Tax Law Prof. Yishai Beer

Effy Stern Tax Law

Prof. 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

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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

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Deduction of expenses (cont’d) and relevant legislation (Section 17) – ‫ניכוי הוצאות ותתי‬ 17 '‫311....................................................................................................... סעיפים חשובים תחת ס‬ Section 30 TO: Restrictions on reductions: ...............................................................................118 Section 31 TO: Regulations on the deduction of expenses & ‫תקנות מס הכנסה )ניכוי הוצאות‬ (‫811........................................................................................................................................מסוימות‬ Section 32 TO: Deductions that are not to be allowed – ‫121......................ניכויים שאין להתירם‬ ‫521......................................................................מגבלות כמותיות להוצאה המוכרת; קיזוז הפסדים‬ Setting off losses – ‫521...............................................................................................קיזוז הפסדים‬ Offsetting profits – ‫521..............................................................................................קיזוז פירותי‬ Section 28(b) TO: ...........................................................................................................126 Offsetting capital – ‫821..................................................................................................קיזוז הוני‬

Class 1 30/10/11 * There will be a lot of reading. Reading will help for the exam. For every class (starting next week) we need to give in a targul on the required reading. The point of the targul is to force us to read the material (in other words the targul doesn’t have to be accurate). The maximum to write is a page, but if can even be a few lines (average is half a page). We need to give in a minimum of 10 targilim. The grades of the targul are 1, 2, and 3. And it is worth 20% of the grade (the exam is worth 80%). * Regarding machberot bechina, 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. * Attendance is mandatory * He said that this is not an easy course, and for that reason he stressed that it’s important to attend class. He explained that the course is complex because this course deals with many disciplines. He said that you don’t need to have previous knowledge of other courses, but nonetheless the course is multidisciplinary.

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Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

‫הבסיס החוקתי להטלת מיסים ואגרות; הכרת המאפיינים השונים של מס, אגרה ומחיר‬
There are two parts to the course. For the first few classes we will deal with the introduction and basic questions that arise. The introduction will have four parts: the first part deals with the role of the tax system; the second part will deal with basic concepts (‫ )הגדרת יסוד‬of tax law; the third section will be a brief overview of the different forms of taxation; and the fourth section will deal with the constitutional aspects of tax law (‫( )דיני חוקה כלכלים‬e.g. say Joe goes into my pocket and takes 1000$ dollars. So that would be dealt with by the penal law. But if the person that took the money was the tax authority than obviously it wouldn’t be a penal issue, rather this is under tax law. This raises various constitutional and administrative issues. The role of the tax system – ‫תפקידי מערכת המס‬ The role of the tax system is to: (1) finance government expenditure; (2) promote the equal distribution of wealth (3) ;1(‫ )צדק חברתי/צדק חלוקתי‬and to direct the conduct of the citizens (e.g. charging a tax on imports). 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, the primary role of taxation is to finance government expenditure. With regards to this role of taxation, there is unanimity of opinion that this is an appropriate and necessary reason for taxation. Disputes do rise however, regards the limits put on government programs. 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 (‫ .)צדק חברתי‬With regards to this function of taxation, 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

Effy Stern Tax Law who to take from? how much to take? and who should receive? etc.). Directing the conduct of the citizens

Prof. Yishai Beer 2011-2012

much disagreement. Disagreements with regards to questions such as how to divide the cake (i.e.

The third role we mentioned is that the tax authority is supposed to direct the conduct of the citizens (e.g. a tax on alcoholic beverages or tobacco. Another example would be tax incentives to live in the periphery). The issue that arises here is paternalism. 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, but is also imposing negative externalities on society (e.g. a smoker that becomes sick ends up being a financial burden on society). With that being said, we many times see that taxes aren’t imposed equally (e.g. 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.e. the tax authorities) is problematic. He explained that in some areas the tax authority doesn’t want to cause us to abstain from a certain activity, but on the contrary it tries to encourage it (e.g. mandatory pension plans2). 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. Regarding the other two roles played by taxation (redistribution of wealth and directing the conduct of the citizens) there is much controversy. Basic concepts - ‫:הגדרות בסיסיות‬ (a) Direct tax/indirect tax – ‫מס ישיר/מס עקיף‬ There is a distinction between direct tax and indirect tax. The classical distinction between the two was ‘who is paying the tax’. Direct tax is paid by whomever is obligated to pay the tax according to law. Indirect tax is paid by he who is not obligated by law to pay it. According to this definition direct tax is the tax paid by someone who is obligated to pay it (e.g. income tax). As we explained
2

Here I would ask Milton Friedman’s suggestion that despite the justification for this paternalistic argument, it still doesn’t justify the fact that the state needs to be in charge of our pension, 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).

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Effy Stern Tax Law

Prof. 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). (E.g. Ruben goes to the market to buy a Tupac CD. One store charges 90$ plus tax totaling 100$; another store tells him that if he pays in cash than he will charge 100$. Basically he is charging you the tax by building it into the price – he is rolling the responsibility on to you – the customer. For this reason we made a different distinction between direct and indirect tax, according to which, we look at what is the basis of the tax. If the tax is a tax on income or capital (‫ )הון‬than we will consider it a direct tax, if the tax is a tax on consumption (‫( )צריכה‬e.g. VAT (‫ )מס ערך מוסף‬the tax we pay when we buy something in a store) than we will say it’s an indirect tax. This tax is only paid if you buy, if you don’t buy the product than you don’t have to pay the tax.

(b) Tax, tolls, charges – ‫מס, אגרה, 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. a person dies and his inheritance owes taxes. This is despite the fact that he is dead and won’t benefit from the tax he still has to pay). Fees (‫ )אגרה‬refers to a mandatory payment decided by a government authority, but here there is a compensation to the payer, but there is not necessarily a direct correlation between the individual taxpayer and the benefit dispensed (e.g. ‫ ;אגרת השידור‬Joe, was in the US for the past year, and John is in Israel and watches TV all day. 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; although as we see, there is a compensation/benefit). The last concept we listed was ‫ .מכיר‬This is when the state sells a service. This is sale like any other market sale (e.g. water; He gave another example of the current issue in Israel regarding the doctor’s protest. Assuming that in light of the doctors protest, we will now be obligated to pay a fee when we go to the emergency room; this would be an example of a fee (‫ )אגרה‬because anyone who want to go to the emergency room has to pay it3. He continued with the example and said that say that the fee is 20$, and in reality the cost of the doctor is 100$; that means that the state is subsidizing the other 80$. This he explained

3

This seems like ‫?מכיר‬

7

Effy Stern Tax Law for the visit to the ER, this would be an example of positive tax (i.e. tax).

Prof. Yishai Beer 2011-2012

is what we call a negative tax. An opposite example would be where the state would charge 200$

(c) Relative tax, progressive tax, regressive tax – ‫מס יחסי, מס פרוגרסיבי, מס רגרסיבי‬ A relative tax is where everyone pays the same tax (e.g. everyone pays 10% of their income, regardless if you earn an annual income of 20,000$ or 100,000$) according to this system the rich person ends up paying more than the poor man, but relatively speaking everyone pays the same amount (GOP candidate Herman Cain advocated a relative tax). Progressive tax says that as your income goes up the (percentage) amount of how much tax you pay, goes up. The logic behind this tax structure is based on what we mentioned above regarding distribution of wealth. As the saying goes ‘to whom is the last dollar worth more, the rich man or the poor man, and the answer (according to this theory) is that it is worth more to the poor man (because if you take the dollar from the rich man it wont effect him, but if you take it from the poor man you are taking away his breakfast). Regressive tax is the opposite of progressive tax. This would be a situation where the rich man pays a lower percentage of tax than the poor man. To explain the logic behind such a tax structure we mentioned a current matter being suggested in the Knesset which would be to cancel the bituach leumi payments. He explained that historically the bituach leumi tax was according to the relative income of the person, up till a certain point where it became a flat tax (once you made 40,000 and up4, than you paid the same amount). So this he explained ends up being a situation for regressive tax, because proportionally speaking the guy making 100,000$ pays less tax than the guy making 40,000$. Because many people were upset they canceled the tax ceiling. What happened than is that people started incorporating because corporations don’t have to pay bituach leumi. This had catastrophic effects, costing the government millions as a result. In light of this they are considering reversing the situation. Either way this was an example of regressive tax and he said that while it sounds unjust, there are situations where we would want a regressive tax. (d) Tax brackets – ‫מס שולי, מדרגות מס‬ Regarding ‫ מס שולי‬and ‫ :מדרגות מס‬he explained that any tax system that is not a relative tax system, needs to establish tax brackets. If it’s a relative tax than we don’t need to establish brackets
4

Number is arbitrary

8

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

because everyone pays the same percentage amount. But the moment you have a progressive or regressive tax than you need to establish brackets which establish who pays how much. He explained ‫ מס שולי‬with an example: say for the first 1000$ you make you pay 10% tax, 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%, and for every additional dollar up till 10,000$ you pay 40%. So if you were to graph this than we would see steps or brackets – tax brackets. So in the aforementioned example he would pay 100$ on the first 1000$, on the next level he will pay 400$, on the next level he will pay 600$, and on the final level he will 2000$, so the total amount that he would pay is 3100$. In this case the ‫ שיעור המס השולי‬is 40%. He explained that it would be inaccurate to say that he pays 40% tax, because 40% of 10,000$ would be 4,000$ (and he is only paying 3,100$) that is why we say ‫ מס שולי‬or incremental tax wherein the tax percentage progresses in increments. Class 2 1/11/11 Last class we discussed various concepts of tax law (progressive, regressive, relative, etc). As we said the tax structure in Israel is a progressive tax system. However in Israel there is an exception, wherein there is also a relative tax, this is when we are dealing with corporate tax (a big company and a small company will pay the same [relative] tax)5. In England the corporate tax is progressive. 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. (d) Tax deductions, tax credits – ‫ניכוי מס, זיכוי מס‬ He explained tax deductions (‫ )ניכוי מס‬with an example. Sammy’s Pizza sells one million worth of pizza. This doesn’t mean he profited one million, because he first has to deduct his expenses of the business (‫ .)הוצאות לצורך הכנסה‬So when configuring taxes, he is allowed to do deduct these expenses, after deducting these expenses he pays tax on the remainder. With regards to tax credits ( ‫ )זיכוי מס‬this refers to the amount that reduces the ‫ .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).

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Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

wants to encourage philanthropy to public institutions (public institutions that are recognized as such by the law). According to 46 Tax Ordinances (TO) if one gave a donation of over 310 shekels, to a public institution (in accordance with section 9(2) TO) than they are entitled to a tax credit, provided that the amount doesn’t exceed 30% of their chargeable income of the given year. Section 46 TO:
‫תרומה למוסד ציבורי‬ ‫אדם שתרם בשנת מס פלונית סכום העולה על 013 שקלים חדשים‬ (‫)תיקון מס' 5664. )א‬ ( 1984 ‫תשמ"ד-' 69(לקרן לאומית, או למוסד ציבורי כמשמעותו בסעיף 9)2( שקבע לענין זה שר האוצר‬ ( ‫תיקון מס‬ 1994 "‫תשנ‬ ‫תיקון מסד-421(באישור ועדת הכספים של הכנסת, יזוכה מהמס שהוא חייב בו באותה שנה בשיעור‬ ( ' 2000 "‫תשס‬ ‫תיקון מסא-741(של %53 מסכום התרומה – אם הוא יחיד, ובשיעור הקבוע בסעיף 621)א( מסכום‬ ( ' 2005 -‫תשס"ה‬ ‫התרומה – אם הוא חבר-בני-אדם, 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, או על 000,636,7 שקלים חדשים, לפי הנמוך מביניהם ) להלן – התקרה‬ 2009 -‫תש"ע‬ -‫הודעה תשע"א‬ ‫לזיכוי(; 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

For instance if you have a receipt that you donated 1000$ to Yad Sarah, than you would receive back 35% of 1000% (350$) as a tax credit than you would receive 350$ back, or in other words they would deduct 350$ off of your tax account (‫ .)חשבון מס‬Regarding which is better for the taxpayer, a deduction, or a credit, the answer is that it depends on the ‫ מס השולי‬of the person (e.g. there are two groups of tax payers, one group pays ‫ מס שולי‬of 40% and the other group pays 20%. Both of these groups donated 1000$ each: The group that pays 40% would choose a tax deduction (‫ ;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$, because they pay 20%) whereas a credit (as explained in the above footnote) would be worth 350$). Tax deductions [may] have a regressive effect (because deductions (‫ )ניכוי‬works to the benefit of the rich – the richer you are the less you pay). So back to the original question, if the government wants to encourage philanthropy it depends on which group you are trying to encourage. In Israel we have the credit (‫ )זיכוי‬system.

