches were used concurrently by the courts. In Rubenstein (3415/97) the court ruled as follows: There was a fish company. He gave an example with a leasing transaction122. The company was loosing money. One if the מסלול הדין הכללי 123 (i.עסקה מלאכותיתAs we explained. It’s a thirty month lease. Yishai Beer 2011-2012 obligated to let the parties know – and he must let them know right away. and the assessor can choose whichever he wants. etc) rather he can apply his basic understanding of tax law. and the other approach saying that section 86 is a last resort if he can’t find statutes to properly categorize the transaction. is the other approach – the wider approach – which says that the assessor has an assortment of tools before him which enables him not to recognize the transaction before him. In reality this is a ( חוזה מכרit’s basically financing the car or in plainer terms. He gave an example of a real rent transaction (here the transaction wasn’t artificial). 122 Ruben leases an expensive car (it’s written in the contract that it is a leasing transaction) from Shlomo Leasing. the tax ordinances states that a rental transaction that is for thirty years is to be treated as a sale for tax purposes. Parallel to this approach. With one approach saying that the assessor needs to resort right away to section 86. If such a transaction comes before the assessor. 96 . in this case company’s law) the other approach is according to section 86. Thus in this case the assessor. up till Rubenstein (3415/97). he doesn’t have to call the transaction an עסקה מלאכותיתall he has to do is apply his basic knowledge of civil law.Effy Stern Tax Law Prof. The main way that he could do this is by classifying the transaction as something other than what the parties called it. The court said that the assessor has two options when checking a transaction. Barak explains that both options are relevant. In the contract it’s written that after thirty months the leaser can buy the car for a small fee of 1000 shekel. But in this case say the transaction was for thirty years. Rubenstein came along and bought the company for the sake of writing of losses to his real estate company. The court was forced to decide whether or not this was a legitimate transaction.e. So when the assessor categorizes the transaction for what it is. 123 What we said above – civil law. financing a car in payments). in which a hefty amount of 19000 is paid each month. So though the rent transaction may be a real rent transaction. He explained that in some situations the assessor doesn’t have to put on his civil glasses (common sense understanding of the basic law of contracts. than he doesn’t have to recognize the transaction as a lease (which has different tax ramifications than a sale) just because the contract categorizes the transaction as a lease. Of course choosing one or the other will have its ramifications. So what this approach says is that the assessor puts on his civil glasses and calls the transaction what it is. using is understanding of tax law is able to categorize the transaction differently than how the parties to the transaction may have categorized it – this is without having to declare that the transaction was an . and calls the transaction what logic says that it is. In this case the couple has an electronics company.)מלאכותיתfictitious ( . או שהסבה פלונית [28] ( תיקון )תשכ" מס' 31אינה מופעלת למעשה. או כי אחת ממטרותיה העיקריות של עסקה פלונית היא הימנעות 1968 -ח ממס או הפחתת מס בלתי נאותות.(על החלטתו של פקיד השומה בהשתמשו בשיקול דעתו שניתן לו בסעיף קטן )א The section lists three scenarios where the assessor can categorize the transaction as something other than the parties classified it as: artificial ( . rather the court said that its an artificial transaction whose goal was tax evasion (in other words. just the fact that the transaction was done to avoid taxes is not enough. Yishai Beer 2011-2012 סמכות להתעלם 68. )א(היה פקיד השומה סבור. say Abraham and his wife Sarah work in the same grocery) will be treated as if they have one source of income124. בהתאם לסעיפים .)בדויהor a transaction whose principal objective is improper avoidance. saying that the transaction was for the purpose of avoiding taxes doesn’t solve the problem125 for that is exactly what we are trying to understand). etc) and she listed herself as working for the subsidiary (they did this so that she would be treated as working for a separate company).לענין זה. 124 This would mean that each party is not taxed according to how much they make. as we said above. or improper reduction of taxes. את מעסקאות מסוימות סכום המס המשתלם על ידי אדם פלוני היא מלאכותית או בדויה. כי עסקה פלונית המפחיתה. או העלולה להפחית. the transaction is nonetheless legit! 97 . והאדם הנוגע בדבר יהא נישום לפי זה. the couple opened a subsidiary company (substantially speaking there was no change in the company.אפילו אינן נוגדות את החוק . she sat at the same desk.g. רשאי הוא להתעלם מן העסקה או מן ההסבה. 125 Because there are transactions which although their purpose is to avoid taxes. "עסקה" . rather they are taxed according to what they make in total.לרבות פעולה 153-158 )ב( שום דבר האמור בסעיף זה אינו מונע מהשיג בערעור.Effy Stern Tax Law We again looked at section 86: Prof. The court ruled that it was an artificial transaction whose goal is tax evasion. To solve this problem. הימנעות ממס או הפחתת מס ניתן לראותן כבלתי נאותות . But in light of section 66 their income was treated as combined income. We see that the court didn’t use the option of saying that the goal of the transaction was to avoid taxes. The woman worked from day to night. Regarding the latter – this is basically replacing an apple for an orange – for that is exactly what we are trying to figure out – when do we say that a transaction is in fact artificial?! Herzikovitch: He gave an example with the Herzikovitch case: he mentioned that at the time section 66 (it has been amended since) stated that a couple that works in the same place (e. So the question on the table was what purchase tax was Ruben obligated to pay? So the way for Ruben to exempt from the tax (or in other words. He explained that Ruben would do this because if a person buys both at the same time he pays purchase tax ( )מס רכישהon everything. In this case the defendant said that the reason for the transaction was because of tax purposes in South Africa (he wanted to pay less tax in South Africa). This is a problematic test.) doesn’t mention the term . 126 127 Could a ‘compelling reason’ be tax evasion? Usually you buy both the property and the structure in the same contract. in order for Ruben’s transaction to be recognized) he has to provide a compelling commercial reason ( )טעם מסחריfor his transaction. and vice versa. From a legal perspective. just because no one does something today they may start doing it tomorrow! The next test to evolve in the case law was the טעם כלשהוtest (265/67 :)מפיAccording to this test in order that a transaction not be deemed an artificial transaction (in acc with section 86) you need to demonstrate some reason as to why the transaction was constructed in the way that it was (and that reason must be something other than an attempt to avoid paying taxes). The majority opinion ruled that it was clearly an artificial transaction for the purpose of avoiding taxes. 98 . because what does a deviation from the norm mean! Something that is a norm today may not be the norm tomorrow. whereas if a person brings a contractor to build on property that is his than he doesn’t have to pay purchase tax. first he wants to buy the land.Effy Stern Tax Law Prof. Yishai Beer 2011-2012 102/59 ( :)איסמרWith this in mind we went on to try and understand what is an artificial transaction according to the case law? In 102/59) )איסמרthe court stated that if the transaction is a deviation from normal business practice than it will be deemed an artificial transaction. The minority opinion (Ohr J.עסקה מלאכותיתhe simply says that the assessor puts on his civil glasses and in doing so he could clearly see that this was a regular transaction where the buyer bought a property with a house and thus מס רכישהneeds to be on the whole transaction. both transactions accomplish the same thing as if it was done in one transaction. The following test that evolved was the טעם מסחרי משכנעtest (761/77 :)אבנעלAccording to this test the tax payer needs to provide a compelling commercial reason ( )טעם מסחריfor why he deviated from the customary business practices126 (For instance Michelangelo goes to a contractor to buy a luxury condo (this example is based on the case (390/80 )תעש מורRuben tells the contractor that he wants to be sold the property in two separate stages. and than a week later he will buy from them the structure on the property127. The judges didn’t accept his claim. Effy Stern Tax Law Prof. Yishai Beer 2011-2012 83/81 ( :821)ת.מ.ב תחזוקת מפעליםBy way of background he explained that there were certain laws in place at the time with regards to limited liability of companies (.)עיקרון האחריות המוגבלת He explained that in light of the desire that companies form themselves into companies 129 we relieve such persons from paying taxes on the transaction (of converting their companies from private to public). However, we don’t want to encourage artificial transactions (e.g. immediately upon going public, Ruben sells half of the shares of the company to Simon. In such a transaction we would want to tax, being that here already Ruben is selling part of his property)130. So the statute (Section 95131) takes care of this issue. In this case Ruben converted his company into a public company – 100% of the shares of the company were his. Two weeks later he transferred 50% of the shares to Simon. The company is still one company, but the ownership of the shares is divided 50/50, thus we have a transaction that was done into phases, so the question was if this was considered " "מידor not. Or to put it differently is Ruben obligated to pay tax on the transaction? Section 95 TO: ריווח הון ממכירה הגיע לאדם או למספר בני-אדם ריווח הון ממכירת נכס לחברה (59. )א תמורת מניות בחברה ( תיקוןהמס' 6(תמורת מניות בלבד באותה חברה, לא יחוייב ריווח ההון במס אם מיד לאחר 1965 - "תשכ המכירה היה בידי המוכר או המוכרים, 09 אחוז לפחות מכוח ההצבעה של אותה .החברה )ב( במכירת הנכס שנרכש על ידי חברה כאמור בסעיף קטן )א(, וכן במכירת המניות שנתקבלו על ידי המוכר תמורת הנכס האמור, ייחשב כמחיר המקורי שלהם יתרת מחירו המקורי של הנכס בידי המוכר כאמור בסעיף קטן )א(; ויראו את יום.הרכישה של הנכס ביום שבו רכש אותו מי שמכרו לחברה ((95 'תיקון מס )ג( סעיף זה יחול על ריווח הון שהגיע לאדם או למספר בני אדם מנכס 1993 -תשנ"ג .(1994 שנמכר עד ליום י"ח בטבת תשנ"ד )1 בינואר Class 19 10/01/12 128 129 He changed the details of the case for the sake of simplification. Or in light of the fact that we don’t want to deter persons from converting their private companies into public ones. Or to put it differently, in order to keep the tax system neutral, we would need to make the transaction from private to public we need to exempt the transaction from taxes. 130 Again, in light of the legal protection that incorporating provides to the business owner, we want the tax code to be neutral to allow the business owner to incorporate. However there is no reason to leave the code neutral if Ruben goes ahead and sells half of the corporation to Simon. 131 The section says that if מידright away after the transaction you hold at least 90% of the shares than the transaction is exempt from the tax. 99 Effy Stern Tax Law Prof. Yishai Beer 2011-2012 Regarding artificial transactions, last class we mentioned the approaches of the various judges (390/80 ( ,))תעש מור(, 18/38 ת.מ.בand 3415/97 (390/80 .(( רובינשטייןwhich dealt with the guy who claimed that he wanted to evade taxes in South Africa) Shamgar didn’t buy the claim, and said that it was an artificial transaction. Ohr J. doesn’t mention the idea of artificial transaction, he says simply look at the transaction and you could see that this was the original intent of the parties and thus the full transaction is taxed. In 83/81 (which dealt with a person that incorporated his company, and than sold half to a partner), the question was if we should tax the incorporation in this case. Bach J. said that formally speaking, in the beginning “Ruben” had 100% of the company. Regarding the assessors claim that this was an artificial transaction, Bach J. said that you can’t raise this claim at this point. He explained that had Ohr J. adjudicated this case he would have said that we don’t have to resort to artificial transaction, we could (have) simply looked at the intent of the parties to the transaction. In 3415/97 Mr. Rubenstein acquired a fish company (which was in dire straits) for the purpose of writing of the losses of the fish company for his primary business (i.e. real estate). The question was if this was a legitimate transaction with regards to tax purposes or if this was an artificial transaction. Barak J. ruled that both approaches are relevant (the assessor could check if this is an artificial transaction; or he could put on his civil glasses and apply the relevant law and than categorize the transaction). So if the assessor had put on his civil glasses (and in this case) apply companies law, than the rule would have been that Rubenstein’s actions were legit (he took all the actions required by (companies) law to acquire a company). The second novelty introduced in this case is that until this case came up, the understanding of section 86 was that the assessor is allowed to ignore a transaction (if he feels that it wasn’t a legitimate transaction) or accept a transaction. In this case Barak says that the assessor is allowed to ignore part of a transaction if it’s artificial, meaning that he could ignore only the tax element of the transaction132. In light of this ruling, Rubenstein wouldn’t have been able to do what he did in order to write off taxes. Therefore if you want to acquire a company (that is loosing money) for the sake writing off its losses, than all you have to do is prove that you were interested in the company (e.g. in the Rubenstein case, you would spend the first year after you acquired the company growing some fish – for the sake of demonstrating to the assessor that you have interest in the company). 132 Is this an element of piercing the veil? 100 Effy Stern Tax Law Prof. Yishai Beer 2011-2012 With regards to whether categorization of a transaction as artificial for one of the parties to the transaction automatically affects the other party, it depends: According to the approach that says that we put on our “business glasses ( ”)ראיה כלכליתand we ask what was bought and what was sold – the answer would apply to both parties. However, if we go according to the narrow approach that says that we ask the buyer why he made the acquisition – than it’s possible that he won’t be able to provide a compelling reason, whereas the seller would. Thus, in such a case the acquisition of the buyer will be deemed artificial, whereas the sale of the seller won’t! Lastly, we mentioned that if you deceive the tax authorities and the assessor doesn’t except what you show him than you will be forced to pay taxes. However it’s also possible that the assessor would find you guilty of a criminal offense, in which case there will be criminal ramifications (we won’t discuss this sub topic). He pointed out that having professional lawyers/accountants do the “dirty work” for you won’t serve as a (full) defense in court133. In Summary – the tests for artificial transactions: (1) Deviation from regular business practice – )סטייה מדפוסים מקובלים )איסמר (2) “Some reason” – )טעם כלשהו )מפי (3) “A compelling business reason – )טעם מסכרי משכנע )אבנעל (4) According to Shamgar the assessor should accept the transaction as it is, but if he has reason to think that the transaction is artificial, than the burden of proof falls on the taxpayer to prove otherwise. Ohr takes the wider approach, he says that you need to look at what was sold and what was bought, without even needing to resort to section 86 ()תעש מור (5) According to Bach if the assessor wants to treat a transaction as artificial he must (immediately) let the taxpayer know (6) Barak says that there are two ways to check for an artificial transaction (narrow approach and wide approach) and both are valid. הוצאות מותרות בניכוי 133 It’s a partial offense 101 הכנסתו החייבת של היחיד מעסק או ממשלח יד. וכן סכומים בשיעורים ובתנאים כאמור אך בשינויים )תיקון מס' 23( תשל"ח.לקופת גמל כאמור או למוסד או לגוף תשס"ה. )תיקון מס' 22( תשל"ה. תיקונים )3( סכומים שהוצאו לתיקונים של חצרים. Yishai Beer 2102-1102 Expenses that can to be written of as expense are listed in Chapter 2 (Sections 17 and onward) of :the Tax Ordinances :Section 17 TO הניכויים המותרים 71. שהחובות נעשו רעים בשנת המס.2891 כאמור. )תיקון מס' 23( תשל"ח. לאחר שהופחת מהם )5א( השתלמות לעצמאים סכום השווה ל-%5. כלי שרת או חפצים ששימשו כאמור. לרשות מקומית או לגוף אחר שקבע תיקון מס' 241(( תשס"ה. אם הצמדה נוכח פקיד השומה שהם משתלמים על הון ששימש בהשגת הכנסה. יציאות והוצאות שיצאו כולן בייצור הכנסתו בשנת המס ולשם כך בלבד.8691 ידי המנהל לענין פסקה זו. מוצבה או מכונות. וכן חובות מסופקים במידה שנאמדו.Effy Stern Tax Law :ניקוי הוצאות – )71 Deduction of expenses (Section Prof. דמי שכירות )2( דמי שכירות ששילם שוכר קרקע או בנין שהיו תפוסים בידו לשם השגת ההכנסה. לשם שמירת זכות הפנסיה של עובדו וכן כל סכום או חלק תיקון מס' 841(( ממנו ששילם מעביד . סכומים כאמור לא יעלו על %5. חובות רעים )4( חובות רעים שנתהוו בעסק או במשלח-יד והוכח להנחת דעתו של פקיד השומה. )2( סכום שקיבל בשל אותו חלק ממס היתר שאינו עולה על %51 מהמס המגיע ממנו על פי שומתו העצמית. תשלומי מעביד )5( סכומים ששילם מעביד .8791 המחוייבים על פי הענין ששילם מעביד למדינה. אלא שכספים שנגבו בשנת המס לחשבון סכומים שנמחקו או שנוכו לפני כן בשל חובות רעים או מסופקים. זולת אם הניכוי הוגבל או לא הותר על א(-)ח( )י()יי(()1(11[ ])) פי סעיף 13.7791 בשנה שבה קיבל ריבית או הפרשי הצמדה פטורים ממס על פי סעיף 9)42(. כחובות שנעשו רעים בשנת המס. לפני הניכוי לפי 201 .4002 שר האוצר לענין זה. וכן לחידושם. ששימשו בהשגת ההכנסה.5991 מהכנסתו הקובעת. למעט הגבוה משני אלה: )1( סכום שקיבל בשל מס יתר ששילם משום שפקיד השומה דרש ממנו לשלמו או שנוכה ממנו במקור. לענין זה – "הכנסה קובעת" . אף אם זמן פרעונם של החובות הרעים או המסופקים חל לפני תחילתה של שנת המס.5791 )ב( נישום התובע ניכוי ריבית או הפרשי הצמדה על פי פסקת משנה )א( תיקון מס' 62(( תשל"ז. לתיקונם או לשינויים של כלי מלאכה. לשם בירור הכנסתו החייבת של אדם ינוכו.באישור המנהל . תשלומים לקרן סכומים ששילם יחיד לקרן השתלמות לעצמאים. להנחת דעתו של הפקיד. ינהגו בהם לענין פקודה זו כמו בתקבוליו של העסק או משלח-היד לאותה שנה.5002 כאמור שלא בתור השתתפות שנתית סדירה. כ ( תיקון מס תשל"ב-' 71(לרבות – 2791 ריבית והפרשי )1( )א( סכומים המשתלמים בתור ריבית או הפרשי הצמדה על כסף שלווה.8791 לא יותר לו לניכוי סכום השווה לסכום הריבית והפרשי ההצמדה הפטורים )תיקון מס' 45( תשמ"ב.2 מהכנסתו הקובעת.בתנאים ובשיעורים שנקבעו בתקנות לענין סעיף 74 לקופת גמל בתור השתתפות שנתית סדירה לקופת גמל כמשמעותה בסעיף האמור שאושרה על )תיקון מס' 31( תשכ"ח.4 )תיקון מס' 801( תשנ"ו. )8( ניכוי בעד פחת כאמור בסימן ב'. )א( סכומים ששילם נישום בעד לינה או שכירת דירה באזור שנקבע )31( כשטח פיתוח על פי סעיף 11. לפי יחס עסקאותיה עם כל חבר.1891 דמי לינה או שכירות באזור פיתוח )תיקון מס' 52( תשל"ז. )9( סכומים שאגודה שיתופית החזירה לחבריה בתור הטבה שנתית.651 שקלים חדשים בשנה. אולם אם קבעו בית המשפט או ועדה לקבילות פנקסים שהיה בערעור או בערר משום הטרדה ולא היה צידוק סביר להגשתם לא יותרו הוצאות משפטיות הכרוכות בהם. but personal expenses can’t be deduced. )6( הוצאות בנקיטת אמצעים למניעת סחף-קרקע ונגד שטפונות ופגעי טבע אחרים שייקבעו. )ג( שהטבות ייחשבו כאילו נתקבלו על ידי החברים ביום תום שנת החשבון שאליה הן מתייחסות.1102 to mean that only businessוהוצאות שיצאו כולן בייצור הכנסתו The case law understands the words expenses can be deducted. "קרן השתלמות לעצמאים" – קרן השתלמות המיועדת ליחיד שיש לו הכנסה מעסק או ממשלח יד.Effy Stern Tax Law Prof. יופחת סכום ההוצאות שנפסק מסכום ההוצאות שתבע. Yishai Beer 2102-1102 פסקה זו. )41( )51( היטל ששולם לפי חוק מיסוי רווחי נפט. )נמחקה(. )01( )א( הוצאות בקשר להכנת הדו"חות והטיפול בקשר למס בכל הליכי שומה )11( וערעור. שיחסו לכלל הכנסתה החייבת הוא כיחס סכום עסקאותיה עם חבריה לסך-כל עסקאותיה. ובלבד – )א( שלא יותר ניכוי בסכום העולה על אותו חלק מהכנסתה החייבת לפני החזרת ההטבה. )7( הוצאות בנקיטת אמצעי זהירות מפני התקפות מן האוויר. ניכויים אחרים שייקבעו בתקנות לפי פקודה זו. We will obviously have to 301 . במשך חמש שנים מיום שעבר לגור בדירה האמורה. התשע"א-1102. )ב( הוצאות כאמור בפסקה זו לא יותרו בקשר להכנסות מעסק או משלח יד שלגביהם לא נוהלו פנקסי חשבונות או אם הדו"ח לא בוסס על פנקסי חשבונות. )ב( שההטבה ניתנה לחברים תוך תשעה חדשים מתום שנת החשבון שאליה היא מתייחסת או במועד מאוחר יותר שקבעו המנהל.5002 נזקי טבע התקפות מהאויר פחת הטבות באגודה שיתופית תיקון מס' 241(( תשס"ה. תיקון מס' 841(( תשס"ה. נפסקו הוצאות משפטיות לטובת הנישום. )ב( שר האוצר רשאי לקבוע את תקרת הסכום שיותר לניכוי על פי פסקת משנה )א( ואת תקופת הניכוי. דמי שכירות אלה יותרו לניכוי מדמי השכירות שהוא מקבל בשל השכרת דירת הקבע שלו באותה תקופה.7791 ניכויים אחרים )תיקון מס' 22( תשל"ה. דמי שכירות ששילם יחיד בעד דירה ששכר בישראל ושאליה עבר לגור )21( לרגל עבודתו או עיסוקו.4002 תיקון מס' 35(( תשמ"ב.5791 תיקון מס' 481(( תשע"א. אשר בו עובד הנישום דרך קבע אך אינו גר בו עם משפחתו שעמה היה גר אילולא עבד שם. ועד לסכום של 000.2891 הוצאות הכרוכות בתשלום המס )תיקון מס' 22( תשל"ה.5791 דמי שכירות שמשלם יחיד שעבר זמנית תיקון מס' 34(( תשמ"א. על ידי מי שחב בו לפי אותו חוק. 136 This is despite the fact that the law demands that you watch and protect your children and you aren’t allowed to leave them unattended for! 104 . So to. he gave an example: Dana goes to the grocery and spends 1000$ can she write off the expense? It will depend.