6

If this group was earning 1 million, than ‫ ניקוי‬would basically mean that we deduct 1000 which means that they in fact earned 900, 999, what this means is that they saved 400 (60% of 1000). Because basically the government tells the guy, ‘you donated 1000, so we will deduct another 1000 of what you made, what that basically means is that they save 400, because out of every 1000 they usually only get to keep 600 (they pay 400 out of every 1000 to the government). Whereas ‫ זיכוי‬would only be worth to them 350 (the law says that with donations the tax is 35%), thus they would rather ‫.ניקוי‬

10

Effy Stern Tax Law Choosing a fair and just tax structure:

Prof. Yishai Beer 2011-2012

Neutrality: In deciding ‘how to choose a just/fair tax structure’, the basic principles on which the structure must be based must first be established. The first principle we mentioned is the principle of neutrality. As we explained the law tries to channel the citizenry towards a desired conduct. In a world without taxes we would expect persons to act in way that maximized their individual utility, in a way that served to their greatest benefit. However in a world with taxes, people will make their decisions based on tax considerations. We want that the tax system will do its best not to effect people’s decisions, 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, and they are trying to figure out how to divide the finances. So, interestingly enough it’s possible that there would be tax incentives that may influence their decision in one or the other direction; Jim is a computer programmer. 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, and with Bituach Leumi he pays another 13%, thus 58%), and the boss promises to send him a cleaning lady that will clean the house for him valued at 45$. So in a world without taxes Jim would choose to stay at work, and focus his energies on what he is good at (programming). However, in a world with taxes he will choose to go home (because as we said for each 100$ he is only left with 42$ (58%) and than he will have to go home and pay a cleaning lady 45 (he losses 3$). So what we have is a situation where from a utilitarian point of view we would want this guy to work at what he is best at – programming, but because of the tax structure he will choose to go home and clean; He gave another example: You have two lawyers that are sitting outside the court house, complaining about the fact that their wives don’t work (they are busy at home running the house). So in response we would say that first avol she is working (she is running the house). Second avol, not only does she work, but she is an earner as well (the money that is not being spent on watching the kids, paying someone to clean, cook, etc.). In the example he gave he valued his wife’s house-work at 8000$. Before she had children she was earning 14,000$. In a world without taxes, she would continue to work in the law firm and earn 14,000$ and than spend 8000$ on all the house chores (that would be the rational choice). 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. The term he used for the theoretical value of the work of a housewife was ‫ ;הכנסה רעיונית‬this term refers to all work wherein the reward is in ‫ שווה כסף‬such as a housewife.

11

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

to stay at home, 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 once again we see the tax structure influencing our decisions)8. We also see the tax structure influencing our decisions with regards to housing (‫ )דיור‬and whether to buy or to rent (e.g. Brothers, Nathan, Solomon, and Carl, received 250k each as an inheritance. 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), Solomon also bought an apartment but rather than live there, he rented out the apartment for 5000$ a month and than rented somewhere else, Carl invested the money in a money-making venture. So in a world without taxes, they would all do as they wish. But in a world with taxes their decisions would possibly be different. He explained that according to the law although Nathan is theoretically making 5000$ it is not taxable. However, 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). Carl’s situation is even worse, because he is forced to rent an apartment, being that he spent all his money on the business venture (and being that he is renting an apartment for his private use, 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, Nathan ends up in the best situation, whereas Carl ends up in the worst situation. Thus again we see that the tax structure is not neutral and it influences the decisions we make. 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, meaning that each source of income should be taxed equally (so in the aforementioned example of the three brothers, each brother would be taxed, and would be taxed equally for their investment). And according to vertical justice we would put each person in the tax bracket in accordance with their wealth. The problem with such a system is the inherent difficulty in applying it. Utility: With regards to considerations of utility occasionally we try to adjust the tax structure but in the end it doesn’t work (e.g. yesterday’s example with bituach leumi; He gave another example: There used to be an inheritance tax in Israel, the logic was that there were a few tycoons in Israel,
8 9

This very issue was dealt with in the case 4243/08 ‫ .ורד פרי‬See infra at 100 It’s a reduced tax [‫ ]שיעור מופחת‬rate but nonetheless there is a tax.

12

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

and there is no reason that their children should receive all the money and become tycoons as well. 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, Thereby making the tax inefficient). To sum up: In approaching a tax structure and trying to figure out which road to take, the principles that need to be looked at are the principles of justice, equality, utility, and neutrality.

Class 3 6/11/11 We began with a brief overview of various tax systems that exist in the world. He explained that the tax system constantly evolves and changes, and therefore it’s important to get a deeper understanding of it.

Different forms of taxation (in the West):
(1) Head tax or per capita tax - ‫מס גולגולת‬ A head tax was common in ancient Rome. Crudely put, it said that if you want your head than you pay a tax, or in other words each person has to pay a head tax. This was an easy and efficient tax to collect, the problem was that it wasn’t just, and for that reason you won’t find any western country that has a head tax. In Israel there was a tax similar to a head tax known as ‫ ,מס נסיעות‬but it was repealed in 1985. (2) Income tax - ‫:מס הכנסה‬ A reason why this tax is so popular is because of the advantage that it has; which is that it is easy to collect. At a later date we will discuss ‘what is income’. A Disadvantage of income tax, or in other words, a reason why a state cant rely solely on income tax is because: there are people that don’t pay their income tax; it takes away the incentive of people to save (e.g. if I receive dividends

13

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

on stocks, they are taxable); inflation10; lastly, with income tax there is no averaging (‫ .)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, finally 30 years later after he becomes a great rich doctor, who walks in the door! The tax authority! From an economic (‫ )כלכלי‬perspective it isn’t fair, because the money that the doctor is making at age 50 is compensation for working hard for the past 30 years, the million dollar paycheck reflects his years of handwork, 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. It is an annual system, 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. Regarding the aforementioned disadvantage of inflation, he explained that when there is inflation the tax system gets crushed (‫ .)מתרסק‬Basically what happens during inflation is that it creates advantages for savvy people that understand inflation while those that don’t loose out (e.g. 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. In 2011 he is owed 1,000,000$ and he has expenses of 500,000$. Ruben’s chargeable income (‫)הכנסה מחייבת‬ for 2011 will be 500,000$. Simon on the other hand is more sophisticated. While he draws the same income as Ruben, he opens his books twice a year. On January 1st he writes income of 1,000,000$. regarding his expenses he takes care of that on 30th of December, so if it’s a year where there is 100% inflation, than by playing this game, he has no taxable income (because by going with the oncoming year’s inflation rate, 1$ becomes 2$, thus his 500,000$ of expenses becomes 1,000,000$ in expenses and thus he has no taxable income!). We than gave an example of Levi. He writes his income at the end of the year (31/2012), and he writes his expenses on 31/2012, so because of inflation his expenses will have become worthless thereby forcing him to pay the full 1,000,000$ in taxes! What we see from here is that you can have several tax payers, each one making the exact same income, but each guy will pay a different amount of taxes, based on inflationary rates, and how they play the game. What this shows us is that the chosen tax structure looses its relevance during inflation. (3) VAT – ‫)מס צריכה/מס הוצאות, )מע"מ‬

10

See next paragraph

14

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

We than went on to ‫ מיסוי צריכה‬or ‫ .מס הוצאות‬We began with value added tax - VAT ( ‫.)מע"מ‬ This is a most efficient form of taxation because it’s easy to have everyone pay it. 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, what comes out is that the store-owners become the tax collectors for the state. Also unlike with income tax which is annual, 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). Furthermore VAT is considered a fair and equal tax, because you only pay if you buy and if you buy than no matter whom you are you pay the same amount. The disadvantages of this system are that: there are those store-owners that play tricks; but a more significant disadvantage of VAT is that it is a regressive tax. He explained that it is regressive because the poor man is forced to buy the basic amenities (heat, water, etc) and those amenities are taxable, so what happens is the remaining 100% of his meager income is taken away by taxes, 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. So if taxes on basic amenities amount to 2k, than the poor man is forced to pay all his income in taxes whereas the rich man has 98k leftover). He explained that for this reason there is a movement that is calling for a progressive VAT tax. Under this tax basic items wouldn’t be taxed whereas luxury items would be taxed. In the UK they have a progressive VAT tax, however he explained that it results in absurd cases coming to the House of Lords, such as the case regarding a mini-skirt which the store listed as a children’s garment (and thus it is exempt), whereas the tax authority claimed that it is an adults skirt. So basically the court is kept busy dealing with such ridiculous cases. 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, and thus we see that in many instances, by having VAT you open up a Pandora’s Box. (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. We will get back to this tax and its applicability in Israel. (5) Estate tax or property tax – ‫מס רכוש‬

15

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

The logic behind this tax is if your rich (if you own property) than pay a tax on your property, if your poor (if you live in a tent) than don’t pay. He explained how this is a bad tax with an example: Say Joe has 10 acres of property in Tel Aviv. That doesn’t mean that Joe is rich, 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. 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, so the owner will always claim that it’s worth less, whereas the tax authorities will always say its worth more. An additional problem that comes up is that say Tim who is poor inherits a luxury apartment, now he is forced to pay a estate tax which he can’t afford to pay. This in turn will result in his selling of the party. Thus again we see a lack of neutrality of the tax structure, in that it influences the decisions of the tax payer. (6) Business tax – ‫מס עסקאות‬ A transaction (‫ )עסקה‬means a transfer of wealth from A to B. Such transactions can be taxed. He gave an example with inheritance tax. The justification for this tax is redistribution of wealth. The disadvantage with this is that there are ways around the system (in the example of inheritance tax, I will simply give the money as presents to my children before I die). The solution to this hole in the tax is that presents are taxable as well. 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. The job of tax lawyers in these countries is to figure out ways to make big presents small (e.g. the 10,000$ deposits a grandfather might put in his grandchildren’s accounts; say I want to bequeath my mansion to my kid, 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, he had a fancy villa. In the 90s they started taxing villas. 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. This case ended up coming to the Supreme Court, and the court ruled that we don’t go by the registration (‫ )רישום‬rather we go by the essence (‫ )מהות‬of the estate.

16

Effy Stern Tax Law Fiscal policy, monetary policy – ‫:מדיניות מוניטארית, מדיניות פיסקאלית‬

Prof. Yishai Beer 2011-2012

Monetary policy is decided by the head of the bank. Fiscal policy is decided by the government. He explained that budget (‫ )תקציב‬is presented by the executive, and is voted upon by the legislature. Budgets are usually annual. If there is deadlock regarding a budget than the government collapses, and you have elections. Lastly he mentioned the concept of tax expenditure ‫ .הוצאות מס‬He explained the absurdity that results from this concept. He gave an example: in Israel all products have a VAT besides for fruits and vegetables. What this means is that the treasurer is forgoing a tax or in other words it is subsidizing a certain area. 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, 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), 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. For this reason most western countries began to add a column listed as ‫.הוצאות מס‬ The tax system in Israel: (distinction between peyrot and etzim) Israel, like most of the former colonies of the British Crown, inherited its tax system from the British. However In 1961 Israel established its own unique system. Since that point it has been revised many times. Nonetheless, the (income) tax code still contains many similarities to the British system. The British system distinguished between peyrot and etzim (income that is derived from the etz and income that derived from the peyrot). This distinction ended being accepted by most of the western world. To better illustrate the distinction, we gave an example: Joe had a field with fruit trees, every year his trees provide him with fruit. However if he sells the trees than he has no source of income (‫ .)מקור הכנסה‬If he sells the field than he will receive a one time fee, this would be ‫ .הכנסה מאץ‬This is the (British) distinction between income from the fruits (income that repeats each year), and income from the tree (or ‫.)הכנסה מהון‬ 4th Class 8/11/11

17

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Last class we mapped out the different types of tax structures that exist in the West. Today we will discuss the tax regime of Israel. We will discuss the different types of taxes that exist in Israel. We will also discuss taxes that were once in effect but were repealed. As we explained in a previous lecture, taxes that were once obsolete many times end up being brought back to life as a result of political reasons, etc. for this reason it is important to discuss taxes though they may no longer be in effect.