הוניתThe case law fine tunes these criteria. because you would eat even if you weren’t working! With regards to expenditure on transport to work. Peri. if she spent 1000$ on food for a business meeting than possibly she would be able to deduct the expense. playgroup. etc) or equipment would be considered a business expense. In general food is considered a personal expense. babysitter) was considered a personal expense136. The words בשנת המסmean that if you have an expense that is הוניתthan it too can’t be treated as a . Peri was a lawyer and she claimed that in order for her to work she needs to send her kids to a playgroup. you 134 If you are an appraiser and you need to travel from place to place than that would be considered a business expense. According to the logic until this case. What we are discussing is transport from home to work to home! 135 A job that requires special clothing (e. because if you choose to live far from work that is your personal decision. Regarding something like reading glasses (despite the fact that a lawyer could claim that he needs the glasses in order to work) according to the case law this is nonetheless a personal expense and thus not deductable 135.הוצאה פירותיתSo you first need to check if the expense is a business expense ( )עסקיתand that it is not . However in this landmark decision the court accepted the claim of Mrs. than possibly it will be viewed as a business expense and thus deductable. Yishai Beer 2011-2012 understand what is considered personal expenditure. English case law has ruled that this is not business expenditure. helmet.g. here to it would depend if he bought the tie because he needs it for his work. in Israel transportation is not treated as a business expense134. because it’s your choice to have children – having children is not a necessary requirement for the job! For this reason the tax assessor didn’t accept Mrs. With regards to expenses in raising children. in the case 4243/08 ( :)ורד פריthe court recognized that raising children could be considered a business expense. until the case 4243/08 raising children (i. In this case Mrs. Peri’s claim to have the expense deducted. if it is demonstrated that it was for personal use than it wouldn’t be. If she spent the 1000$ on food for her kids than it wouldn’t be deductable: Another example. If a lawyer buys a nice tie.e. Regarding the claim that ‘I need food in order to work!’ this is not true. With regards to personal expenditure. we would have said that this is a personal expense.Effy Stern Tax Law Prof. goggles. He explained that the difference between food and raising children is that with food. and in certain areas the statute expands the list of what could be deduced. if you didn’t work. The second thing that section 17 states is that you can’t deduct capital expenditure ( )הוצאות הוניות (e. than you wouldn’t need to send them to a playgroup (true.נפרד מהם " הוצאות אש"ל" – הוצאות שהוציא יחיד בשל ארוחותיו. Either way. בפסקה זו "הוצאות כרוכות ושלובות בתהליך הפקת ההכנסה" – הוצאות המשתלבות בתהליך הטבעי של הפקת ההכנסה ובמבנהו הטבעי של מקור ההכנסה.g. E. and you buy a new saw. a lawyer is sent to Eilat. Though this is an expense for this business. שאינם כסף שהוצא כולו לייצור ההכנסה ולשם כך בלבד ניכויים שאין להתירם . Immediately following this ruling.32 [12] ((170 'תיקון מס 2009 -תשס"ט ((179 'תיקון מס 2011 -תשע"א Thus the legislature nullified the זיקה ממשיתtest offered by the courts and brought back the הוצאה כרוכהtest. than we don’t have to say that the expense is a תנאי )לעסק )הוצאה כרוכהrather it is sufficient that there is a זיקה ממשית וישירה לייצור ההכנסה between the job and the expense. והמהוות חלק בלתי . Possibly this wouldn’t be treated as a business expense because he would have eaten regardless (there is separate legislation dealing with a person that flies abroad on business). הוצאות שהוצאו לשם הגעה למקום ההשתכרות ולשם חזרה ממנו. with the passing of section 32 food expenses are considered a private expense. הוצאות פרטיות. you would need to stay home with the children. ולמעט הוצאות בשל ארוחת בוקר הכלולה במחיר לינה .)2( תשלומים או הוצאות. הוצאות אש"ל731. שהוצאו בין במקום ההשתכרות ובין מחוצה לו. He explained that in the past there was legislation which said you could deduce up to three shekel (this was old legislation.עליו או לשם טיפול באדם אחר או השגחה עליו. The court ruled that in fact the amount didn’t reflect reality. the legislature amended section 32: Section 32 TO: – בבירור הכנסתו החייבת של אדם לא יותרו ניכויים בשל )1( הוצאות שאינן הוצאות הכרוכות ושלובות בתהליך הפקת ההכנסה. (Does this mean that the solution to this is to eat with your client?) 138 What if you put the playgroup in the office building? 105 . והוצאות שהוצאו לשם טיפול בילד או השגחה . However with raising children.Effy Stern Tax Law Prof. Yishai Beer 2011-2012 would eat food regardless. it too wouldn’t be deductable138. 137 This refers to food expenses outside of the home. Thus only expenses directly connected to work could be deducted. He pointed out that actually this section expanded the rule because it says או לשם טיפול באדם אחרmeaning if you have an elderly parent that needs your help. With regards to how to separate between the expense of the playgroup and the additional paid-for amenities supplied by the playgroup. but you wouldn’t have to send them to a playgroup and thus there is a difference). the court deals with this by explaining how to dissect the expenditure (we will discuss this next lecture).g. say you are a carpenter. לרבות הוצאות הבית.המותרת בניכוי . based on old numbers). The court ruled that if you want to get a תוצאת מס אמתin this case. and while in Eilat he buys a sandwich to eat. The publisher spends 500. bribery wouldn’t be recognized as a deductable expense).e. and in light of the various shady elements in the industry he had to pay off certain persons so that he could hold on to the circuit.Effy Stern Tax Law Prof.000$ on a printing press. Likewise if you build a factory for your business. a certain percentage of the value of the saw could be deduced each year. 106 . expenses spent on protexia . Additionally the courts ruled that expenses that are attached to the business operations ( )כרוכות בפעולות העסקיתthan even if its capital expenditure ( )הוניתit will be treated as peyrutit. each year it produced for you a certain amount of peyrot).)שמירה על הקייםExpenditure towards maintenance will be treated as peyrutit. It than wanted to write off the expenses that were spent in bribing the girls school to move.)141לשמור על הקיים Class 20 139 Why didn’t we say that in light of this rising children is considered ( הוניתbeing that their education will last them a lifetime?) 140 He mentioned the case (35/67 )שתדלןwhere an ultra orthodox school paid off a girls school that it move from the premises.)נכסThere are other הוצאות הוניותwherein you could do a partial deduction via amortization (( )פחתi. He than gave a different example where you have a book publisher. the latter – is not an expense that is meant to go beyond the first tax year – and thus it is not הוניתand thus it is deductable. In this case the first expense would be considered הונית and thus not deductable. this to the court has considered שמירה על .g. With regards to the first expansion ( )שמירה על הקייםhe gave several examples from the case law (expenses on insurance – e.000$ on a stage to hold a book fair for an upcoming book. The case law expanded הוצאות פירותיתto include expenses whose goal is maintaining what is already in existence ( . For there are capital ( )הוניתexpenses that can’t be deduced but you will be able to consider them when you sell the property ( . The court ruled that if its grey area than it will allow the deduction. or in other words. 141 One of the cases we read dealt with a person that had a garbage truck circuit. Yishai Beer 2011-2012 this saw will last מעבר לשנות המסand thus it is considered הוניand not deductable. it will be considered a capital expense ( )הוניתand thus not deductable139. and thus deductible. say you insure your office or your property. However. and 500. being that it last beyond the tax year. with regards to the first expense (the capital expense – the printing press) even though it can’t be deducted there are ramifications for tax purposes. if there is a clear criminal offense going on than it wouldn’t recognize the deduction (e.g. He mentioned the He mentioned the case Ela Rabiya as an example where it dealt with money changing and the court said that the action though illegal was done all the time and thus it allowed the expense to be deducted. lobbyists – expenses spent on lobbying. despite the fact that you are insuring נכס הוןit will still be considered as peyrutit and thus deductable. being that with time it goes down in value.041הקייםlegal expenses. Effy Stern Tax Law 15/01/12 Prof. Yishai Beer 2011-2012 השתלמויות (141/54 :)לילי וולףWe continued the discussion of deduction of expenses ( )ניכוי הוצאותspecifically with regards to :השתלמויותHe gave an example; a dentist finished his studied twenty years ago. He decides to fly to a convention in Amsterdam to learn new technique on how to fill cavities. There are some that will say that he learned a new technique and thus now he is a new type of dentist (i.e. he created ,)הוןand thus he can’t write off the expense of the trip. Others will say that in order for a dentist to protect his position as a dentist ( ,)לשמור על הקייםhe needs to constantly update his knowledge. So in short the question is whether taking advanced study courses ( )השתלמויותis creation of something new, or is its protecting what is already there. This issue came to the Supreme Court; the court ruled (141/54 )לילי וולףthat we need to understand לשמור על הקייםin a wide fashion. However studies towards an official degree (BA, MA, PhD) would not be considered .לשמור על הקייםSo we can see that there is a slight contradiction in the case law, in that expanding your knowledge of expertise would be considered שמירה על הקייםgetting a degree or an additional degree wouldn’t. With regards to the inability to deduct expenses towards a degree, the legislature enshrined the case law ruling into statute in section 32(15): – בבירור הכנסתו החייבת של אדם לא יותרו ניכויים בשל הוצאות לימודים, לרבות הוצאות לרכישת השכלה אקדמית או לרכישת (15) מקצוע, ולמעט הוצאות השתלמות מקצועית, שאינה לרכישת השכלה או מקצוע ;כאמור, לצורך שמירה על הקיים ניכויים שאין להתירם .32 [12] ((151 'תיקון מס 2006 -תשס"ו We moved on to :הוצאות כרוכותlast lecture we mentioned the case 4243/08 (.241)ורד פריThe question is, what is meant by ?הוצאות כרוכותWe gave several examples: Say you have a hotelier, and in light of the fear of law suits, he spends huge sums of money on making sure that the facilities are safe (e.g. no one slips because of water on the floor) the courts have ruled that while his main business is not cleaning, nonetheless this is considered an expense that is כרוכה בעסקand thus it is מותרת בניכוי 142 The lawyer that wanted to deduct her children’s playgroup expense; and the court accepted her claim. The legislature than came (in section 32(1) referring to this as הוצאות כרוכותand reversed the ruling of the court). 107 Effy Stern Tax Law Prof. Yishai Beer 2011-2012 The case law has ruled that with a ( גוף עסקיe.g. a bank) its donations are not considered הוצאה .כרוכהHowever as we learned in the beginning of the year, they would be entitled to זיכוי according to section 46. Section 46 TO: תרומה למוסד ציבורי אדם שתרם בשנת מס פלונית סכום העולה על 013 שקלים חדשים (64. )א (65 ')תיקון מס 1984 -תשמ"ד לקרן לאומית, או למוסד ציבורי כמשמעותו בסעיף 9)2( שקבע לענין זה שר האוצר ((96 'תיקון מס באישור ועדת הכספים של הכנסת, יזוכה מהמס שהוא חייב בו באותה שנה בשיעור 1994 -תשנ"ד ((124 'תיקון מס של %53 מסכום התרומה – אם הוא יחיד, ובשיעור הקבוע בסעיף 621)א( מסכום 2000 -תשס"א ( 'תיקון מס תשס"ה-741(התרומה – אם הוא חבר-בני-אדם, ובלבד שלא יינתן זיכוי בשנת מס פלונית בשל 2005 ( ' תיקון מסז-451(סכום כולל של תרומות העולה על %03 מההכנסה החייבת של הנישום באותה 2007 "תשס ( )הוראת שעהשנה, או על 000,636,7 שקלים חדשים, לפי הנמוך מביניהם ) להלן – התקרה 2009 -תש"ע הודעה תשע"אלזיכוי(; סכום העולה על התקרה לזיכוי שנתרם באותה שנת מס, יזוכה מהמס 2011 בהתאם להוראות סעיף זה בשלוש שנות המס הבאות בזו אחר זו, ובלבד שלא יינתן זיכוי בכל אחת משלוש שנות המס כאמור, בשל סכום כולל של תרומות העולה .על התקרה לזיכוי As a side point he mentioned that if a public institution ( )מוסד ציבוריwants to donate to a specific organization and it wants to deduct ( )ניכויthe expense (as supposed to a ( )זיכויwhich as we already mentioned is not possible according to the law being that a donation can’t be deducted (there is no ניכויa donation only entitled the donor to .)זיכויThe way to do so would be via advertisement (because advertising is an expense that is considered .341)כרוכה He gave another example of ,הוצאות כרוכותas follows: In the Super Markets, they have the area where there are nuts and etc, and there are people that steal. Likewise in clothing department stores, there are always those people that rip off clothing. Thus, for these stores the fact that a certain percentage amount will be stolen is כרוכהin the business (it’s a built in expense). He explained that stealing could also be from the employers of the business. The case law has ruled that these expenses144 are considered הוצאה כרוכהand thus .מותרת בניכויHowever, if the CEO of a bank would steal a large sum from the bank, than according to the case law this would not be 143 Say the Elite company wants to donate 1,000,000 to Macabee Tel Aviv. What it can do, is it can pay for an advertising campaign where you see Macabee players eating Elite Chocolate. Thus the advertisement helps promote Elite as well as Macabee business. Of course if the advertisement didn’t help to promote Elite’s business than it wouldn’t be considered .כרוכה 144 He stressed that we are talking about minor theft 108 Effy Stern Tax Law Prof. Yishai Beer 2102-1102 – because this is not considered, within the reasonable risks/expensesהוצאה כרוכה considered a that a business should have to expect. The test is the reasonability test. He reminded us of section and it disappeared (e.g. it was stolen) than it will beמלאי עסקי 85 which states that if you have הוצאה 145, however it will be viewed asסכום השווי viewed as if you sold it at the market price .641שמותרת בניכוי :Section 85 TO עסקי הערכת מלאי 58. )א(בחישוב ההשתכרויות או הרווחים מעסק לענין פקודה זו, יראו מלאי עסקי במקרים מסויימים )תיקון מס' 31שהיה שייך לאותו עסק במקרים האמורים להלן כנמכר בסכום השווי: ( תשכ"ח- 8691 )1( מלאי עסקי השייך לעסק בעת שהופסק או שהועבר; )2( מלאי עסקי שהוצא או שהועבר מהעסק שלא בתמורה או שלא בתמורה מלאה, וכן מלאי עסקי בעסק שהפכוהו לנכס קבוע באותו עסק. )ב( לענין סעיפים 12 ו-88, לגבי מלאי עסקי שהפכוהו לנכס קבוע ונראה כנמכר כאמור בסעיף קטן )א(, יהיה סכום השווי המחיר המקורי. )ג( בסעיף זה – "מלאי עסקי" - כל נכס מיטלטלין או מקרקעין הנמכר במהלכו הרגיל על העסק, או שהיה נמכר כך אילו הבשיל או הגיע לגמר יצורו, הכנתו או בנייתו, וכל חומר המשמש בייצורו, בהכנתו או בבנייתו של אותו נכס; "עסק" - לרבות חלק מעסק; " סכום השווי" - הסכום שאפשר היה לקבל תמורת המלאי העסקי ממוכר מרצון לקונה מרצון כשהוא נקי מכל שעבוד הבא להבטיח חוב, משכנתה, או זכות אחרת הבאה להבטיח תשלום; אולם אם פקיד השומה שוכנע, כי המחיר בעד המלאי נקבע בתום לב בלי שהושפע במישרין או בעקיפין מקיום יחסים מיוחדים בין המוכר לקונה - ובמקרקעין גם בתנאי שהמכירה נעשתה בכתב - יהא סכום השווי המחיר שנקבע. ( )תיקון מס' 05)ד( )1( על אף האמור בסעיף קטן )א()2(, יראו מלאי עסקי כמפורט להלן, כנמכר תשמ"א- 1891 בסכום העלות: )א( בנין שהפכוהו לבנין להשכרה כמשמעותו בסעיף 35א לחוק לעידוד השקעות הון, תשי"ט-9591 )להלן בסעיף קטן זה - חוק העידוד(; )ב( מגרש שנכלל בתכנית מאושרת על פי חוק העידוד למטרת בניית בנין להשכרה כמשמעותו בחוק האמור, שנבנה עליו בנין להשכרה כמשמעותו בסעיף 35א לחוק האמור; )ג( בנין או מגרש כאמור בפסקאות משנה )א( או )ב(, שהועבר לבעלותה 541 Sat Ruben bought 100 shirts and he paid 100 for them. The 100 shirts were stolen. According to section 85 it is as it too will beהוצאה if he sold them for 150, thus it will be viewed as if he sold 100 x 150. with regards to the .viewed as 100 x 150. Thus Ruben doesn’t loose anything 641 If you come to your business in the morning and you see that your inventory was stolen. The logic behind of this .שינוי ייעוד section is in light of 901 או פרק שביעי 1 לחוק העידוד.גם אם טרם נסתיימה בנייתו ((87 'תיקון מס 1992 -תשנ"ב In summary: tests whether deduction will be allowed – הוצאות מותרות בניכוי (1) ( מבחן היתרון התמשךif the asset provides benefit beyond the tax year it will be considered honit) ()לילי וולף (2) ( )זיקה ממשית )ורד פרדיno longer relevant) (3) )לשמור על הקיים )שתדלן. 147 In this case a fire broke out and caused significant damage to a neighboring property. On the one hand he went to Amsterdam for business (and thus it should be . The court ruled that the possibility of a fire and the need to indemnify is a built-in expense 110 . It would seem that mixed expenses are not deductable. He spends the week working from sunup to sundown. תשמ"א 1891. He is sent to Amsterdam for a week. Ruben shouldn’t be allowed to deduct ( )לנכותthe expenses of the trip! To resolve such issues the case law has ruled that in such a case – of a mixed expense ( – )הוצאה מעורבתwhere you can distinguish between the business expense ( )הוצאה עסקיand the personal expense ( – )הוצאה פרטיwe would allow the business expenses (the plane ticket and the hotel for the first week) to be deducted. כולם או חלקם. תשכ"ג-3691. However. לילי וולף (4) )741הוצאות כרוכות בעסק )שחר זרעים Mixed expenses – הוצאות מעורבות A straightforward reading of the statute reads that it is permissible to deduct ( )לנכותexpenses in which all of the expense ( )כולןtook place in the given tax year. he spends an additional week in Amsterdam to enjoy himself.מי שהעבירם למוכר. היום והשווי שהיו נקבעים אילו נמכר הנכס בידי . בידי מי שקיבל אותם בנסיבות האמורות בה ועל המכירה חלים חוק מס שבח מקרקעין.g.Effy Stern Tax Law Prof.פסקה )1( נמכרו. אשר לאחר שהחילו לגביהם את הוראות . יהיו יום הרכישה ושווי הרכישה בידי המוכר לענין החוקים האמורים.מרכז ההשקעות כמשמעותה בחוק העידוד )2( בנין או מגרש שהוקם עליו בנין. and the case law has ruled in favor of the tax payer (e. in reality most expenses are mixed. If you read the statute literally being that this wasn’t " "כולהa business expense. אם ההעברה לחברה היתה בהתאם לדרישת מינהלת .הוצאה כרוכהon the other hand he spent a week for pleasure purposes. "בנין" . או סעיף 4 לחוק -מס הכנסה )עידוד להשכרת דירות( )הוראת שעה ותיקוני חוק(. Ruben is an electronic engineer for Intel. Yishai Beer 2011-2012 של חברה שחברים בה כל בעלי העסק באופן המקנה להם זכויות לנכס כזכויותיהם בעסק. After the week is over. לענין זה. He also bought inventory in 2011 (which he will pay for in 2012). In December 2011 he also received a rent bill for the factory. he would have had to buy a return ticket (had he left immediately upon finishing his business. and finally he received a bill from his lawyer that dealt with a customer that was injured by her product (the bill is to be paid in 2012). There will be cases wherein a transaction is based on a de minis crime and the court will allow the deduction e. we don’t care about when you paid the lawyer. However. and claims that he went there to see how Marks and Spencer’s puts out its fruit).g. than it wouldn’t be considered built-in. advertising) than we would allow you to separate between the personal expense and the business expense and deduct the business expense. he would have still had to fly back). (54/84 .)ערביהWe pointed out that donations will not be considered a built-in expense! Timing and deduction – כללי העיתוי של ההוצאה With regards to timing ( )עיתויand at what point expenses can be deducted ( .