Different types of taxation (cont’d)
Income tax – ‫מס הכנסה‬ In its raw form this tax was inherited from the British, but it has been revised many times since. Israel. In a previous lecture we mentioned the distinction between the etz and the peyrot. We explained that with peyrot (profit of the fruits) the profits have the ability to repeat themselves, whereas with profits that come from the etz don’t have the ability to regenerate income. We gave an example of s shareholder that receives a dividend, a dividend is peyrot of the stock, and thus it is taxable. However if a shareholder sells his share, than the share is like a etz (it is the source of the peyrot, it is not the peyrot itself) and thus it is not taxable. We gave another example of a fisherman. 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. 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, say he sold the fish to Ruben for 2000$ and he sold the boat to Simon for 100,000$. The tax result would be that the fish sale would be considered peyrutit and taxable whereas the boat sale would be considered honit and thus not subject to taxes. However if he sold the fish and the boat to the same guy for 102000$ than the whole transaction would be treated as honit and thus not taxable! We gave another example with a field owner. If he

18

Effy Stern Tax Law

Prof. 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, whereas the sale of the field would be honit and not taxable. However, 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. Another example which demonstrates the problematic nature of the distinction between peyrot and etz would be with bond washing ‫ .21כיבוס אגרות חוב‬For instance: A lends B a million dollars with 5% interest. A year passes. Thus A is entitled to fifty thousand. On the assumption that there is no change in the exchange rate or the rating of the lender, the value of the bond (the loan) is one million. So the bond is capital (hon) and the interest is peyrot. If I sell a moment before the bond expires than one million fifty thousand is all capital, whereas if I sell it after the bond expires than it would be separate. Similarly like to the examples above, the seller (or the taxpayer) can choose to sell to the same person or to two different people. 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. He explained by way of example: He offers us to choose between two different properties/assets; either he will sell us the cafeteria of the IDC. 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. We now have to decide which property to buy. 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, thus we see that from am economic perspective there is no difference, the only difference is as far as taxes. Taxation in Israel (cont’d) Income tax – ‫מס הכנסה‬

Just to clarify: ‫ – הכנסה פירותית‬tax on the yield of the business; ‫ – הכנסה הונית‬the sake of the profit-yielding apparatus. 12 A bond is a loan with ‫( שיעבוד‬insurance – such as a mortgage on my house).
11

19

Effy Stern Tax Law

Prof. 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. Corporate Tax – ‫מס חברות‬ Israel has a corporate tax and it is a relative tax. In light of the Trachtenberg report the corporate tax will be raised to 26-27% (currently it is 24% of profits). 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 .‫ 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). 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 ‫ .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 the 60s they passed the new ‫ פקודת מס הכנסה‬and the plan was to nullify the ‫חוק מס שבח‬ ‫ ,מקרקעין‬but they never did. As time goes by this becomes more complicated as the two statutes have been taking on separate and distinct forms. Social security – ‫ ביטוח לאומי‬BL Another tax in Israel is ‫( ביטוח לאומי‬BL). He explained that BL has tax aspects and insurance aspects to it. However unlike with insurance where they charge based on the individual risk of the person requesting the insurance, with BL they go according to how much you make, regardless of the risks imposed by your job, thus we see that its not a pure insurance.

Employment tax – ‫מס מעסיקים‬ Until about five years ago there was also ‫ .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

Effy Stern Tax Law would have to pay 10k taxes for the additional worker that he hired)14. Payroll tax – ‫מס שכר ורווח‬

Prof. Yishai Beer 2011-2012

was paying the worker. 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 7.5%15 of the salaries that it paid. As of 2009 if the amount didn’t exceed 160,000 nis than the NPO would be exempt from paying this tax. This tax is also levied on financial institutions (e.g. banks, insurance companies, pension funds, and ‫ )חברי הבורסה לניירות ערך בתל אביב‬at a fixed rate of 16% of the salaries paid and the profits that it yielded. The tax on financial institutions is in place of the ‫ מס ערך מוסף‬levied on regular businesses. This tax is based on section 2(2) TO. Consumption tax (VAT, purchase tax, customs) – ‫)מיסוי צריכה )מע"מ, מס קנייה, מכס‬ One such tax is VAT (‫ .)מע"מ‬This is the tax paid on all products that one purchases (besides for fruits and vegetables, which are exempt from VAT. Another consumption tax is excise tax (‫)בלו‬ (e.g. the tax on gasoline16). Another consumption tax is purchase tax (‫ )מס קנייה‬which is relevant to select products17 (e.g. cigarette and liquor). Another form of consumption tax is customs duties ‫מ‬ ( ‫.)כס‬ Regarding customs, a century ago, this was a dominant course of income for states, nowadays it isn’t. 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. Trachtenberg says that we should obliterate the customs tax regardless of agreements and treaties (e.g. It used to be that if you wanted to buy fabric from abroad you had to pay a high tax. At the time most of the fabric in Israel was manufactured in Israel. 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 הכנסה‬ Or is it 6.5%? 16 He explained that when we buy gas there are 3 taxes; ‫ ,מס קנייה, מס ערך מוסף‬and ‫ בלו‬which is a percentage that is paid on the gas purchase. 17 This is a tax that applies to certain items that are listed in the law (cars, etc).

21

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Prof. Yishai Beer 2011-2012

where we have a comparative advantage. And thus we sent those industries [i.e. fabric] abroad and we began focusing on technology, etc. the problem of course with sending an industry abroad is that people of that given industry loose their jobs. This was the debate regarding cottage cheese (we could get rid of the customs tax, and than it would become cheaper to buy foreign brands of cottage cheese but that would obliterate the Israeli cottage cheese industry. The questions than becomes if we want to do that).

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. In the 80s (early 90s) the travel tax (which was a tax paid with the purchase of an international plane ticket) was repealed. Likewise there used to be a tax on exchanging money (if you changed your money into foreign currency), and it to was repealed. Estate tax or property tax – ‫מס רכוש‬ As of the year 2000 there is no longer estate tax ‫ .מס רכוש‬Last lecture we mentioned the advantages as well as the inherent problems with this tax. 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, than you are obviously rich and therefore we will tax you. The problem was that the state would assess the property at one value, while the property owner would have the property appraised at a different value, and many cases ended up in court (e.g. the docks or the parking lot of a supermarket: the supermarket would say that it is part of the building, the state would say that it wasn’t). 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 ‫ .))בנייה‬As we said this tax no longer exists. Transaction tax – ‫מיסוי עסקות‬

22

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This category of taxes includes inheritance tax (‫ )מס עיזבון‬and presents tax (‫ .)מס מתנה‬As we already mentioned the inheritance tax was nullified in the 80s. Trachtenberg wants to revive this tax, which Prof. Beer claimed is a justified tax18. Stamp Tax – ‫מס בולים‬ Every business needed to have stamps, and the tax was paid with the purchase of the stamps. The tax was repealed in 2006. Purchase tax – ‫מס רכישה‬ This tax is still relevant and (e.g. If you buy a house or property than the buyer needs to pay a purchase tax (‫ .))מס רכישה‬This is a progressive tax. Meaning that the more expensive the house the higher the tax rate. Also if this is your second property than you will pay more than if it was your first property. He explained that parents that give their child an apartment, than it’s considered an ‫ עסקה‬and there is a purchase tax (this is despite the fact that there is no ‫ מס מתנה‬in Israel - though it’s lower than the typical amount19)20. We ended the lecture with a case study: say you come home and there are three letters waiting for you. 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. Another letter says that in light of cleaning that the city had to do we need to pay a tax for that. A third letter is from the ministry that’s says that in light of the fact that contractors (across the state) lost their jobs, 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, 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. 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

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Prof. 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 letter is from the municipality that says that he needs to pay a fee for the construction for a parking lot at the IDC. Another letter says that in light of cleaning that the city had to do he needs to pay a tax. 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 needs to pay a participation fee. What is the validity of these taxes? Does the Mayor of a city (i.e. the municipality) have the right/ability to send such a letter asking Ruben to pay a certain fee in light of circumstances (e.g. in light of the mess on Rothschild Blvd. 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. There are various other questions that can also be asked, for instance: Two students finish law school and join law firms. One is a guy one is a gal. They both receive the same gross salary, except that one pays more taxes and the other pays less taxes. The discipline that will deal with the issue of such a situation would be constitutional law. It would be in constitutional law that the victim of the discriminatory taxation will find the remedy. According to the constitutional regime we live in, taxes can’t be imposed unless there is legislation that authorizes the state to tax. This rule is stated in ‫ חוק יסוד משק המדינה‬which states that there can be no taxation without legislation (‫ .)חקיקה ראשי‬Thus with the aforementioned example of the municipality, it has no right to impose a tax unless there is legislation authorizing it to tax. He reminded us that we are dealing with tax, ‫ ,אגרות, מלוות חובה‬and ‫ ,תשלומי חובה‬we are not dealing with voluntary taxes. With that being said there are certain concepts that require clarification. The first concept which requires elucidation is compulsory loans - ‫ .מלוות חובה‬This sort of loan was common in the early days of the state, nowadays it no longer exists. He explained that there are limits to how much

24

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Prof. Yishai Beer 2011-2012

taxes the state can collect. (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 was that Israeli citizens were already taxed to the max. So the government came up with something called compulsory loans ‫ .מלוות חובה‬This basically meant that the state forced the citizens to lend it money. Unlike with taxes, with ‫ מלוות חובה‬the government pays back the money that it took. 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.g. If you would have deposited your money in the bank at the time of the loan and kept it there for five years, than we will pay the same interest that you would have received). The other type of loan is a loan where the state would return you the loan with interest, but at a reduced rate (at a rate less than the market rate), this is the type that the state used when it imposed compulsory loans. 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, the state was paying you back a reduced interest rate, 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; however it (i.e. the Basic Law) doesn’t specify which of the two types of compulsory loans it is referring to. Regarding this issue there is no case law, but there is much academic writing. Another term requiring clarification is compulsory payments - ‫ .תשלומי חובה‬This category of payment is also listed in the law. However the legislation doesn’t stipulate compulsory payments to whom! All it says is that compulsory payments require legislation. Starting from the 50s the case law began dealing with this question. 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. Mr. Nachomovsky was claiming that the mandatory fee is not
21

He pointed out that in reality this hurts the small people, the big fish have ways to get out of paying [high] taxes.

25

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constitutional being inherently it is a tax, and being that there is no legislation authorizing it, 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, 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. 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. One of the measures taken was a freeze on all fees. Shortly thereafter the broadcasting authority (‫ )רשות השידור‬came along and imposed a fee (a television tax). So in this case Mr. Kriv, a ‫ מתרגל‬for tax law, 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, here, whether the payer receives of doesn’t receive anything is irrelevant). The court (Barak J.) rejected this because as we explained fee has two aspects to it, a dominant tax element, and a less dominant element).
‫ :תקנת שעת חירום‬However there is a caveat; and that is that the state has the ability to impose taxes

in a situation of emergency ‫ .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; however the attempt failed). 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. Thus in light of the failure of 92 as well as the limits imposed by the basic law, it is unlikely that this power of the state will be used. Just like the state can’t tax without legislation, so to it can’t decide to remove taxes without legislation (e.g. a politician can’t go ahead before the primaries and give tax breaks to appease his voters). This is stated in section 245 TO: Section 245 TO: ,‫542. )א(לא יותרו ניכויים או קיזוזים, ולא יינתנו פטורים, הנחות ממס או הקלות אחרות‬ ‫איסור מתן הנחות‬ ‫והקלות‬ .‫)תיקון מס' 22אלא אם נקבעו במפורש בחוק או מכוח סמכות מוגדרת בחוק‬ (
1975 -‫תשל"ה‬ ((24 '‫תיקון מס‬ 1976 -‫תשל"ו‬

26

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 ,‫)ב( על אף האמור בסעיף קטן )א( רשאי שר האוצר, באישור ועדת הכספים של הכנסת‬ ;‫להתקין תקנות למתן הקלות כאמור, אולם תקפן יפקע בתום שלושה חדשים מיום פרסומן‬ ‫ובלבד ששר האוצר, באישור כאמור, רשאי להאריך את תקפן עד תום שנת המס שבה‬ .‫פורסמו‬ ( ‫)תיקון מס' 28)ג( )1( שר האוצר, באישור ועדת הכספים של הכנסת, רשאי לקבוע לכל שנת מס‬ 1990 -‫תש"ן‬ ‫תקרה להטבות מס שיינתנו לפי סעיפים 02 ו-02א בשנת המס, ורשאי הוא‬ ‫לקבוע תקרות נפרדות לסוגי הטבות; תקרה לענין הטבות בשל חיפושי נפט‬ ;‫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, מעבר לתקרת סכום שקבע שר האוצר לאותה שנת‬ .‫מס‬

It states that the legislature can’t give tax-breaks unless there is clear legislation stipulating that it can (e.g. say it’s a bad farming year. The agriculture minister can’t go ahead and give tax exemptions to the agriculture sector, unless of course there was legislation stipulating that he can do so).
Pre-Ruling: Although you can’t give tax breaks unless there is legislation, there are areas which

are ambiguous. 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). In Israel we also had a dialogue going on between the tax payers and the tax authorities, but it wasn’t published. It was only with the passing of section 158A which obligated that these questions/answers be published for all to see.