בסיס מצטברapply (e. However in a case where the business reason given for flying abroad is seemingly fictitious (e. here too.g. at what point ( )עיתויcan they be deducted – in 2011 or 2012? According to the בסיס מסחריwe don’t look at the time that the money was received. if say Coke Cola started a new line of product (e. Though.Effy Stern Tax Law Prof. wine) and began an advertising campaign on it. In December 2011 he sold IDC a thousand chairs.)מותר בניכויThe question with all of these expenses is with regards to.e. The plane ticket would be deductable in its entirety because regardless of the vacation. with regards to the insurance policy. But. All these expenses are deductable ( . What we do care is the ( התאמה הכלכלית לתשלוםe. As we mentioned previously advertisements are considered a built-in expense ( . if the majority of the expense was a business expense (i.g. for which he will be paid in February 2012. the court wouldn’t accept the claim. if Coca Cola begins an advertising campaign for a new line of product. we would look at the 148 We go by the majority. or when you paid the corporate tax. Ruben sells the furniture to IDC. Yishai Beer 2011-2012 (whereas the personal expenses wouldn’t be deductable). or when you paid the rent. if this was a mixed expense ( )הוצאה מעורבתthan we would scrutinize the transaction and separate the personal expense from the business expense148.g. 111 .)הוצאה כרוכהthus Coca Cola’s advertising campaign for Coke would be considered built-in.)ניכויthe same two approaches that we mentioned above concerning taxation – בסיס מסחריand . a citrus grower fly’s to England. and he received his insurance policy (which will be valid till Dec 2012).g. as well as a corporate tax bill. than we wouldn’t allow the expense to be deducted. On the other hand it’s possible that the employer will end up committing a crime and will loose his entitlement to severance pay.000 miles should be written off for this year (because there is a חוב )תלויthe court ruled that you cant have a חובto yourself. it would depend to what year the tax is based on. 112 . than we would divide it accordingly. on the dealership – for providing the warranty) could be 149 In the Arkia case the situation was that an engine needs say 1 million dollars worth of fixing every 100. we would go by the date that he received the inventory – regardless of when he paid for the inventory In short we go according to when the אירוע כלכליtakes place. therefore its considered . ( . than if only one month in 2011 is covered. The court has ruled that if the chances are that the employer will have to pay severance than the expense will be recognized as built-in ( )כרוכהand it could be deducted.g.000 miles. Yishai Beer 2011-2012 period that the policy applies to. Thus a simply solution to bypass the ruling is to set up a subsidiary. and the remaining eleven months are in 2012. and you would be able to write off one month for 2011 and eleven months for 2012.000 cars a year and every car comes with a guarantee) and whether the costs (e. In almost all cases (besides for a worker that steals) the employer will have to pay severance.תלוי חובות מותנה/חוב תלוי חובות מותנהrefers to expenses which are ambiguous (e.g.g.תלויFor a חוב תלויto be recognized as a deductable expense it needs to be a חוב לצד שלישיit can’t be money that one owes to oneself (e.))פס"ד ארקיעA solution for a company that wishes to deduct a חוב תלויis simply to set up a subsidiary149. With regards to the inventory. if its for 2011 than the deduction will be in 2011 even if he actually paid it in 2012. Honda sells 10. So if it is a twelve month policy. חוב מותנה . with regards to the corporate tax.g.Effy Stern Tax Law Prof. rather it will be paid years from now (when the employee retires/gets fired). in this case the argument was that the first 50. Warranties – כתבי אחריות With regards to warranties (e. This is considered a חוב תלויbecause the employer isn’t going to pay the severance now. Severance pay – according to the law you are obligated to pay severance pay. a certain percentage on each car based on the logic of ( חוב תלויbased on the possibility that Ruben – the customer – may end up returning the car.e. One option is to say that we should wait till all claims are settled (this is not feasible because that would mean waiting many years!). than that expense will be viewed as built-in ( )כרוכהand we will allow for it to be deducted at the time of sale151. the medical insurance company would need to procure both medical and tort experts to evaluate the amount of the potential suit.g. say a real estate company sells thousands of apartments a year. Business entities that have cases pending against them . Such a company needs to file claims and financial statements. such a company is exposed to possibly claims for the next seven years (for problems that may come up with the apartments). could be up to twenty-five years!). Obviously we would allow you to write it off if two years later the customer returned it to be fixed. statute of limitations – i. how does it evaluate the potential suits that may arise? This question is especially pronounced with insurance companies (in medical law. So in a case involving a medical issue. Class 21 22/01/12 Deduction of expenses (cont’d) and relevant legislation (Section 17) – ניכוי הוצאות 17 'ותתי סעיפים חשובים תחת ס 150 151 Thus when there is a guarantee its not clear cut profit. exposure. According to the statute of limitations. 113 .g. Thus the case law has ruled that similar to חוב תלויsay an insurance company would need to hire professionals in the fields that it covers.גופים עסקיים שיש כנגדם תביעות משפטיות פתוחות With regards to business entities that have cases pending against them (e. Yishai Beer 2011-2012 deducted (e. the point here is that we are allowing you to write of the expense already at the time of sale. and he will have to fix it 150) the case law has ruled (as was mentioned above) that if there is a high reasonable chance that a certain percentage (say 2%) will claim their guarantees – if there is clear-cut statistics. and these professionals need to estimate the chances of a suit being filed in each type of situation. with regards to this exposure. He explained that if the assessment doesn’t end matching up to the final amount than you would adjust the final amount to the amount that was assessed originally by the experts.Effy Stern Tax Law Prof. because there is a slight chance that there will be a liability. For example. We also mentioned that the term loan is interpreted in a wide fashion (i.Effy Stern Tax Law Prof. according to the case law on this section though it is a capital asset ( )נכס הוןit deductable ( . He than gave another example: The owner of a café buys a coffee maker for the café. rather they will be included in the expenses of the final costs of the building of the hotel (this is important with 114 . for in the coffee machine example.מהמס המגיע ממנו על פי שומתו העצמית The section states that interest expense ( )הוצאות ריביתon a loan taken out for the purpose of creating income is deductable. לא יותר לו לניכוי סכום השווה לסכום הריבית והפרשי ההצמדה 1982 -תשמ"ב :הפטורים כאמור. It’s a rather lengthy section containing many sub-sections.e. overdraft in the bank is considered a loan. לרבות ריבית והפרשי . He explained that this doesn’t mean that the (interest) expenses will be lost. למעט הגבוה משני אלה )1( סכום שקיבל בשל מס יתר ששילם משום שפקיד השומה דרש .)1( )א( סכומים המשתלמים בתור ריבית או הפרשי הצמדה על כסף שלווה הצמדה (22 ')תיקון מס . Yishai Beer 2011-2012 Section 17 is the primary section that deals with deductions. לשם בירור הכנסתו החייבת של אדם ינוכו.אם נוכח פקיד השומה שהם משתלמים על הון ששימש בהשגת הכנסה 1975 -תשל"ה ((26 'תיקון מס ()ב( נישום התובע ניכוי ריבית או הפרשי הצמדה על פי פסקת משנה )א 1977 -תשל"ז (32 ')תיקון מס )9 בשנה שבה קיבל ריבית או הפרשי הצמדה פטורים ממס על פי סעיף 1978 -תשל"ח (54 ')תיקון מס 42(. the coffee machine immediately starts generating income the moment it is purchased. and the purchase results in the storeowner being in overdraft (minus) in such a case we have a loan for the purpose of creating income and thus the interest expense is deductable. a storeowner buys inventory. זולת אם הניכוי הוגבל או לא [11(1)((א(-)ח( )י()יי ]) כ תיקון מס' 71)(הותר על פי סעיף 13. We stressed the importance of the term הוןin the clause.ממנו לשלמו או שנוכה ממנו במקור 15% )2( סכום שקיבל בשל אותו חלק ממס היתר שאינו עולה על . This is different than the coffee machine example. and therefore it is not deductable. It list the expenses that can deducted (provided that deduction is not disallowed under section 31) Section 17(1) deals with interest and linkage differentials: Section 17(1) TO: הניכויים המותרים 71.)מותר בניכויHe gave another example: assume that someone takes out a loan to build a new hotel. some of which are relevant and some of which aren’t. Whereas in this case the loan wont result in the “immediate” generation of income. It will take four years for the hotel to be built. יציאות והוצאות שיצאו כולן בייצור הכנסתו בשנת המס ( 1972 -תשל"ב – ולשם כך בלבד. 115 . However with regards to someone that loans money for the sake of investment (i.)חלףIn this case Ruben took out a loan to purchase . banks) interest expense can de deducted. With regards to someone whose profession is to provide loans (i. Needless to say the bank charged interest on the second million.e. מוצבה או מכונות. Beer referred to as “a bad ruling” the district court ruled that section 17(1) says לצורך ייצור הכנסהwhereas the second million was used towards investment. because as we learned elsewhere money spent for the generation of income or towards maintenance ( )לשמור על הקייםis deductable. כלי . Chalef than wanted to deduct the (interest on the) second million based on the claim that it couldn’t have received the first million without taking the second million.e. וכן לחידושם.Effy Stern Tax Law Prof.מלאי עסקיWhat was unique about this case was Chalef requested a loan of one million. Section 17(2) TO: deals with rent: )2( דמי שכירות ששילם שוכר קרקע או בנין שהיו תפוסים בידו לשם השגת . not a bank but an investor) the case law has ruled that you can’t write off the interest expenses (however it could be written off in the same way mentioned above. לתיקונם או לשינויים של כלי מלאכה. and thus the court didn’t allow him to write it off (Before the case came to the Supreme Court the tax authorities realized that the District court made a mistake. and the banker told him that he can have a million on condition that he takes two million (this was illegal). regarding a person who takes out a loan on building a hotel – upon the completion of the project).