Section 158A TO:
‫ומתן‬ ‫שמיעת טענות 851א. )א( לא תיעשה שומה לפי מיטב השפיטה על פי סעיף 541 ולא יינתן צו‬ ‫נימוקים‬ ( .‫)תיקון" מס' 22לפי סעיף 251, 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, and participation fees (‫ ,)דמי השתתפות, אגרות, והטלים‬but not taxes. 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, claiming that he should pay his share
22

So you will see “in light of pre-ruling 152 you can do X.

27

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

of the road23. So the court went and checked to see if the municipality was authorized to impose the payment (‫( .)תשלום‬If after checking if the municipality is authorized we come to the answer that it was, than we can ask the question whether it is constitutional (fair) or not). The court came to the conclusion that the municipality had the authority to impose the tax. 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.g. Take Ben Gurion Blvd. of Ramat Gan which cuts through Ramat Gan, Givatayim, and Bnei Brak. Say there is a fire or a flood, obviously the Ramat Gan fire truck won’t stop the moment he hits the section of the street that is Givatayim, what happens is that the municipalities unite). So the same was true regarding certain veterinary standards of meat, the municipality is in charge of ensuring the quality of the meat, and an urban union was established to ensure the quality standard of the meat in the relevant cities. 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. For that reason there is ‫ חוק איגוד ערים‬which authorizes the municipality to impose payments ( ‫ )תשלומים‬for the functions that the legislature obligated it to do. Anyways a change was made to the ‫ .חוק איגוד ערים‬Originally there was a section that said that when one sells meat you have to pay for the check. A while later the urban union of Gush Dan came along and changed the way things were done. They said that any meat that is brought in to the Gush Dan is obligated to this payment; 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, because this, they claimed, was a tax, and the municipality is not authorized to impose a tax. The court accepted the claim of SuperSol. 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. 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); 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. 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.

28

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

sense that the Knesset authorized the tax via legislation. But Mr. 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. The majority checked the case via the tests of the basic law (proportionality, etc) and came to the conclusion that the fee was reasonable. However Cheshin J. (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. Regarding the question that was raised in the beginning of the lecture concerning the two lawyers, one male and the other female, and the female pays less taxes: He mentioned section 36A TO which says that a woman gets a certain tax discount. Section 36A TO:
‫זיכוי לאשה‬ .‫63א. 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. So he mentioned that this could possibly raise a constitutional issue. Class 6 15/11/11

‫:הכנסה מחייבת – בירור ההכנסה לפי הפקודה‬ He began with an illustration. Mary and her daughter were in the US on vacation and they got into a car accident, to which they were indemnified two million dollars by the insurance company of the tortfeasor. He gave another example, of an Israeli that went to the US and won the lottery wherein she receives one million annually for the rest of her life. 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, at one point do they get taxed (‫?)עיתוי‬ Question 1 – what type of tax – ‫מה סוג ההכנסה‬

29

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

The law is isn’t clear: it states that income is obligated in tax according to section 6 TO.

Section 6 TO: .‫המס לכל שנת מס יוטל על הכנסתו החייבת של אדם באותה שנה‬
6 .6 ] ‫]שנת מס‬

The question is which sort of income is obligated in taxes. section one defines income in accordance with Sections 2 and 3 of the TO. In addition there is section 2A which obligates a lottery winner to pay taxes. Question 2 - ‘who is the tax payer’ – ‫שאלת זהות הנישום‬ This question is important because we have progressive tax, 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. Another question that could come up is if with the lottery example, 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 we see that it’s important to identify who is the tax payer ( ‫ .)זהות הנישום‬The case law will provide us with tools regarding how to check. Question 3 – regarding international standing – ‫מעמד הבינלאומי‬ ‫ :גישה פרסונאלית/גישה טריטוריאלית‬Regarding the question of the ‫ מעמד בינלאומי‬this is a complex topic. There are two approaches the British and the American. 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, thus if you made money outside of the state (in the case of Israel, if you made money in Egypt) than you wouldn’t be obligated to pay taxes. This was Israel’s approach up till 2003. The American approach is the ‫ .גישה פרסונאלית‬According to this approach we don’t look at the territory but rather we look at the persona. For instance if you are an American you have to pay (report) taxes on income no matter where you live in the world 24. After 2003 Israel adopted the US approach.

24

In light of various treaties and agreements between states such as Israel with the US, 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). 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.

30

Effy Stern Tax Law Question 4 - The question of timing (‫)עיתוי‬

Prof. 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. Thus we can’t say that you should be taxed for the whole amount in the beginning. Thus we see that the question of ‫ עיתוי‬is a strong question and there is much case law on the topic. (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, and with the market the way it is, 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). 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 ‫ .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, than the tax I would have to pay wouldn’t reflect reality. Therefore the correct test is the ‫ .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, we will count that as money received or more specifically as money that is taxable25). 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. Regarding the question, whether it’s better for him to take the money now or later, it depends. It would depend on what ‫( מס שולי‬tax bracket) he is in. 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). 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.

31

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

pay the current rates). Of course this goes both ways, meaning that the clients have their considerations regarding the tax system as well, and they will also want to pay taxes in a way that serves their interests. As a result of this, deals will be made (e.g. the lawyer will say that if you pay me now than I will knock off ten percent). As a side point he mentioned that until Trachtenberg the tax system was going on a downward trend (taxes were being lowered. 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. Back to the aforementioned example with the lawyer that is considering whether to pay taxes now or later, he said that the wiser thing is to push off the tax payment till next year. He mentioned an article by Prof. Brown who said that not only is the choice to push it off smart but we can also measure the value of the decision. He explained that pushing off tax has an affect of exemption ( ‫ )פטור‬from the tax on the interest that accumulates on the ‫( קרן המס‬e.g. Ruben and Simon make the same amount of money (100k annually). Both are in the same tax bracket (50%). The only difference between them is that Ruben pays taxes on time, whereas Simon finds a legal way to push off paying his taxes for two years at an interest rate of 10%. The following will be the difference after two years have passed: Year 1 Year 2 He begins with 100,000 and than After two years of the money he pays 50% tax (100,000/2) = sitting in the bank he will have 50,000. He deposits the money. made 5,250 interest, again 50% The bank pays him interest (10%) tax on that and he ends up with being that the money was in the 2,625 and thus he ends up with bank. The interest amounted in 55,125 net. 5,000 and than he had to pay 50% tax on the interest which means 2,500. Thus he ends off with Simon (pays 2 years late) 52,500. He begins with 100,000. However Here he will make 11,000 in unlike Ruben he deposits the full interest and thus he will have a 100,000. After a year he receives total of 121,000. Now he has to 32

Ruben (pays on time)

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 10% interest, thus he ends up with pay 50% tax. 50% of 121,000 110,000 (on the interest he also is 60,500! (Thus he ends up doesn’t pay taxes till two years are with 5,625 more than Ruben). up).

As we see from here (and this is true all the time) it is always worth it to push off paying your taxes. He than reminded us what Prof. Brown said, ‘‫.’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. However unlike Ruben, Levi doesn’t pay tax on interest.

Levi

Year 1 Year 2 He deposits 100,000. He pays He deposits 55,000. the next 50%. Thus he is left with year he receives another 5000 50,000, plus 5,000 in interest. on the principal (‫ )קרן‬and 500 Thus he is left with 55,000 on the interest and thus according to this ‫ חישוב‬he also ends up with 60,500 just like Simon.

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. It’s as if Simon gave himself a tax exemption, it’s as if he arranged his own tax system for himself. Question 5 – what is the chargeable income – ‫?הכנסה מחייבת‬ ‫ :עיקרון המימוש‬This issue is discussed my many scholars. From an economic perspective, 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”. 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. you compare the difference and that is how 33

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

much taxes he should pay. In simplest terms you calculate how much of the “pie” each person needs, and than you calculate the change in wealth of that person in the given year. He explained this theory has no relevance to tax law, because when it comes to taxation we don’t tax unless there is realization (‫( )מימוש‬e.g. let’s say the tax of your property rises annually; you won’t be affected by that until the point that you decide to sell. This is called the realization principle ( ‫ .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; laptops, cell phone, etc. He will only pay income tax on that property provided that he decides to open a store and sell all his property, 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 American model He explained that in the West there are two different accepted approaches regarding how to categorize ‫ .הכנסה חייבת‬One model is the American model. This approach says that any income is ‫ מחייבת‬unless there is a law that says that this specific form of income is exempt from tax. Chargeable income (‫ –)הכנסה מחייבת‬the British/Israeli model (‫)גישת המקור‬ The other approach is the British as well as the approach used in Israel. 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 ‫ .)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. Class 7 20/11/11

Legislative source for taxation, section 2 – 2 '‫סעיפי המקור, ס‬

26

Infra at 70

34

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫.‪Last class we mentioned the two different models of taxation, the American and the British model‬‬ ‫‪We explained that Israel follows the British approach which states that there is no taxation‬‬ ‫‪without (specific) legislation. As we mentioned, income tax (which we explained as a source of‬‬ ‫.‪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, בכפוף להוראות פקודה זו, לכל שנת מס, בשיעורים‬ ‫מקורות הכנסה ]52.‬ ‫])1‬ ‫תיקון מס' 231(המפורטים להלן, על הכנסתו של אדם תושב ישראל שהופקה או שנצמחה בישראל או‬ ‫(‬ ‫תשס"ב- 2002‬ ‫מחוץ לישראל ועל הכנסתו של אדם תושב חוץ שהופקה או שנצמחה בישראל, ממקורות‬ ‫אלה:‬ ‫עסק ומשלח יד‬ ‫)1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן כלשהי,‬ ‫או מעסקה או מעסק אקראי בעלי אופי מסחרי;‬ ‫עבודה‬ ‫)2( )א( השתכרות או ריווח מעבודה; כל טובת הנאה או קצובה שניתנו לעובד‬ ‫)תיקון מס' 22(‬ ‫ממעבידו; תשלומים שניתנו לעובד לכיסוי הוצאותיו, לרבות תשלומים בשל‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 921((‬ ‫החזקת רכב או טלפון, נסיעות לחוץ לארץ או רכישת ספרות מקצועית או‬ ‫תשס"ב- 2002‬ ‫ביגוד, אך למעט תשלומים כאמור המותרים לעובד כהוצאה; שוויו של‬ ‫שימוש ברכב או ברדיו טלפון נייד שהועמד לרשותו של העובד; והכל - בין‬ ‫שניתנו בכסף ובין בשווה כסף, בין שניתנו לעובד במישרין או בעקיפין או‬ ‫שניתנו לאחר לטובתו;‬ ‫תיקון מס' 921((‬ ‫)ב( שר האוצר, באישור ועדת הכספים של הכנסת, יקבע את שוויו של‬ ‫תשס"ב- 2002‬ ‫השימוש ברכב או ברדיו טלפון נייד שהועמד כאמור לרשות העובד;‬ ‫)תיקון מס' 31(‬ ‫)3( )בוטלה(;‬ ‫תשכ"ח- 8691‬ ‫דיבידנד, ריבית‬ ‫)4( דיבידנד, לרבות דיבידנד המשתלם מתוך רווחי הון של חברה, ריבית,‬ ‫והפרשי הצמדה‬ ‫הפרשי הצמדה או דמי נכיון;‬ ‫)תיקון מס' 22(‬ ‫תשל"ה- 5791‬ ‫גימלאות‬ ‫)5( קיצבה, מלוג או אנונה;‬ ‫אחוזת בית וקרקע‬ ‫)6( דמי שכירות, תמלוגים, דמי מפתח, 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, במישרין או בעקיפין, על פי הסכם שנעשה בשעת ההשכרה או לפני‬ ‫כן, יראו את הקונה כאילו קיבל הוא ביום הקניה דמי מפתח או פרמיה באותו‬ ‫סכום; נעשתה הקניה תוך שנה לאחר ההשכרה יראו זאת כראיה לכאורה‬ ‫שאמנם היה הסכם כאמור;‬ ‫נכסים אחרים‬ ‫)7( השתכרות או ריווח שמקורם בכל נכס שאינו אחוזת-בית ולא קרקע ולא‬ ‫בנין תעשייתי;‬ ‫חקלאות‬ ‫)8( השתכרות או ריווח שמקורם בחקלאות, בעבודת אדמה, בייעור או בגידולי‬ ‫קרקע, לרבות שוויה של תוצרת המתקבלת בשל השימוש בהון, בנכס, בזרעים‬ ‫או בחיות- בית לצרכי מקורות ההכנסה האמורים בפסקה זו, ולרבות חלק‬ ‫ברווחים המתקבלים מן השימוש כאמור;‬ ‫פטנט וזכות-יוצרים‬ ‫)9( תמורה המתקבלת בעד מכירת פטנט או מדגם על ידי הממציא, או בעד‬ ‫מכירת זכות יוצרים על ידי היוצר, אם הומצאה האמצאה או נוצרה היצירה שלא‬