ההכנסה דמי שכירות This sub section is redundant because. we already know that it is permitted to deduct expenses towards the creation of income. ששימשו בהשגת ההכנסה. In what Prof. and thus they allowed him to write it off). We mentioned the decision of the court in the case 3196/93 ( . Section 17(3) TO: deals with repairs: )3( סכומים שהוצאו לתיקונים של חצרים. Yishai Beer 2011-2012 regards to configuring amortization ( )פחתand capital gains tax ( )מס רווח הוןif and when the hotel owner eventually decides to sell the hotel).שרת או חפצים ששימשו כאמור תיקונים This sub section is also redundant. בתקבוליו של העסק או משלח-היד לאותה שנה חובות רעים He gave an example of a check cashing business. He stressed that you need to distinguish between a bad debts ( ( )חוב רעe.)7( הוצאות בנקיטת אמצעי זהירות מפני התקפות מן האוויר התקפות מהאויר This section refers to the building of a shelter ( .g. Section 17(7) TO: deals with expenditure on air-raid precautions: . ינהגו בהם לענין פקודה זו כמו . אלא שכספים שנגבו בשנת המס לחשבון סכומים שנמחקו או שנוכו לפני כן בשל חובות רעים או מסופקים. וכן חובות מסופקים במידה שנאמדו. because of two potential issues. This would obviously apply to banks as well. Say I invest in a restaurant that goes bust) which can’t be written off. which is considered a .Effy Stern Tax Law Section 17(4) TO: deals with bad debts: Prof. להנחת דעתו של הפקיד.')8( ניכוי בעד פחת כאמור בסימן ב פחת 116 . say I build the whole house as a shelter. Yishai Beer 2011-2012 )4( חובות רעים שנתהוו בעסק או במשלח-יד והוכח להנחת דעתו של פקיד השומה.e. אף אם זמן פרעונם של החובות הרעים או המסופקים חל לפני תחילתה של שנת המס. שהחובות נעשו רעים בשנת המס. can the expense be deducted? Or say in accordance with the requirements of the law a contractor builds a shelter in a forty story building. which naturally has some bad checks. firstly we are not dealing with a profit-making-mechanism. but it would allow the deduction in the example with the forty story building (See 401/93 . loan or credit that is not honored by the debtor) which could be written off and a ( השקעה כושלתa bad investment. would he be able to deduct the expense? Or to put it differently.הוצאה הוניתE. it will provide a benefit beyond the given tax year)! He gave an example to demonstrate the question. In such cases the section is stating that those expenses can be deducted.g. and secondly we are dealing with something that is honiy (i.)מקלטHe explained that this is a novel clause. say Ruben builds a shelter which just so happens to be his home. כחובות שנעשו רעים בשנת המס. could he deduct the expense? The court has ruled that with regards to the shelter of the private it home it wouldn’t allow the deduction.)גולדברג Section 17(8) TO: deals with deductions for depreciation/amortization . or any business that has a customer or two that doesn’t honor its debts. תקנות מס הכנסה פחתdeals with depreciation expenses ( .000. El Al buys a Bowing 747 this is considered as הוצאות הוניתand thus can’t be written off. but you could write off the annual depreciation each year. נפסקו הוצאות משפטיות לטובת . He gave another example: say Ruben spent a million on a dry cleaning machine.000 than there is a capital loss ( )הפסד הוןof 50. obviously he can’t consider his taxes as a deductible expense. He gave an example. 117 .000 than there is capital gain ( )רווח הוןof 50.000 (10% of 1 million).הנישום.000$ in taxes. To sum of if you buy such a machine you can’t write of the expense. if he sells it for 650. However according to the תקנותthe amortization of aircraft could be written of at 30%. he than pays 400. He explained that when El Al decides to sell its plane.Effy Stern Tax Law Prof.000$ a year (before taxes but after all expenses). Section 17(11) TO: deals with expenses connected with the payment of tax: )11( )א( הוצאות בקשר להכנת הדו"חות והטיפול בקשר למס בכל הליכי שומה וערעור. לצורכי מסit will be valued according to the established depreciation rate.g. However according to this sub section he could deduct expenditure towards preparing his tax statements (e.)פחתThis means that for the given year there is a הוצאה פירותית that could be written of 100. for 750. Three years later לצורכי מסthe machine is worth 700.חשבונות הוצאות הכרוכות בתשלום המס (22 ')תיקון מס 1975 -תשל"ה He explained with an example.000. Yishai Beer 2011-2012 1941 . we will configure taxes according to the depreciation of the plane.000.)הוצאות פחתIn the תקנות מס )הכנסה )פחתit lists the depreciation rates as well as different types of property ( )נכסיםand the relevant depreciation that applies. and without this section we wouldn’t have allowed it to be written off. יופחת סכום ההוצאות שנפסק מסכום ההוצאות שתבע )ב( הוצאות כאמור בפסקה זו לא יותרו בקשר להכנסות מעסק או משלח יד שלגביהם לא נוהלו פנקסי חשבונות או אם הדו"ח לא בוסס על פנקסי .000. If Ruben than decides to sell the machine. The תקנהsays that such a machine has 10% depreciation ( . אולם אם קבעו בית המשפט או ועדה לקבילות פנקסים שהיה בערעור או בערר משום הטרדה ולא היה צידוק סביר להגשתם לא יותרו הוצאות משפטיות הכרוכות בהם. Ruben makes earns income of 1. procurement of an accountant)! He explained that like with section 17(7) (shelter) this section is a novelty clause. meaning regardless of the market value. תשס"ה-241(לפי צרכי ייצור ההכנסה של הנישום.153-158 על ידי החלטת המנהל מלערער עליה בהתאם לאמור בסעיפים He explained that without this clause.)2( סכומי ההוצאות שיותרו בניכוי. Section 31 TO: Regulations on the deduction of expenses & תקנות מס הכנסה )ניכוי )הוצאות מסוימות ניכוי תקנות בדבר 13. the assessor doesn’t have the authority to reject a law firms deductions on wages for interns being that he feels that paying interns 7000$ a month as supposed to 4000$ is extravagant. in the form of charging their company rent.)4( דרכי הוכחת ההוצאות 118 . we would still have known this from section 17.Effy Stern Tax Law Section 30 TO: Restrictions on reductions: Prof. He mentioned that there is a procedural question that is dealt with in the case law. בסכום העולה על הדרוש [11(2)] ( 'תיקון מס . שר האוצר רשאי. What section 30 is dealing with when it says מופרזis situations such as where a mother pays her son 20. The section states “extravagant expenses ( :”)הוצאות מופרזותHe explained that the assessor wouldn’t be authorized to disallow regular business practices (e. because section 17 states that any tax assessor ( )פקיד שומהcan decide whether or not to recognize the deduction ( ."תשכ ( – )תיקון" מס' 71מסויימות לפי סעיפים 71 עד 72.בדבר הגבלתו או אי-התרתו של ניכוי הוצאות 1965 . and took out an exorbitant loan from the company.בין הוצאות ( תיקוןהמס' 6(דרך כלל ובין לסוגים של נישומים . Again he pointed out that the same conclusion reached by the court could have been achieved via section 17. ובכל שאלה לענין סעיף זה יכריע המנהל 2004 ובלבד ששום דבר האמור בסעיף זה לא יתפרש כמונע כל אדם הרואה עצמו מקופח . he said that the case law deals with this question extensively. או שיעוריהן . ובמיוחד בדבר 1972 -תשל ב . לא יותר כל ניכוי בשל הוצאות לפי סעיפים 72-71. להתקין תקנות .g.000 to be an intern in her firm (e. Yishai Beer 2011-2012 סייג לניכויים 03. Without saying what the final ruling of the case law is.)ניכויHowever section 30 specifically states that only the מנהל רשות המסcould decide whether or not to allow the deduction. He mentioned the ליבנהcase: The two brothers that were the majority shareholders of the company. באישור ועדת הכספים של הכנסת. The court didn’t accept what they did).)1( שיטת החישוב או האומד של ההוצאות .)3( התנאים להתרת ההוצאות .g. Effy Stern Tax Law Prof. והגבלתם תק' תשנ"ז. We mentioned some of the regulations listed inניכוי הוצאות( deductions of expenses (refreshments [i. 3 ' )תקה-)מס' להלן: תשל" 5791 תנאים לניכויים 2. "כיבוד קל" .with airfare there are limits :Section 2(2a)(a) TMNHM )א( הוצאות לינה שהוציא נישום בישראל או באזור.3991 ).0002 911 . ואולם הוצאות שהוציא נישום ללינה במקום המרוחק פחות מ-001 קילומטרים ממקום מגוריו או ממקום עיסוקו העיקרי.אם היו הכרחיים לפעילותו. ובחבר-בני-אדם שחל עליו סעיף 3)ז( לפקודה .שתיה קרה או חמה. Yishai Beer 2102-1102 ) with regards toתקנות( This section authorizes the Minister of Finance to enact regulations תקנות מס ).0002 תק' תש"ס. יותרו בניכוי הוצאות שהוציא נישום הוצאות לינה וארוחת בוקר תק' תש"ס.0002 )2(2 (cookies. Section 2(2a)(a) says that expenditure on lodging and breakfast could be deducted but like . יותרו לניכוי רק בהתאם לאמור )1( %08 מההוצאות שהוצאו לכיבוד קל במקום העיסוק של הנישום. זולת אם שוכנע פקיד השומה שהלינה היתה הכרחית לייצור ההכנסה של הנישום. לענין זה. עוגיות וכיוצא באלה.7991 כיבוד תק' תש"ס. ובלבד )2א( שהסכום המותר בניכוי אינו עולה על הסכומים הנקובים בפסקה )2( )ב()1()ב( כשהוא מחושב בשקלים חדשים לפי השער היציג של הדולר כפי שפורסם לאחרונה לפני מועד הלינה. We also mentioned that expenses for a degree abroad aren’t recognized.e. He than mentioned that if you fly first class for a business trip than you could only do deduct up to the value of business class tickets. We also mentioned that the case law has recognized trips that were mixed withלילי וולף 45/141( both business and pleasure elements (the case law ruled that we divide expenses of the trip). כמפורט להלן: We already mentioned that it needs to be demonstrates that the trip was for business purposes נסיעה לחוץ-לארץ )תק' )מס' 2 תשמ"ד. sectionכיבוד קל Section 2(1) states that 80% of a :נסיעות לחו"ל deals with )2( הוצאות שהוצאו בקשר לנסיעה לחוץ-לארץ אם הנסיעה לחוץ-לארץ והשהייה שם היו הכרחיים לייצור ההכנסה. for a workכיבוד ) (TMNHM) section 2 deals withהכנסה )ניכוי הוצאות מסויימות :)]function :Section 2 TMNHM ההוצאות המפורטות בפסקאות )1( עד )6(. soft drinks) could be written off.4891 תק' תשנ"ג. )ב( על אף האמור בפסקה )3(. לא יותרו בניכוי. באופן בולט. ואולם אם לא ניתן להשתמש בביגוד שלא לצורכי עבודה . . ובלבד שסכום הניכוי לא יעלה על סכום של 003. With regards to cloths that could only be used for the job (say the uniform of a: steward. מתנות )תק' )מס' 3 תשל"ה. )2( על פי דין קיימת חובה ללבוש את הביגוד.Effy Stern Tax Law Prof. מקום נתינת המתנה וקבלות לאימות ההוצאה. השתייכות לעסקו של הנישום. לרבות נעליים. להנחת דעתו של פקיד השומה.As we learned an employer can give up to 200 shekels and it could be written off as an expense הוצאות ביגוד :Section 2(6) TMNHM: deals with )6( %08 מההוצאות שהוציא נישום לרכישת ביגוד בעבורו או בעבור עובדו. )ג( הוראות פסקה זו לא יחולו על הוצאות לינה שהוציא הנישום במסגרת השתתפות בכנס בתחום עיסוקו.5791 )תק' )מס' 4 תשל"ט.0002 We already mentioned that 80% of the expenses will be recognized as a deductible expense.2 שקלים לשנה לאדם אחד אם ניתנו בישראל. a lawyer whose told by his boss that he must buy a fancy suit). or a cop.בגדים. כי בית המגורים משמש את עיקר עסקו או משלח ידו של הנישום.9791 )תק' )מס' 2 תשמ"ד. )א( לא יותרו בניכוי הוצאות בשל החזקת טלפון שאינו נייד במקום מגוריו של 3 תק' ) תשל"ה.)lunch it is not a deductable expense :Section 2(4) TMNHM: deals with presents )4( מתנות שנתן נישום.4891 . "ביגוד" . or a teller that has a shirt that states Bank Hapoalim on it) 100% of the expense could be written off. This is with regards to clothing that could be used both during work and after work (e. This section was nullified. הוצאות ביגוד תק' תש"ס. Yishai Beer 2102-1102 בשל ארוחת בוקר הכלולה במחיר לינה המותרת בניכוי. יחולו הוראות אלה: 021 . Section 2B deals with telephone :)expenses (and the restrictions thereof :Section 2B TMNHM טלפון )שיחותמס' 2ב. שנועדו לשמש לצורכי עבודה ומתקיים בהם אחד מאלה: )1( ניתן לזהות בהם.יותרו ההוצאות כאמור במלואן. בפסקה זו.5791 הנישום או של בעל שליטה בנישום. thus such expensesהוצאות אש"ל Section 2(3) TMNHM: deals with are not recognized as deductable expenses (thus if a lawyer goes to Eilat and spends money on .0002 בנישום. כאמור בפסקת משנה )א( לעיל.g. ועל סכום של 51 דולר של ארצות הברית לשנה לאדם אחד אם ניתנו מחוץ לישראל ובלבד שנרשמו פרטי זיהוי המקבל. זולת אם הוכיח הנישום או בעל השליטה תק' תש"ס. הוכיח כאמור. Effy Stern Tax Law :הוצאות אירוח Section 3 TMNHM: deals with Prof. )7( סכומים ששולמו.5791 תיקון מס' 31(( תשכ"ח. ניכויים שאין להתירם 23.g. )5( כל הפסד או הוצאה הניתן להיפרע על פי ביטוח או חוזה שיפויים. והוצאות שהוצאו לשם טיפול בילד או השגחה עליו או לשם טיפול באדם אחר או השגחה עליו. הוצאות שהוצאו לשם הגעה למקום ההשתכרות ולשם חזרה ממנו. הון. או נועד לשמש. " הוצאות כרוכות ושלובות בתהליך הפקת ההכנסה" – הוצאות המשתלבות בתהליך הטבעי של הפקת ההכנסה ובמבנהו הטבעי של מקור ההכנסה. לבעל שליטה שהוא חבר בה או לאחר במקומו. )2( תשלומים או הוצאות. Yishai Beer 2102-1102 אירוח ניכוי בשל 3. שהוצאו בין במקום ההשתכרות ובין מחוצה לו. למעט ניכוי הוצאה סבירה לאירוח אדם מחוץ-לארץ. כמשמעותה בסעיף 67. כמס הכנסה.8791 121 . לרבות הוצאות הבית. )3( הון שניטל או סכום כסף המשמש. או שיש לשלמם. הוצאות פרטיות. The section states . The expense will only be deductible if the clients are from abroad (e.8691 תיקון מס' 12(( תשל"ה. ]21[ תיקון מס' 071(( תשס"ט.case ניכויים שאין להתירם – Section 32 TO: Deductions that are not to be allowed בבירור הכנסתו החייבת של אדם לא יותרו ניכויים בשל – )1( הוצאות שאינן הוצאות הכרוכות ושלובות בתהליך הפקת ההכנסה. בשל שנות עבודה עד שנת 5791. הוצאות אש"ל. say Chinese clients of Ruben the lawyer come in to close a big deal. )4( עלות ההשבחה. )9( )א( )1( תשלום סכומי מענק עקב פרישה או עקב מוות הפטורים ממס לפי סעיף 9)7א( ששילמה חברה שהיא בשליטתם של לא יותר מחמישה בני אדם. לא יותר ניכוי הוצאה בשל אירוח בארץ. של חצרים או של חלק מהם.9002 תיקון מס' 971(( תשע"א. ששולמו או שנגרמו שלא לשם ייצור ההכנסה.1102 תיקון מס' 22(( תשל"ה. והמהוות חלק בלתי נפרד מהם. it will be considered . "הוצאות אש"ל" – הוצאות שהוציא יחיד בשל ארוחותיו. ולמעט הוצאות בשל ארוחת בוקר הכלולה במחיר לינה המותרת בניכוי. )8( )בוטל(. If Ruben takes them to dinner. )6( דמי שכירות ועלות תיקונים. this will depends on each individualהוצאה סבירה as a deductible expense).5791 תיקון מס' 23(( תשל"ח. שאינם כסף שהוצא כולו לייצור ההכנסה ולשם כך בלבד. בפסקה זו. כמשמעותו בסעיף 67)ד(. )ד( בזכות למנות מנהל.9791 תיקון מס' 801(( תשנ"ו. למעט תשלומים לקופת גמל לפיצויים או לקצבה בשיעורים ובתנאים שנקבעו בתקנות לענין סעיף 74. "חבר" .52 לירות לכל שנת עבודה. )11( הוצאות למתן טובת הנאה שנתן מעביד לעובדיו ואשר לא ניתן לייחסה לעובד פלוני. בגבולות סכומים שנקבעו בתקנות על פי סעיף 13. על אף האמור בפסקה זו רשאי המנהל להורות אחרת אם ראה לעשות כן לפי הנסיבות. לפחות %5 מהון המניות שהוצא או מכוח ההצבעה או מהזכות להחזיק או לרכוש כל אחד מאלה או מהזכות לקבל רווחים.4 ממשכורתו הקובעת של החבר.5002 תיקון מס' 23(( תשל"ח. )ג( בזכות לקבל %01 לפחות מהרווחים.5791 221 . "קרובו" . או שיש לבן- זוגו. במישרין או בעקיפין. הוצאות. ולא ניתן לייחס את טובת ההנאה מהשימוש בו לעובד פלוני.4002 תיקון מס' 841(( תשס"ה.5002 תיקון מס' 22(( תשל"ה. "משכורת קובעת" . ובלבד שלא יובאו בחשבון לענין זה זכויותיו של בן-זוג שנרכשו לפני הנישואין או שנתקבלו בירושה. להחזקת רכב שבהחזקתו של מעביד והמשמש את עובדיו.בעל שליטה שיש לו לבדו או יחד עם בן-זוגו.5791 תיקון מס' 92(( תשל"ח.9791 תיקון מס' 12(( תשל"ה.9791 )תיקון מס' 53( תש"ם. למעט פרמיות כאמור ששולמו לקופת גמל.5791 תיקון מס' 52(( תשל"ז. לענין זה – "בעל שליטה" .8791 )תיקון מס' 801( תשנ"ו.5991 תיקון מס' 241(( תשס"ה. )ב( פרמיות ששילמה שותפות לטובת עצמה לביטוח חייו של שותף בה. ובלבד שלא יותר בניכוי סכום העולה על %5. אך לא יותר מ- 000. לבדו או ביחד עם קרובו באחת מאלה: )א( ב-%01 לפחות מהון המניות שהוצא או ב.מי שמחזיק. )ב( בזכות להחזיק ב-%01 לפחות מהון המניות שהוצא או ב- %01 לפחות מכוח-ההצבעה או בזכות לרכשם. או ששילם שותף לטובת עצמו לביטוח חייו של שותפו. )ב( האמור בפסקת משנה )א( לא יחול על סכום מענק עקב מוות הפטור ממס לפי סעיף 9)א( או על סכום מענק עקב מוות שאינו עולה על 000.%01 לפחות מכוח-ההצבעה.Effy Stern Tax Law Prof.52 לירות לשנה ולמעט תשלומים לקרן השתלמות. הוצאות שאינן תיקון מס' 43(( תשל"ט. במישרין או בעקיפין. Yishai Beer 2102-1102 )2( תשלומים לקופת גמל ששילמה חברה כאמור בפסקת משנה ) 1( בשל חבר. הכל לפי הסכום הקטן.8791 תיקון מס' 33(( תשל"ח. )01( )א( פרמיות ששילמה חברה לטובת עצמה לביטוח חייו של בעל שליטה בה כמשמעותו בפסקה )9(.5991 תיקון מס' 12(( תשל"ה. הוראות פסקאות משנה )1( ו-)2( יחולו גם לגבי מי שטרם חלפו שנתיים מיום שחדל להיות חבר.8791 )תיקון מס' 53( תש"ם.כהגדרתה בסעיף 3)ה(. למעט הוצאות שהוכח כי לפי טיבן אינן מיועדות להעניק טובת הנאה אישית לעובד.7791 תיקון מס' 241(( תשס"ה.4002 תיקון מס' 841(( תשס"ה. כשיש למבוטח %01 לפחות מהונה או מהזכות לרווחיה. יותרו ניכויים בשל הוצאה לרכישת הביטוח המועדף שהיא בסכום של עד %5.3 מההכנסה לפי סעיף 2)1( או ממשכורתו של העובד. ההפרש שבין השיעור ששילם המעביד כאמור. לרבות הוצאות לרכישת השכלה אקדמית או לרכישת מקצוע.4002 )תיקון מס' 351( תשס"ז.9002 .4891 תיקון מס' 831(( תשס"ד. )61( תשלומים.8691. הכנסה לפי סעיף 2)1( או )2(. על חשבון מרכיב תגמולי המעביד. לגבי הכנסה לפי סעיף 2)2(. ישתלמו הכספים על פי הביטוח ממועד קרות מקרה הביטוח ועד תום תקופת אבדן כושר עבודתו או עד שימלאו למבוטח 06 שנים לפחות. )41( )א( הוצאה לרכישת ביטוח מפני אבדן כושר עבודה. "משכורת" – הכנסת עבודה למעט שוויו של שימוש ברכב שהועמד לרשותו של העובד. לענין פסקה זו – " ביטוח מועדף" – ביטוח מפני אבדן כושר עבודה. למעט ביטוח קבוצתי. התשל"ב-2791. ואולם אם שילם המעביד בעבור עובדו לקופת גמל. סכום בשיעור העולה על %4 ממשכורתו של העובד. העולה על סכום השווה לסך כל השכר הממוצע במשק בשנת המס כשהוא מחולק ב-3.4002 תיקון מס' 831(( )תיקון( תשס"ד. 321 תיקון מס' 15(( תשמ"ב. שהיא הכנסה חייבת. יופחת מהשיעור הנקוב ברישה. )ב( על אף הוראות פסקת משנה )א(. והביטוח הוא ביטוח מועדף.8002 )תיקון מס' 351( תשס"ז. " השכר הממוצע במשק" ו" מרכיב תגמולי המעביד" – כהגדרתם בסעיף 3)ה3()2(.7002 תיקון מס' 361(( תשס"ח. לא יותרו בשל הכנסה כאמור.1891 תיקון מס' 95(( תשמ"ד. לפי המוקדם. שאינה לרכישת השכלה או מקצוע כאמור. לפי הענין.7002 תיקון מס' 841(( תשס"ה. תשכ"ח. "קופת גמל" – )נמחקה(. ולמעט הוצאות השתלמות מקצועית. )51( הוצאות לימודים.6002 תיקון מס' 271(( תש"ע. ובלבד שניכויים לפי פסקה משנה זו. נמשכת עד שימלאו למבוטח 06 שנים לפחות. לבין %4.Effy Stern Tax Law Prof. )2( אם יקרה מקרה הביטוח בטרם ימלאו למבוטח 06 שנים. שיש יסוד סביר להניח שנתינתם מהווה עבירה לפי כל דין.8002 תיקון מס' 361(( תשס"ח. לצורך שמירה על הקיים. "ביטוח מפני אבדן כושר עבודה" – כהגדרתו בסעיף 3)א(. היתה ההכנסה שבשלה נרכש ביטוח מפני אבדן כושר עבודה. התקיימו לגבי הביטוח גם שני אלה: )1( תקופת הביטוח. )31( תשלומים ששולמו כתוספת לפי סעיף 971 לחוק הביטוח הלאומי ]נוסח משולב[. )21( סכומים ששולמו בעד פעולה האסורה לפי סעיפים 5א ו-5ב לפקודת הטלגרף האלחוטי ]נוסח חדש[. ואם נרכש הביטוח בטרם מלאו למבוטח 06 שנים.5002 תיקון מס' 151(( תשס"ו. בין שניתנו בכסף ובין בשווה כסף. Yishai Beer 2102-1102 ניתנות לניכוי כאמור לא ייראו כהכנסת עבודה בידי העובדים. )1( הוצאות שאינן הוצאות הכרוכות ושלובות בתהליך הפקת ההכנסה לרבות הוצאות הבית.בילד או השגחה עליו או לשם טיפול באדם אחר או השגחה עליו. being that we were able to know this without the legislation. לרבות הוצאות לרכישת השכלה אקדמית או לרכישת מקצוע. ולמעט הוצאות השתלמות מקצועית. כמס הכנסה Section 32(15) TO: deals with educational expenses: (7) )51( הוצאות לימודים. או שיש לשלמם. Section 32(16) TO: deals with expenses with a criminal nature: ((151 'תיקון מס 2006 -תשס"ו )61( תשלומים. הוצאות פרטיות. שיש יסוד סביר להניח . Section 32(7) which deals with amounts paid or payable as income tax is also redundant: Section 32(7) TO: .Effy Stern Tax Law Prof. לצורך שמירה על הקיים This section is also redundant. הוצאות שהוצאו לשם הגעה למקום ההשתכרות ולשם חזרה ממנו. Section 32(1) was put in place in response to the case 4243/08 ( . שאינה לרכישת .שנתינתם מהווה עבירה לפי כל דין 152 ((172 'תיקון מס 2009 -תש"ע Supra at 105 124 . שאינם כסף שהוצא כולו לייצור ההכנסה ולשם כך .251)ורד פריIt states: Section 32(1) TO: . etc won’t be recognized as a deductable expense. Yishai Beer 2011-2012 Here too (like in section 17) some of the sub-sections are superfluous.בלבד This section is superfluous for we would have known this without the section. בין שניתנו בכסף ובין בשווה כסף.השכלה או מקצוע כאמור. הוצאות אש"ל.סכומים ששולמו. והוצאות שהוצאו לשם טיפול . ((170 'תיקון מס 2009 -תשס"ט ((179 'תיקון מס 2011 -תשע"א Section 32(2) TO: deals with payments or expenses which are not wholly exclusively expended for the production of income: )2( תשלומים או הוצאות. בפסקה זו The sub-section states clearly that expenses on playgroup. )קיזוז הוניWe began with offsetting profits.g. In 2011 Ruben’s café losses 1. Yishai Beer 2011-2012 Israel was obligated to add this section when it joined the OECD. He has a barbershop which saw profits of 300. and if you reaped a profit the previous year. He gave an example: Ruben opens a café.000.000. Prior to the addition of this section the case law ruled out deductions of such expenses based on market overt principles ( . sideways taxation meaning that you can offset losses of one sources of income with another source of income (e. but his Laundromat profits 1. but there is side-ways taxation and forward looking taxation153. קיזוז הפסדים Setting off losses – קיזוז הפסדים Offsetting profits – קיזוז פירותי Offsetting losses can be divided into two groups: offsetting profits ( )קיזוז פירותיand offsetting capital ( . Class 22 24/01/12 מגבלות כמותיות להוצאה המוכרת.Effy Stern Tax Law Prof. However with the enactment of section 32(16) so long that there is even a reasonable doubt regarding the payment the expense can’t be deducted (e. and ‘backward’. they should also partner with him in the year that he incurred losses.000$.000$. such a payment can’t be deducted as an expense. He also has a 153 I coined the terms ‘side-ways’.000.g.g. In 2011 it sees losses of 1. In Israel there is no backwards looking taxation as in the US. and in the current year you incurred losses than you could setoff ( )קיזוזthe taxes you paid last year with this year). (2) Ruben’s café looses 1.g.000. Ruben can offset the loss and thus in this case he wouldn’t pay any taxes. ‘forward’. In 2010 the café sees profits of 1. so if you want to build a project in Jerusalem and you need to bribe the mayor you wont be able to deduct the expense).000. 