‫53‬

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 ;‫בתחום עיסוקם הרגיל של הממציא או היוצר‬ ) ‫השתכרות או ריווח מכל מקור אחר שאינו כלול בפסקאות ) 1( עד‬ (10) .‫9(, 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; section 2(2) deals with employment; section 2(3) was repealed. It dealt with taxation on one’s apartment27; section 2(4) deals with dividends, interest, and linkage differentials; section 2(5) deals with benefits; section 2(6) deals with house, property, and land; section 2(7) deals with “other assets”; section 2(8) deals with agriculture (husbandry). As we will see this is an anachronistic clause, based on the times were agriculture was the primary form of employment; section 2(9) deals with patents and copyrights; and section 2(10) deals with “other sources.” 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). Section 2(1): Business or vocation – ‫עסק או משלח יד‬ ,‫)1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן כלשהי‬ ;‫או מעסקה או מעסק אקראי בעלי אופי מסחרי‬
‫עסק ומשלח יד‬

‫ משלח יד‬means vocation. This raises the question of what is meant by a vocation. We mentioned two cases that dealt with this question: 134/92 (‫ – )מחאג'נה‬This case dealt with a janitor (whose job was to clean stairwells). He claimed that cleaning stairwells is not a vocation and thus he is not obligated to pay taxes according to section 2(1). The court ruled that it is considered a vocation and thus he is obligated to pay taxes according to section 2(1). 2308/08 (‫ .)פס"ד גבריאלה שלו‬This case dealt with Prof. Shalev that taught abroad and was also involved in arbitration, the question was whether being a professor should be interpreted widely to include anything within the ability of the law professor, 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!). In other words the question was if arbitration
27

The value of the tax was configured according to the rental value, had the person decided to rent out the apartment.

36

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

should be included as part of Prof. Shalev’s vocation and thus taxable according to section 2(1). The Supreme Court ruled that it was. To sum up: In both cases the court was trying to figure out if the job they did was via their profession, if yes, than as we said they would be obligated to pay taxes according to section 2(1). 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 – “‫( ”.עסק‬However in 2308/08 it would indeed have made a difference [at the time] because the section regarding income from abroad differentiates between ‫ עסק‬and ‫ .)משלח יד‬So in short, we check to see what skills are necessary to create the income, and if income was generated by way of those skills than we will say that we are dealing with vocation – ‫.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, 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. 609/68 (‫ :)משולם‬This case dealt with an architect that won a prize for an architect contest. He explained that it is customary for architects to join tenders, and because these tenders require a lot of preparation on the part of the architect, those offering the tender usually offer a prize for those that came in second and third place. In this case Meshulam came in third place, and won a prize. He claimed that he shouldn’t be obligated to pay taxes on the prize money. The court said an architect can generate income in either of two ways; by supplying the information (blueprints, etc) that architects provide; or by his ability to enter contests for tenders, (and thereby win prizes). Thus we see that there is an offer, Meshulam accepts the offer and a contract is signed, and than in fact he receives the prize. Thus the court ruled that prize money in this case is considered “Business” income and is taxable according to section 2(1). 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. Thus we would say that it is part of their profession, and therefore 37

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

taxable according to section 2(1). Regarding a lottery winner, there is no connection to a person’s profession or connections built by their profession, and winning the lottery which is purely coincidental! Thus technically according to what we said a lotto winner, which is purely coincidental, shouldn’t be taxed. So here the legislature stepped in and actually switched things around. 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). As a side note he pointed out that when your given a prize for work (E.g. Universities used to pay TAs in the form of prizes) than it is obligated to taxes under section 2(1). The prizes we were discussing above were real prizes. 136/67: With regards to labor that is a one-time thing (e.g. 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). The executer that receives a fee is not receiving a present; it is a fee for work done, and thus it is taxable, 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, he is obligated to pay tax according to 2(10). 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. Two months later the girl receives a million dollar check from the lady. Is the million dollars she received considered taxable income or not30? As background he explained that a gift (e.g. wedding present) from ones employer could be considered as taxable income (in certain circumstances). The rule of thumb is that there can’t be outside influences influencing the gift, in order for the gift to exempt from taxes it needs to be a pure gift.

28

He explained (not responsible) that the reason is because unlike say with income tax, a person has the ability to write off expenses. However with lottery winners, we don t allow them to write off expenses, so it could be that a person spent 500,000 on lottery tickets (for a 1 million win) yet we still wouldn’t allow him to write it off. For that reason we say that it’s only fair that we tax him at a reduced rate. 29 If the person appointed as the executer was a lawyer than it wouldn’t be a question, he would be obligated to pay taxes because the appointment was based on his profession. 30 [if I’m not mistaken he said that the court ruled that it wouldn’t be taxable]

38

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

13/82 (‫ )פרומקין‬provides yet another example of the courts employing section 2(10). This case dealt with a psychiatrist that for a fee gave soldiers exemptions. Firstly the court establishes that illegal income is taxable31. As an aside He referred to those that claim that by taxing illegal income you are giving legitimization to such activity. Either which way, the court applied section 2(10) and said that the income was taxable. 597/75 (‫ :)ברנשטיין‬This case dealt with a teller of a bank that (as a side job) brokered deals between clients (e.g. he happens to here that Ruben wants to buy and the Simon wants to sell, so he connects the two). 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, it doesn’t make a difference that it won’t repeat itself, so long that the job itself is a job with income (peyrot) we will apply section 2(10). Regarding the woman who helped the lady on the street, and whether she has an obligation to pay taxes on the present she received; 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. During the ride the

lady cried to him about all her problems. The cab driver realized that this lady has no family, and thus from than until her death he took care of her. When the lady died she gave him all her inheritance. The tax authorities came along and said that he is obligated to pay taxes (because he wouldn’t have been able to help her, or he wouldn’t have had the opportunity to help her had he not been a cab driver). The court ruled that being that it is clear that the cab driver was helping her simply out of the kindness of his heart, it won’t view the money as income, and thus he is not obligated to pay taxes. Similarly in the case with the girl, 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.

31

As a side note he pointed out that with income achieved illegally you can’t write off expenses, for the obvious reason of market overt ‫ .תקנת הציבור‬So for instance you can’t write off bribery as an expense (e.g. If I got involved in a deal in Africa and I had to bribe off an official their, I can’t go ahead and request to write off that expense). See infra at 119. 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.

39

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.g. participation in tenders is an integral part of the business of an architect). As we saw in several cases, 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. The deal was that if it had

leftover tickets than it has to pay the lottery ticket company (‫ )מפעל פיס‬for those tickets, but it got to receive the winnings if there was one. 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). The court ruled that the storeowner is different than the regular person; reason being that lottery tickets is an “integral” part of his business and thus he is obligated to pay taxes. So back to the architect case: we said that there are two conditions. Now we see that either one of those conditions alone is sufficient to make an income taxable34. Class 8 27/11/11

‫עסקת אקראי בעלת אופי מסחרי‬
Last lecture we discussed the difference between sections 2(1) and 2(10), we also discussed the term ‫ עסק‬and what it means. He than asked if the intent to earn a profit is a necessary condition ‫ ?לקיומו של עסק‬He gave several examples to illustrate the point; (e.g. 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$.
33 34

Now the law has changed and lottery wins are taxable. 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. In other words, 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, with tax law a person could buy from himself]) And buy the tickets. We will discuss this at length in a later lecture when we will discuss ‫( שינוי ייעוד‬infra at 87). He gave another example of a contractor who builds houses for a living. Not necessarily does that mean that every house he sells is integral to his business, 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.

40

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Would this be considered a ‫( ?עסק‬e.g. 2) A café decides to give out free coffee free (5$ value) as a marketing scheme. Would this be considered an ‫ ?עסק‬We mentioned the landmark
British case, which dealt with a missionary society that had a book store. In addition to the store

missionaries would be sent out to sell Bibles on the street for a discounted, symbolic price (wherein they made no profit). They wanted to tax the Missionary society for the Bibles that were sold. 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, it’s possible that you could be loosing money and it will still be considered am ‫ .עסק‬However if there is no intent to market and you are loosing money without any intent to make a profit, such as with these missionaries, than we won’t consider it 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 ‫ .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 ‫ .עסק‬Likewise Chabad of Thailand that gives out free meals wouldn’t be considered a ‫.עסק‬ Section 2(1) cont’d – Incidental transactions of commercial character - ‫עסקת אקראי בעלת‬ ‫:אופי מסחרי‬ In section 2(1) it states:
) ‫מס הכנסה יהא משתלם, בכפוף להוראות פקודה זו, לכל שנת מס, בשיעורים‬ .25] ‫מקורות הכנסה‬ 1)] ‫תיקון מס' 231(המפורטים להלן, 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, ממקורות‬ :‫אלה‬ ‫עסק ומשלח יד‬ ‫)1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן‬ ;‫כלשהי, 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, or from any incidental transaction or deal of a commercial nature, is subject to taxes. 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, but either way it’s in the statute and thus it must be understood. 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, the difference between them remain vague. Lastly he

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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, 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. 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). (He pointed out that there was a district judge in (‫ )פס"ד ברנר‬that made a distinction between ‫ עסק אקראי‬and ‫ .עסקת אקראי‬Thus according to her there are four categories, the two mentioned and ‫ משלח יד‬and ‫ .עסק‬We will not deal with the added distinction that she made).
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. The first test that the case law mentioned is the ‫ .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. E.g.2. Ruben went in to the supermarket and there was a sale on red wine, two bottles for 100$. Later his neighbor stops by and she needs wine, so he sells her one bottle for 100$ (he profits 50$). In this case we wouldn’t say that Ruben is a wine salesmen because this was a one time transaction, he had no intent to sell when he bought the wine, etc. However, in the same example, if Ruben was a wine connoisseur, and he buys out the whole store (but he bought it for personal purposes), and than goes and sells the same neighbor a bottle, so in this case because he bought many bottles ( ‫ )מבחן הכמות‬we would say that it is for commercial purposes (e.g. 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, in that case the court used the ‫מבחן‬ ‫ הכמות‬and said that it was ‫ .)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. 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. However this was a case where though the person sold in bulk it was not for commercial purposes. The reason why he

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sold carpets was because at the time people leaving France weren’t allowed to take their capital with them, so the guy switched his capital for carpets and this way he was able to get his money out of France. In that case the court ruled that in fact it wasn’t a ‫.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.g. contractors). So to sum up; 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), and than there are real estate deals that are in the middle – incidental transactions. (E.g. Michelangelo buys an apartment, sells it after three months, buys a new place, lives there for two months and than sells, etc. According to the ( ‫)מבחן התדירות‬ this would (possibly) be considered an incidental transaction. We mentioned the case
(‫ :)פ"ד אסל‬In this case the fellow sold his apartment five times in ten years. However, he was able

to provide the court with compelling reasons as to why he sold each time that he did (e.g. in the first apartment there was no elevator, and than his back started hurting, than in the second apartment, they moved out because he went bankrupt, etc) the court ruled that in fact it wasn’t 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.
Commodities trading and hedging: He explained that there are some people that purchase

commodities in the hopes of selling at a profit. Other people buy for the sake of hedging (‫)גידור‬ (e.g. a company like Elite has contracts with super market chains for the next year. But because of the volatility of the coffee market, Elite buys in bulk at a certain price to ensure that despite possible fluctuations, it will be able to provide the coffee at the prices that it established). He explained that judges don’t seem to understand this. 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. So when a person buys bonds the court tends to look at it as a private matter, 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 (‫ .)עסק‬In the case

35

Prof. Beer stressed that this categorization by the judges is a mistake, bonds involve risk (albeit less than stocks) as well! As can be seen with the Greek or Italian bonds which recently plummeted!