125 .000$. just like with any other partnership! In light of this very logic the law in the US states that with regards to taxes you’re able to look backwards. It states in situations where there is a reasonable grounds to believe that the payment was made in offense of any law.000$. E. Ideally the law should state that just like the tax authorities partnered with Ruben during the profitable year.000.)תקנת השוקIn grey cases (e. an arms dealer that bribed foreign official) the case law vacillated whether or not to consider the expense.000. He offsets the losses to next year. In this case too he could setoff his losses and the net result () הפסד שהיה לאדם בעסק או במשלח-יד בשנת המס ושאילו היה קיזוז הפסד ]31)1 82.Effy Stern Tax Law :will be 0 in taxes). )2( אותו אדם חדל לעסוק בעסק או במשלח היד שאת ההפסד שהיה לו בו הוא מבקש לקזז.000. ( תשס"ב. או שיקוזז כנגד סך כל הכנסתו החייבת של אותו אדם. מחברה משפחתית כמשמעותה בסעיף 46א או מחברה שקופה כהגדרתה בסעיף 46א1)א(. 5791 תשל"ה-451(Forward looking taxation refers to a situation where there is no possibility of offsetting the loss in ( תיקון מס' )תיקון מס' 22( תשס"ז. יקוזז כנגד הכנסתו מאותו מטע בלבד בשנה השביעית והשמינית. באותן השנים. Yishai Beer 2102-1102 law firm which saw profits of 700.000$. יועבר סכום )תיקון מס' 22( 5791 תשל"ה-451(ההפסד שלא קוזז לשנים הבאות בזו אחר זו ויקוזז כנגד סך כל הכנסתו החייבת ( תיקון מס' תשס"ז. 621 . )תיקון מס' 22( )ו( הפסד שלא ניתן לקזזו כאמור בסעיפים קטנים )ד( ו-)ה( יחולו עליו תשל"ה. )תיקון מס' 22( )ה( הפסד שהיה לאדם במטע הדרים שניטע לא מורכב. where the café profits )ב( מקום שלא ניתן לקזז את כל ההפסד בשנת מס כאמור.5791 והשביעית מתחילת שנת המס שבה ניטע. The net result is 0 taxes.the given tax year. )3( מקורו של ההפסד שהיה לאותו אדם אינו מחברת בית כמשמעותה בסעיף 46. לרבות ריווח הון בעסק או משלח יד.5791 הוראות סעיף קטן )ב(.5791 )ד( הפסד שהיה לאדם במטע הדרים שניטע מורכב. so the law allows you to push off your losses to the subsequent tax year (e. ניתן לקיזוז כנגד סך כל הכנסתו החייבת של אותו תשל ה. This is stated in section 28(b :Section 28(b) TO Ruben’s café losses 1. אם ביקש זאת הנישום לא תשל"ה. )א( ])2 ( )תיקון" מס' 22ריווח היה נישום לפי פקודה זו.5791 אדם ממקורות אחרים באותה שנת מס.g :)1. וקוזז כנגד הכנסתו מאותו מטע בלבד בשנה השישית והשביעית.2891 תיקון מס' 231(ריבית או דיבידנד אם שיעור המס החל עליהם אינו עולה על %02.7002 . This is mentioned in section 28(a) TO :Section 28(a) TO Prof.5791 ( )תיקון מס' 45יקוזז הפסד לפי סעיף זה כנגד ריווח הון שהוא סכום אינפלציוני או כנגד רווח הון תשמ"ב.5002 )תיקון מס' 22( תשל"ה.000$.000. לא יותר לקזזו בשנה שלאחריה: )1( לאותו אדם לא היתה הכנסה מעסק או ממשלח יד בשנת הקיזוז. לפי סעיף 2)2( בהתקיים כל התנאים המפורטים להלן.7002 של אותו אדם באותן השנים מעסק או משלח יד. והכל ובלבד שאם ניתן לקזז את ההפסד באחת השנים. בשנים החמישית והשישית מתחילת שנת המס שבה ניטע.000$. תיקון מס' 22(( )ג( על אף האמור בסעיפים קטנים )א( ו-)ב(. בשנים השישית תשל"ה.2002 תיקון( תשס"ג-( 2002 תיקון מס' 741(( תשס"ה. He decides to close the café and become a teacher.000$ from 2011 his net profit would be 100. according to section 28(b) he would not be able to set off his losses!) Thus.g. (2) In 2012 Ruben closes the café but continues to teach.Effy Stern Tax Law Prof.000$.000$. He decides to close the café and become a wage earner (e.()תיקון מס' 52סעיף 6 לחוק מס שבח מקרקעין.451)רווח הוןThe problem that rose with this is that what if a person was no longer a businessman – what if they were once a businessman and than decided to become a hired worker.)משלח ידor capitals gains ( .בשנים הבאות ((54 'תיקון מס .000$.000$. Ruben’s café incurs losses.)תשל" מס' 17בנובמבר של כל שנה כאילו ניטע בחודש הראשון של שנת המס שלאחריה ( תיקון 1986 -תשמ"ז (25 ')תיקון מס )ח( הפסד שהיה לאדם מהשכרת בנין ניתן לקזזו כנגד הכנסתו מאותו בנין 1977 -תשל"ז . a teacher). 127 . תשכ"ג-3691 )להלן . his teaching brought him profits of 150. After offsetting his losses his net profit for 2012 would be 0. 154 An example of capitals gains would be if say you sold the coffee machine of the café. E.000$.000$ as a hired teacher.g. and so long that the three criteria (mentioned in the clause) are met one could offset the losses with their salary.000$. E.g. Ruben’s café incurs losses. After offsetting his losses (in accordance with section 28(a)) he would have losses of 500. he wouldn’t be able to write of his losses from the café! In light of the unjustness of this the legislature added salary.000$ as a private tutor. and his private tutoring brought him profits of 200. In addition he buys a Laundromat which sees profits of 600. Being that a wage earner is not a business.000$. and 50.000$ which would be pushed off yet again to the subsequent year.g. according to the section such a person wouldn’t be able to offset their losses (e. than he would finish the year with a loss of 50. Being that (until 2008) salary wasn’t included in the statute.g.)עסקvocation ( . In the same year he profited 200. In light of the 500. In all these examples Ruben continued to own a business and thus was able to setoff his losses.שבח מקרקעין Regarding section 28(b) TO. (1) in 2011 Ruben’s café incurred losses of 750.g. (4) If Ruben began 2012 with losses of 500. and his Laundromat brought in profits of 300. Yishai Beer 2011-2012 30 )ז( לענין הסעיפים הקטנים )ד( ו-)ה( יראו מטע הדרים שניטע לאחר ((22 'תיקון מס 1975 -ה . E. "הכנסה חייבת" ו"ריווח הון" . however according to section 28(b) (prior to the 2008 amendment) if he didn’t have a business than he wouldn’t be able to offset his losses! (E.לרבות שבח כמשמעותו לפי 1975 -תשל"ה ( .000$.()ט( )בוטל 1982 -תשמ"ב ((22 'תיקון מס )י( בסעיף זה. His Laundromat saw profits of 300.000$.g. in 2008 the legislature amended the section and added salary (albeit with exceptions) (e. (3) Ruben began 2012 with losses of 500.000$. until 2008 section 28b said that you offset losses from a persons 1977 -תשל"ז ((26 'תיקון מס 1977 -תשל"ז business ( . יחולו עליו תשס"ה.000. ואולם הפסד הון מנכס כאמור יקוזז תחילה כנגד רווח הון מחוץ לישראל.2002 תיקון מס' 231(( )3( היה לאדם הפסד הון במכירת נכס מחוץ לישראל.5002 הכספים של הכנסת. או איסור על קיזוז כאמור. )תיקון מס' 22( )ב( סכום שלא ניתן לקזזו.000$. כפי שקבע שר האוצר באישור ועדת תשס"ה.2002 ( תיקון מס' תשס"ה-741(לביצוע סעיף זה והוראות לענין דוחות ודרכי הוכחה של הפסדים כאמור וכן לקבוע 5002 הוראות לענין הגבלת קיזוז הפסדים ממכירת ניירות ערך. כולו או מקצתו.2891 אינפלציוני חייב.5791 שקל חדש של היתרה יקוזז כנגד שלושה וחצי שקלים חדשים של סכום )תיקון מס' 45( תשמ"ב. כאמור בסעיפים 131 ו-231.2002 תיקון מס' 231(( )2( )נמחקה(. )ב( הכנסה מריבית או מדיבידנד בשל ניירות ערך אחרים. Just likeרווח הוני( ) can be offset by capital gainsהפסד הוני( that as a general rule capital losses 821 .5002 המס שבה היה ההפסד. לפי הענין.5002 הוראות פסקאות )1( או )3(. ייחשבו לענין סעיף זה כהפסד הון מניירות ערך. יקוזז ההפסד תחילה כנגד רווח הון ממכירת נכס מחוץ לישראל. כולם או חלקם.000.An example of a capital loss would be as follows: Ruben invests 1. כאילו היו ריווח הון או הפסד הון. שלא נוכו בשנת המס. לפי הענין. יקוזז תחילה כנגד ריווח ההון הריאלי וכל )תיקון מס' 22( תשל"ה. )א( מס' ( תשכ"ה. The café isn’t successful and he is forced to sell it for 1.000$. תשס"ב. Yishai Beer 2102-1102 :The section the deals with offsetting a capital loss is section 92 TO :Section 92 TO הון קיזוז )1( סכום הפסד הון שהיה לאדם בשנת מס פלונית ואילו היה ריווח תיקוןהפסד 6(29. Section 92 states ). ואולם הפסד ההון יקוזז גם כנגד אלה: )א( הכנסה מריבית או מדיבידנד ששולמו בשל אותו נייר ערך. רשאי לקבוע הוראות תשס"ב.000$ in a startup company shortly thereafter the company goes bankrupt. היה הסכום שלא ניתן לקזזו הפסד ממכירת נכס מחוץ לישראל.000. כאמור בסעיף קטן )א(. בשנת מס תשל"ה. תיקון מס' 741(( )4( היה לאדם הפסד הון במכירת נייר ערך בשנת המס. . באישור ועדת הכספים של הכנסת. יקוזז כנגד ריווח הון בלבד כאמור בסעיף קטן )א( בשנות המס הבאות תשס" 2002 ( תיקון מס' 741(בזו אחר זו לאחר השנה שבה היה ההפסד ובלבד שהוגש לפקיד השומה דוח לשנת תשס"ה. תיקון מס' 231(( )ג( שר האוצר.5691 הון היה מתחייב עליו במס.2991 מקרקעין. Another example would be: Simon buys a café for 2. יחולו עליו הוראות פסקה )1(. קביעת סדר קיזוז ההפסדים וייחוס הרווחים וכן דרכי הוכחה והוראות לביצוע סעיף זה.2002 היה מתחייב עליו במס בישראל. תשכ"ג-3691.Effy Stern Tax Law קיזוז הוני – Offsetting capital Prof. לענין זה רואים שבח והפסד כמשמעותם בחוק מיסוי )תיקון מס' 09( תשנ"ב. תיקון מס' 231(( תשס"ב. ושאילו היה רווח תשס"ב. תיקון מס' 741(( )5( הוצאות בשל ניירות ערך.5791 ( ' תיקון מסב-231(מסויימת. ובלבד ששיעור המס החל על הריבית או הדיבידנד שקיבל אותו אדם לא עולה על %52. Regarding the exam: The exam will be fair and it will only be based on what we discussed in the lectures. The main challenge will be to identify the issues that are relevant. Yishai Beer 2011-2012 with offsetting profits. and that most of the answers could written in a few short sentences (if he provides a space limit of half a page assume that the answer could be written in a quarter of a page)! When quoting a source avoid formalities and write as concise as possible. the solution to the issues is of less importance. He also stressed that we should always spell out both sides to the transaction (e.g. 129 . with offsetting capital losses you have the ability to push off the losses to the subsequent year (provided that in the subsequent year you have capital gains!) Prior to 2008 there was a limit of up to seven years. He stressed that we shouldn’t be verbose.Effy Stern Tax Law Prof. In the exam we will be required to try and draw out the relevant issues from the case. if we are dealing with an artificial transaction than spell out both sides to the transaction). and now capital losses can be pushed off ad infinitum. however in 2008 the law was amended.