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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

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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

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5378/90 (‫ :)הפועל תבריה‬In this case they didn’t pay ‫ .מס מעסיקים‬The claim was that they are not employees. Shamgar J. explained that at the end of the day the players aren’t working for free. Moreover the players follow the commands of the boss. 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. Whether or not we should look to Labor law to establish whether a situation of employee/employer exists, Shamgar leaves as an open question. 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. The questions that arise out of this ruling are: will any payment that the employer pays will be considered employment income; secondly what is the rule regarding a payment that someone gets that is not from his boss (e.g. a waiter). With regards to the first question he gave several examples: A) Ruben is a law student, who works by his mother’s firm two hours a week doing administrative work, and receives a monthly salary of 8000$. B) A law intern gets married during her internship and she invites her boss to the wedding and she receives a present from him of 100$. Another intern under the same circumstances received 10000$. C) Levi works at his mothers firm as an intern, and during the year he gets marries and she gives him an apartment. The commonality between all these cases is that there is a payment from the employer to the employee. We than took a closer look at the cases. With regards to the first case the mother is allowed to give a gift (to her son) so long that it’s not on the account of someone else. In this case she pays her son (a disproportional amount of money) via the firm, this way she gets to write it off as an expense – this she can’t do. If she wants to give him money than she could privately give him allowance, but in giving him money via the company she is doing so at the expense of the tax authority. So in this case with regards to the question of whether this is employment income we would have to separate the 8000$ that he received into the amount that he should have reasonably

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received (say 200$) and that would be considered employment income and the rest would be not be considered employment income rather money that she gave in her private capacity (and thus it wouldn’t be counted as a work expense). With regards to the second example (the interns that received gifts from their employers, one received 100$ and the other received 10000$). The one that received 100$, it wouldn’t be deemed employment income. However, it’s not that simple, for there are situations (e.g. the owner of a big company – each time an employee has an event he sends them 100$; in such a case it would be considered employment income. In general, gifts up till 200$ will be considered employment income and deductible, gifts amounting to more than 200$, will be viewed as a private expense. With regards to the intern that received 10000$, we need to first ask under which circumstances (“under which hat”) did he give the gift (say the intern a friend of his 44; or were there possible business reasons for his giving her or him such a handsome amount).
(‫ :)פס"ד ליבנה‬In this case there were two brothers that were the controlling shareholders of a

company, and both of them rented their own personal equipment to their own company for a very high price (100,000$). The court first looked at the going rate for renting such equipment, and from there it was able to establish that the additional amount didn’t reflect the going rate. 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. For this reason when a worker receives a gift from his employer for holidays it is considered employment income45. If however part of the payment can be attributed to something else (e.g. a gift) than we will deduct the amount of the gift and the remainder will be considered employment income. 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.g. a waiter)). 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; 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).

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reserve duty and receives money from social security (BL). 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. 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. 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; likewise with the lawyer that slipped, the money she receives from the insurance company will be considered employment income. So again, when there is a payment by a third party, we need to ask, why he or she received the payout. He went on to give an example of a doctor in the Kupat Cholim. On the evening of Rosh Hashanah a patient stops by and brings him a box of chocolate. We need to try and establish what the motivation for the gift was; the costs of the gift, etc: If it can be established that it was a pure gift than it wouldn’t be taxable. We gave another example of the emergency room at 2am. There are many people waiting on line and one of the waiting patients slips the doctor 20000$. In this case we would say that though it is obligated in tax it is not a situation of employer/employee (he received the payment not from his employer – the hospital – but rather from a third party – the patient that slipped him the money) Its clear that 20000$ is not a every-day type of transaction (on the other hand there is no way to consider it a gift). He mentioned the British case that dealt with the soccer game in 1966 between Germany and the UK. At the eve of the game, the British team was told that if they won they would receive significant gifts. Sure enough they won and the players received the gifts. The tax authorities claimed that the players should have reported it. 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. 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, it would seem that it’s a gift because the patron gives it

49

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voluntarily; on the other hand the tip is given because of the service ( ‫ )מתן שירות‬that the waiter provided. 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)). We mentioned the case
2105/06 (‫ :)אסתר כהן‬This case dealt with a waiter that didn’t report taxes. At some point he

drowned while trying to save someone. But because he didn’t have a salary reported, he (his widow) wasn’t entitled to BL (or if he was it entitled, it was a negligible amount). The court ruled (that in light of the circumstances46) that the tips would be considered employment income (in accordance with section 2(2))47. Prof. Beer explained that this ruling was given under specific circumstances and it is not clear how this will affect the general law regarding waiters. We looked at section 2 TO:
) ‫מס הכנסה יהא משתלם, בכפוף להוראות פקודה זו, לכל שנת מס, בשיעורים‬ .25] ‫מקורות הכנסה‬ 1)] ‫תיקון מס' 231(המפורטים להלן, 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, ממקורות‬ :‫אלה‬ ‫עסק ומשלח יד‬ ,‫)1( השתכרות או ריווח מכל עסק או משלח-יד שעסקו בו תקופת זמן כלשהי‬ ;‫או מעסקה או מעסק אקראי בעלי אופי מסחרי‬ ‫עבודה‬ ‫)2( )א( השתכרות או ריווח מעבודה; כל טובת הנאה או קצובה שניתנו לעובד‬ (22 '‫)תיקון מס‬ ‫ממעבידו; תשלומים שניתנו לעובד לכיסוי הוצאותיו, לרבות תשלומים בשל‬ 1975 -‫תשל"ה‬ ((129 '‫תיקון מס‬ ‫החזקת רכב או טלפון, נסיעות לחוץ לארץ או רכישת ספרות מקצועית או‬ 2002 -‫תשס"ב‬ ‫ביגוד, אך למעט תשלומים כאמור המותרים לעובד כהוצאה; שוויו של‬ ‫שימוש ברכב או ברדיו טלפון נייד שהועמד לרשותו של העובד; והכל - בין‬ ‫שניתנו בכסף ובין בשווה כסף, בין שניתנו לעובד במישרין או בעקיפין או‬ ;‫שניתנו לאחר לטובתו‬ ((129 '‫תיקון מס‬ ‫)ב( שר האוצר, באישור ועדת הכספים של הכנסת, יקבע את שוויו של‬ 2002 -‫תשס"ב‬ ;‫השימוש ברכב או ברדיו טלפון נייד שהועמד כאמור לרשות העובד‬

Class 10
46 47

She was a widow and the court felt bad. 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. However if the situation is categorized as 2)2) ‫))הכנסת עבודה‬ than the employer is responsible to make sure that the tax is reported.

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‫הכנסה והוצאה רעיונית - אופציות‬

Imputed/conceptual income – ‫הכנסה רעיונית‬ To explain the concept we gave several examples: Ruben works in a law firm. The office is shabby and lacking in amenities. Simon works in a firm where the conditions are superb. Levi works in a factory that makes iron, he works near an oven, and he receives from his employer a set of special cloths and a helmet: Two interns, Judah and Issachar are flown to Eilat to hand over judicial documents. Zebulon’s boss tells him that he needs to buy a fancy new suit on the firm’s tab. A law firm sends all of its employees to Turkey for a relaxing weekend. The commonality of all these cases is that there are employee/employer relationships. With regards to all these situations there are two approaches in how to deal with it with regards to taxes. One approach (the Israeli approach) is to check the motivation of the employer. The other approach (British approach) says we evaluate the value of the stipend/item (‫.)שווי השוק של ההטבה‬ According to the Israeli (motivation) approach, we wouldn’t tax Levi for the helmet. Likewise we wouldn’t tax a police officer that receives a uniform. 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. In all these cases the motivation for the employer is for the benefit of the employer and thus we don’t tax the employee. Similarly, when a fancy law firm provides (Simon with) first class facilities (fancy office, etc) we won’t tax the worker, because at the end of the day the firm is not doing it for the worker rather it is doing it for clients (i.e. it is doing it for itself) 48. So even though in comparison to Ruben, Simon is receiving much more, we won’t say that he has to pay a tax. With regards to the flight to Eilat, again in a situation where the employee charges clients 100$ an hour for the interns services, it is worth it for him to fly the intern, 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, but basically their approach will be quicker to say that ‫שווה כסף‬ is like ‫ כסף‬and thus taxable.

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Prof. Yishai Beer 2011-2012

employer (but each case needs to be judged on a case to case basis!). Similarly with the suit, it would be considered for the benefit of the employer (in this case!49). With regards to the flight to Turkey, we would say that the dominant aspect to the trip is to the benefit of the employee. Likewise if a company gives a prize for the best worker of the month, than that would be considered for the benefit of the employee and thus it would be taxable. Similarly, if El Al gives all its workers a bottle of wine, than the worker is obligated to pay tax on it 50. The way to judge each case is to look at what is the dominant motivation or trigger of the benefit given, if it is for the employer than it won’t be taxable and if it is for the employee than it would be taxable51. Section 2(2) TO: Employment
) ‫מס הכנסה יהא משתלם, בכפוף להוראות פקודה זו, לכל שנת מס, בשיעורים‬ .25] ‫מקורות הכנסה‬ 1)] ‫תיקון מס' 231(המפורטים להלן, 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, ממקורות‬ :‫אלה‬ ‫עסק ומשלח יד‬ .…………… (1) ‫עבודה‬ ‫)2( )א( השתכרות או ריווח מעבודה; כל טובת הנאה או קצובה שניתנו לעובד‬ (22 '‫)תיקון מס‬ ‫ממעבידו; תשלומים שניתנו לעובד לכיסוי הוצאותיו, לרבות תשלומים בשל‬ 1975 -‫תשל"ה‬ ((129 '‫תיקון מס‬ ‫החזקת רכב או טלפון, נסיעות לחוץ לארץ או רכישת ספרות מקצועית או‬ 2002 -‫תשס"ב‬ ‫ביגוד, אך למעט תשלומים כאמור המותרים לעובד כהוצאה; שוויו של‬ ‫שימוש ברכב או ברדיו טלפון נייד שהועמד לרשותו של העובד; והכל - בין‬ ‫שניתנו בכסף ובין בשווה כסף, בין שניתנו לעובד במישרין או בעקיפין או‬ ;‫שניתנו לאחר לטובתו‬ ((129 '‫תיקון מס‬ ‫)ב( שר האוצר, באישור ועדת הכספים של הכנסת, יקבע את שוויו של‬ 2002 -‫תשס"ב‬ ;‫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’. 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. 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. 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. So in the example with the gift of wine, its not that the worker would have to go and pay taxes on the bottle of wine, 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). 51 * Does this mean that if I receive a prize for employee of the month, than I will see a tax on my paystub?

52

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

We explained that imputed income is a benefit given in kind (‫ .)שווה כסף‬He reminded us of the example of the computer engineer that has the choice of either to go home and clean the house, or stay at work and hire a cleaning lady52. Or the husband that complains about his “idle” housewife. In both these cases we explained that in fact there is a value to their work of a housewife, and we said that the added value that she brings is in fact imputed income. We explained that it is a fault in the tax system in that it doesn’t count such incomes. Though there is a value to the work of say a housewife or the engineer that goes home to clean, the tax system doesn’t count such income. He presented another example of imputed income: Ruben is a lawyer and he brings his car to the shop. When he goes to pay, the mechanic tells him that it’s on the house. The mechanic than goes to Ruben and asks him for legal services and Ruben provides him with services free of charge. So in this case we have two transactions being done in kind. 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. However with regards to tax purposes we will pierce the veil and treat the situation for what it is (i.e. a transaction)53. 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. He gave another example: (the example is similar to the case law we read for week 5). Ruben is a student and he rents an apartment for free however the contract requires him to put in a new electric system. 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. So in this case we have two transactions occurring. The renter is receiving free rent, and the landlord is receiving the appliances/systems for free. This is a transaction done in kind (‫.)שווה כסף‬ Say Ruben rents Simon a villa for ten years for free, but when Simon returns the Villa he returns it with an additional floor (the renter builds an additional floor). In such a case again we see two transactions; rent and the building of an additional floor.
52 53

Supra at 12 He reminded us that we are not dealing with a situation of gifts (pro bono; or a wedding gift) those types of situation is dealt with elsewhere. Here we are dealing with ‫ קיזוז‬where A gives B something at value X and B gives A something at the same value X. So in the example of the lawyer in the mechanic, 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, and the same would be for the mechanic. 54 See the case law for this topic (week 5 syllabus – e.g. ‫.)רימון‬

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Prof. Yishai Beer 2011-2012

‫ :הלווה מוטבת‬He explained this concept with an example: There is a worker that is an asset to the

company. He comes to the employer and asks for a five million dollar loan, interest free. The employer goes to the bank and takes out a loan for the worker and gives it to the worker. 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!). He reminded us that with every conceptual transaction (‫ )עסקה רעיונית‬there are two transactions; here the two transactions are; ‫ ,משכורת רגילה‬and ‫ .לווה מלווה‬The value of the transactions is the interest that the employer is paying the bank for the loan. The employee therefore is considered to be receiving the interest that the employer is paying for the loan (e.g. if the employer had to pay the bank 5% interest for the loan, 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). 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. Based on the same logic we also explained that a loan given by an employer to an employee is also taxable. Section 3i TO: ‫)1( מימש אדם זכות שקיבל בעבר לרכישת נכס או שירות, ובעת המימוש היה‬ ‫הפרש בין המחיר המשתלם כרגיל בעד אותו נכס או שירות לבין המחיר ששילם‬ ‫אותו אדם65, או קיבל אדם הלוואה, בין שניתנה לו במישרין או בעקיפין או‬
55

(‫)ט‬

Just to reiterate: with this ‫ עסקת הלווה‬there are two transactions; ‫ הכנסת עבודה‬and ‫ .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). Than we ask the obvious question, 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. Bottom line is that there is no such thing as a free lunch, so whenever you see someone getting a ‘seemingly’ free lunch we have to ask ‘why is it that he is receiving a free lunch’. 56 This is referring to an option. 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 boy tell the children that prices are going to go up so they should by now, the parents of the girl say that prices will go down so they should wait. The couple is unsure what to do. So what this couple does is it buys a ‫ אופציית רכישה‬wherein they pay a certain premium and than they

54

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 ‫לאחר לטובתו, 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, יראו את ההפרש‬ ‫)א( בזכות או בהלוואה שניתנו בקשר ליחסי עובד ומעביד - כהכנסת‬ ;‫עבודה‬ 60 - ‫)ב( בזכות או בהלוואה שקיבל אדם ממי שהוא מספק לו שירותים‬ ‫כהכנסה לפי סעיף 2)1( זולת אם הוכיח שניתנו ללא קשר עם השירותים‬ ;61‫שסיפק‬ ‫)ג(26בזכות או בהלוואה שפסקאות משנה )א( או )ב( אינן חלות עליה‬ ‫שקיבל בעל שליטה, או קרובו, מחברה שבשליטתו - כהכנסה לפי סעיף‬ – ‫2)4(; לענין זה‬ ;(1)(‫"קרוב" - כהגדרתו בסעיף 67)ד‬ ‫"בעל שליטה" - מי שמחזיק או זכאי לרכוש, במישרין או בעקיפין, לבדו או‬ :‫ביחד עם קרובו, אחד מאלה‬ ;‫)1(%5 לפחות מהון המניות שהוצא‬ ;‫)2(%5 לפחות מכוח ההצבעה בחברה‬ ;‫)3(זכות לקבל %5 לפחות מרווחי החברה או מנכסיה בעת פירוק‬ .‫)4(זכות למנות מנהל‬ – ‫לענין סעיף קטן זה‬ :‫"הלוואה" – לרבות כל חוב, למעט אחד מאלה‬ ;‫)1( עסקה בין-לאומית כמשמעותה בסעיף 58א‬ ‫)2( הלוואה שניתנה עד יום כ"ח באדר א' התשס"ח )5 במרס‬ ‫8002(, שהיתה נכס קבוע בידי המלווה לפי חוק תיאומים בשל‬ ‫אינפלציה, ביום כ"ב בטבת התשס"ח )13 בדצמבר 7002(, 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(, 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. ‫ אופציית מכירה‬is the same idea from the vantage point of the seller. 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. section 3 ‫)ט )רישה‬ deals with ‫.אופציית רכישה‬ 57 This refers to a ‫( הלווה מוטבת‬we mentioned this term in a previous lecture). 58 He said that this is dealing with ‫ .רבית אחידה‬He explained that its only called ‫ רבית מסובסדת‬if the interest on the loan is less than 4% + ‫ .מדד‬IF it’s the same or more than this than its not considered ‫.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. 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. The ‫סיפה‬ of the sub section (‫ )...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- Section he explained that dividends can be received either in cash or in ‫ .שווה כסף‬He than gave us an example Ruben and Simon have a company called Ruben Simon Inc. and each of them takes an interest free loan from the company, than once again we would refer to this as imputed dividends (‫( )דיווידנד רעיוני‬this is the ‫ זילברשטיין ומינץ‬case in the syllabus).

55

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 ;‫חלות לגבי אותה תקופה‬ .‫"ריבית" - 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 ;‫הזכות ועד למימושה אך לא יותר משש שנים המסתיימות בשנת המימוש‬ )-‫)3( שר האוצר רשאי לקבוע את דרך חישוב ההפרש האמור בפסקאות )1( ו‬ ;‫2( וכן את דרך חישובו של כל נתון הנחוץ לצורך זה‬ ;(‫)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 .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, 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, or if a person received a loan, whether given directly or indirectly to him or to another for his benefit, 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; (b) if the right or loan was received from someone to whom its recipient provides services – income within the meaning of section 2(1), unless he proves that it was not given in connection with the services he provides; (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). The section goes on to say The tax on the differential in realizing the aforesaid right shall, on the assessee’s application be calculated as if that differential were income received in a number of equal annual installments, as is the number of years from the day when the right was conferred until it was realized, but not more than six years that end with the year of realization. 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.g. the CEO of a contracting company receives an option to buy an apartment at half price. If the CEO realizes this option he will be taxed according to section 2(2)).

56

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Prof. Yishai Beer 2011-2012

(2) A ‫ בעל משלח יד‬receives an option (e.g. a lawyer receives an option from his client, the contractor, to buy an apartment at half price. If he realizes this option he will be taxed according to section 2(1)). (3) The majority shareholder of a company receives an option (as in the aforementioned examples). If he realizes the option he will be taxed according to section 2(4) – income from dividends63. The next part of section 3i states that if a person received a loan interest free or a subsidized loan (i.e. 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), and if it’s the majority shareholder than he will be taxed according to section 2(4).
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. 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.g. with the aforementioned examples of the supermarket or the mechanic that provides free service to the lawyer in exchange for his services), however clause 3i only focuses on the receiver, 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% + ‫ .)מדד‬However in reality there is no set interest rate, 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.g. 533/89 ‫?)זילברשטיין ומינץ‬ (1/98 ‫ :)דר‬The third problem with 3i is that it results in double taxation. He explained that when you get a gift from your boss, 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, it is discussed in the case 533/89 ‫.זילברשטיין מינץ‬

57

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

you receive the gift (from your boss). However section 3i seems to say that it’s when you use the gift, (and thus it seems that you need to pay taxes twice – this is the question dealt with in the case 1/98 (‫.))דר‬ If all we had was section 2 than the law would be as follows: E.g. Say a lawyer received a loan from a client of one million dollars interest free (the price of the interest is 50,000 – meaning the client went to the bank and took out the loan and he pays the bank 50,000 for the loan and than he gives it interest free as a loan to the lawyer). So according to section 2, we would break down this case into the two transactions that it really is ‫ עסקת שכר‬and ‫ .עסקת הלוואה‬With regards to ‫עסקת‬ ‫ שכר‬the lawyer is receiving an imputed payment of 50,000 ands the client is paying 50,000. With regards to the ‫ הלווה‬the lawyer is paying imputed interest of 50,000, and the client is lending 50,000 (again this is in a world where there was only section 2 in accordance with the cases 247/63 (‫ )שפר‬and 375/59 (‫.))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. So in the aforementioned example if he used the money to buy a villa, than he will have to pay tax on the full 50,000 as money he received for the service he provided for his client. In other words being that he used the money to buy a house he can’t write off any expense. 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. Rimon used to collect money from the clients and than he would transfer the money to the parent company that he worked for. The parent company used to allow Rimon to hold on the money for about a month till he handed it over to them. This enabled him to invest the money during that month. So basically we have a situation of an interest free loan between an employer and an employee. 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. (According to section 2, the commissions would be taxed according to section 2(1) and the interest would be taxed according to section 2(4)). But the tax authorities wrote Rimon that he forgot to report the

58

Effy Stern Tax Law interest in accordance with 3 ‫ט‬
64

Prof. Yishai Beer 2011-2012 meaning that he had a double tax obligation on the loan, 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, 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). Therefore Rimon is saying that while it’s true that he received an imputed loan, it should still be written off because he used the money as an expense. Thus we have a conceptual loan ‫ הלווה רעיונית‬as well as a conceptual expense ‫ הוצאה רעיונית‬and they should cancel each other out, 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, 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. 533/89 ‫ :זילברשטיין ומינץ‬In this case Ruben and Simon66 had a company and took out an interest free loan. 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). 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. 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, at this point the 3rd option wasn’t yet added to 3i).

Option 3 of section 3i ‫)ג( בזכות או בהלוואה שפסקאות משנה )א( או )ב( אינן חלות עליה‬ ‫שקיבל בעל שליטה, או קרובו, מחברה שבשליטתו - כהכנסה לפי סעיף‬ – ‫2)4(; 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 ‫.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. 66 He substituted the names of the case. Also some details were changed for the sake of clarity

59

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

income under section 2(4. The case came to the Supreme court, and Dornor J. 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, they received dividends (imputed dividends) and thus you could base the tax on section 2(4). So we started with section 2 than we added section 3i and it confused everything. We than mentioned the case 32/86 (‫ )רימון‬case and we saw the court had no clue what was going on. We than mentioned the case 533/89 ‫ ומינץ זילברשטיין‬where the court finally said that section 2 includes conceptual income ‫ .הכנסה רעיונית‬However the court wasn’t willing to recognize conceptual expenses ‫.הוצאה רעיונית‬ 8131/06 ‫ :אלישע‬Elisha was an Old age home. The way these homes used to be run was as follows: A retired couple calls the home, and the couple moves in and pays a monthly rental fee. In addition they leave a deposit (‫ )פיקדון‬for the apartment/room that they receive. Usually when you receive back a deposit you receive it along with the interest that it produced. The way it works is that each year they take off 2% of the deposit (e.g. so if I gave a deposit of 1,000,000$ and than I die ten years later, than for each year 2% will be deduced and the rest will be given to the inheritors). So while they pay a monthly fee, there is also that additional 2% that the home receives. Additionally there is also the imputed/conceptual interest that they aren’t receiving.

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, monthly reduction of the collateral, and waiving of interest). With regards to the third element (the waiving of interest) he explained as follows: Firstly, this was the first time that the court fully and completely dealt with imputed/conceptual income (‫ .)הכנסה רעיונית‬The court pierced the veil and said that there are two transactions here (‫ ,שכר דירה רעיונית‬and ‫ )הלוואה בריבית‬with regards to the ‫ שכר דירה‬the renter is paying conceptual rent and the home is receiving conceptual rent. Likewise the renter is receiving

60

Effy Stern Tax Law

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conceptual interest and the home is paying conceptual interest67. 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. Thus conceptual expenses can be written off68).

Section 3i: (cont’d) ‫)1( מימש אדם זכות שקיבל בעבר לרכישת נכס או שירות, ובעת המימוש היה‬ ‫הפרש בין המחיר המשתלם כרגיל בעד אותו נכס או שירות לבין המחיר ששילם‬ ‫אותו אדם, או קיבל אדם הלוואה, בין שניתנה לו במישרין או בעקיפין או לאחר‬ ‫לטובתו, 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, יראו את ההפרש‬
( (‫)תיקון מס' 22)ט‬ 1975 -‫תשל"ה‬

For instance, if you are a contractor and you build a thousand apartments and each is sold for two million, but the contractor is given the ability to buy four apartments for one million – that would be considered ‫ .מימש אזם זכות‬We explained that in accordance with section 2 the time of taxation is the time that the person receives the benefit, regardless of when he realizes that benefit (e.g. If I win a plane ticket, than I pay when I receive the prize not when I decide to use the ticket). However section 3i seems to say that the time of taxation is the time that the benefit is realized! 1/98 (‫ .)יאיר דר‬In this case, 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, 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, but a while later the options went down in value, 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. In Response the tax authorities claimed that Sections 2 and 3i are autonomous and function separately69. 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, this claim is problematic for several reasons including the problem of double taxation. But on the other hand, there is merit to the claim of the tax authorities as supposed to the claims of ‫ .דר‬He gave an example: say I receive a benefit in the form of a car, 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

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

contradiction or the double taxation issue that results, 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). 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.g. Say my boss gave me options in a company that hasn’t been established yet 70)71. So section 2 establishes the rule and section 3 ‫ ט‬establishes the exception.

‫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. )א(בסעיף זה‬ ‫הקצאת מניות‬ ‫לעובדים‬ ‫תיקון מס' 231("בחירה" – בחירה של חברה מעבידה באחד משני מסלולי מיסוי להקצאת מניות לעובדים‬ ( 2002 -‫תשס"ב‬ ;‫באמצעות נאמן, מסלול הכנסת עבודה או מסלול רווח הון‬ ;(9)32 ‫"בעל שליטה" – כהגדרתו בסעיף‬ ‫" הקצאת מניות באמצעות נאמן" – הקצאת מניות של חברה מעבידה לעובד, ובלבד‬ :‫שהעובד אינו בעל שליטה בה במועד ההקצאה או בעקבותיה והתקיימו בה כל אלה‬ ((132 '‫תיקון מס‬ ‫)1( המניות, לרבות כל זכות המוקנית מכוחן, הופקדו במועד ההקצאה בידי‬ -‫)תיקון( תשס"ג‬ ;‫נאמן עד תום התקופה לפחות‬ 2002 ‫)2( החברה הודיעה לפקיד השומה על בחירתה במסגרת בקשתה לאישור‬ ;‫התכנית, שהוגשה 03 ימים לפחות לפני מועד ההקצאה‬ ‫)3( תכנית ההקצאה והנאמן אושרו על ידי פקיד השומה, ואולם אם לא השיב‬ ‫פקיד השומה בתוך 09 ימים מיום קבלת ההודעה, יראו את תכנית ההקצאה או‬ ;‫את הנאמן לפי הענין, 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, בישראל, אם אישר זאת המנהל )לענין זה‬ ((147 '‫תיקון מס‬ 2005 -‫תשס"ה‬ ;(‫המעביד‬ ;‫)2( חברה שהיא בעלת שליטה במעביד או שהמעביד בעל שליטה בה‬ ;‫)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, ‫ דר‬received the options when he did, 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. 70 A regular stock is appraisable at the time it is received you simply look up its value on the stock index. 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

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬ ‫"מועד מימוש" –‬ ‫)1( לגבי הקצאת מניות באמצעות נאמן - מועד העברת המניה מהנאמן לעובד‬ ‫או מועד מכירת המניה על ידי הנאמן, לפי המוקדם מביניהם;‬ ‫)2( לגבי הקצאת מניות שלא באמצעות נאמן - מועד מכירת המניה לרבות‬ ‫מכירת מניה שמקורה בזכות לרכישתה;‬ ‫(‬ ‫תיקון מס' 741("מניה" – לרבות זכות לרכישת מניה;‬ ‫תשס"ה- 5002‬ ‫"מניה הרשומה למסחר בבורסה" – לרבות מניה בחברה שמניותיה, כולן או חלקן, רשומות‬ ‫למסחר בבורסה בישראל או מחוץ לישראל;‬ ‫"נאמן" – מי שפקיד השומה אישרו כנאמן לצורך סעיף זה, לרבות עובד;‬ ‫"עובד" – לרבות נושא משרה בחברה, אך למעט בעל שליטה;‬ ‫" שווי ההטבה" – התמורה או השווי במועד המימוש, בניכוי הוצאות שהוציא העובד‬ ‫ברכישת המניה כשהן מתואמות מיום ההוצאה ועד למועד המימוש, וכן הוצאות שהוציא‬ ‫העובד בשל המכירה;‬ ‫"תום התקופה" – כל אחד מאלה:‬ ‫תיקון מס' 741((‬ ‫)1( בחרה החברה במסלול הכנסת עבודה - תקופה של 21 חודשים מיום‬ ‫תשס"ה- 5002‬ ‫שבוהוקצו המניות והופקדו בידי נאמן;‬ ‫תיקון מס' 741((‬ ‫)2( בחרה החברה במסלול רווח הון - תקופה של 42 חודשים מיום שבו הוקצו‬ ‫תשס"ה- 5002‬ ‫המניות והופקדו בידי נאמן;‬ ‫)3( במכירה שלא מרצון כהגדרתה בסעיף 301 - מועד מכירה כאמור.‬ ‫)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, יראו את הכנסתו של‬ ‫העובד כהכנסה לפי סעיף 2)1( או )2( לפי הענין, בסכום שווי ההטבה;‬ ‫)2( בחרה החברה המעבידה במסלול רווח הון, והנאמן החזיק במניות עד תום‬ ‫התקופה לפחות, יראו את הכנסתו של העובד כרווח הון בסכום שווי ההטבה,‬ ‫והוא יחויב עליו במס בשיעור של %52;‬ ‫)3( על אף האמור בפסקה )2(, היתה המניה המוקצית מניה הרשומה למסחר‬ ‫בבורסה, או מניה בחברה שמניותיה נרשמו למסחר בתוך 09 ימים ממועד‬ ‫ההקצאה, 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, לפי הענין, בניכוי ההוצאות, כהכנסה‬ ‫לפי סעיף 2)1( או )2( לפי הענין, ואת יתרת שווי ההטבה כרווח הון החייב‬ ‫במס בשיעור של %52, ובלבד שהסכום שנקבע כהכנסה לפי סעיף 2)1( או )‬ ‫2( כאמור, לא עלה על שווי ההטבה במועד המימוש; לענין תיאום ההוצאות‬ ‫שהוציא עובד ברכישת המניה המוקצית, יוכפלו הוצאות כאמור במדד יום‬ ‫ההקצאה או יום הרישום למסחר, לפי הענין, ויחולקו במדד יום ההוצאה, והכל‬ ‫יתואם מיום ההקצאה או הרישום, לפי הענין, ועד למועד המימוש.‬ ‫)4( על אף האמור בסעיף זה, בחרה החברה במסלול רווח הון ומועד המימוש‬ ‫תיקון מס' 231((‬ ‫)תיקון( תשס"ג-‬ ‫חל לפני תום התקופה, יראו את הכנסתו של העובד כהכנסה לפי סעיף 2)1( או‬ ‫2002‬ ‫)2(, לפי הענין.‬ ‫)ג( )1( הכנסתו של עובד מהקצאת מניות שאינה הקצאה באמצעות נאמן, תחויב‬

‫36‬

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬ ‫במס במועד ההקצאה, כהכנסה לפי הוראות סעיף 2)1( או )2( לפי הענין,‬ ‫ובמועד המימוש - כהכנסה כאמור בחלק ה או חלק ה3 לפי הענין.‬ ‫)2( על אף האמור בפסקה )1(, הכנסתו של עובד מהקצאה של זכות שאינה‬ ‫רשומה למסחר בבורסה לרכישת מניה שלא באמצעות נאמן, לא תחויב במס‬ ‫במועד ההקצאה, ובמועד המימוש תחויב במס כהכנסה לפי סעיף 2)1( או )2(,‬ ‫לפי הענין.‬ ‫)ד( )1( בהקצאת מניות כאמור בסעיפים קטנים )ב()1( ו-)3( ו-)ג()1(, תותר‬ ‫בניכוי, לחברה המעבידה שהוא עובד בה, 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, לפי הנמוך, והכל‬ ‫בשנת המס שבה נוכה המס בשל הכנסת העובד והועבר לפקיד השומה.‬ ‫)2( לא תותר לחברה הוצאה במכירת מניה שלגביה בחרה החברה המעבידה‬ ‫במסלול רווח הון, גם אם נמכרה המניה לפני תום התקופה כאמור בסעיף קטן‬ ‫)ב()4(.‬ ‫)ה( הוראות סעיף 3)ט( לא יחולו על הקצאת מניות לעובדים בחברה מעבידה לרבות על‬ ‫התחייבות להקצאה כאמור;‬ ‫על אף האמור בסעיף 001א, שיעור המס שיחול על חלק הרווח החייב בידי עובד‬ ‫)ו(‬ ‫שחדל להיות תושב ישראל, כהגדרתו באותו סעיף, יהיה לפי שיעור המס הקבוע בסעיף‬ ‫121, בכל אחד מאלה:‬ ‫)1( בהקצאת מניות באמצעות נאמן שלגביה בחרה החברה במסלול הכנסת‬ ‫עבודה;‬ ‫)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(;‬ ‫2002‬ ‫)ז( בחירה לפי סעיף זה תחול על כל עובד אשר לו הוקצו המניות, ועל כל הקצאת‬ ‫מניות שבוצעה בשנה שלאחר תום השנה שבה היתה ההקצאה הראשונה ואילך, כל עוד‬ ‫לא בחרה החברה אחרת; חברה לא תהיה רשאית לבחור אחרת אלא אם כן חלפה שנה‬ ‫לפחות מתום השנה שבה היתה ההקצאה הראשונה שנעשתה לאחר הבחירה הקודמת.‬ ‫(‬ ‫תיקון מס' 241()ח( המנהל רשאי לקבוע כל אחד מאלה:‬ ‫תשס"ה- 4002‬ ‫)1( תנאים לענין ההקצאה;‬ ‫)2( הוראות לגבי חיוב העובד במס כשלא נתמלאו לגביו התנאים שנקבעו‬ ‫בסעיף זה או לפיו, כולם או מקצתם, בשל מימוש מניות במכירה שלא מרצון;‬ ‫תיקון מס' 461((‬ ‫)3( )נמחקה(;‬ ‫תשס"ח- 8002‬ ‫)4( כללים לענין הקצאת מניות לעובד שהוא תושב חוץ, לגבי תקופת עבודתו‬ ‫בישראל;‬ ‫)5( כללים לניכוי מס במקור ולהגשת דוחות על ידי החברה המעבידה והנאמן‬ ‫וקביעת מועדים להגשתם.‬

‫‪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

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

(or in the equity – basically he gives them a share in the company). The point of this system is to give the worker a feeling of being a part of the company72. Without section 102, we would have taxed this sort of benefit at the time that the worker received the benefit (according to section 2). 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, because at this point they didn’t make any money yet!). 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 ( ‫ .)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, and than at whatever time you decide the fiduciary transfers the money to the worker, and than at that point you pay (income) taxes (and the employer writes off the income paid to the worker as an expense). According to the capital gains course: If the employer wishes to waive his right to write off the income as an expense, than the worker can receive the benefit as ‫( הכנסה הונית‬which serves to his benefit with regards to taxes). The first course is referred to as the ‫ מסלול פירותי‬and the second course is referred to as the ‫מסלול‬ ‫ .הוני‬With regards to the ‫ מסלול פירותי‬he explained that the trustee needs to hold on to the benefit for minimum of a year, in the ‫ מסלול הוני‬the trustee needs to hold on to the benefit for minimum of two years73. Either way with section 102 the worker potentially ends up with two benefits, one is the fact that the obligation to pay tax is delayed74, and two is the fact that the benefits that the employee receives (if the employer wishes) could be considered ‫.הכנסה הונית‬ Section 2(4): Dividends, interest, linkage differentials, discounts – ‫דיבידנד, ריבית, והפרשי‬ ‫הצמדה, ונכיון‬
) ‫מס הכנסה יהא משתלם, בכפוף להוראות פקודה זו, לכל שנת מס, בשיעורים‬ .25] ‫מקורות הכנסה‬ 1)] ‫תיקון מס' 231(המפורטים להלן, 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, ממקורות‬
72

He explained that partners on the upside of a company gain if things go up, but not if they go down. He pointed out the obvious problems that could result, such as with banks in the US where partners didn’t care if the banks took risks, being that they were only partners on the upside, not the downside. 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 ‫ ;)מסלול פירותי‬the next third you would get after the third year; and the final third you would get after five years. The reason why the employer does this is because he wants to hold on to the employee. 74 And as we explained in a previous lecture, postponement of tax is actually a monetary gain to the one that received the postponement.

65

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 :‫אלה‬ ,‫)4( דיבידנד, לרבות דיבידנד המשתלם מתוך רווחי הון של חברה, ריבית‬ ;‫הפרשי הצמדה או דמי נכיון‬
‫דיבידנד, ריבית‬ ‫והפרשי הצמדה‬ (22 '‫)תיקון מס‬ 1975 -‫תשל"ה‬

This section deals with income based on interest, dividends, linkage differentials, and/or discounts (‫ .)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$. The reason why a bond would go down is because trust in the ability of the borrower to pay back the loan has gone down, in other words the risk has gone up. It’s also possible that the risk didn’t change and the bond value would go down to 90$ if interest rates changed. So if you sell a bond for less than its face value (‫( )ערך נקוב‬e.g. bond that you paid 100$ and sell for 90$) than that is considered discount ‫( 57נכיון‬i.e. so in this case the ‫דמי‬ ‫ נכיון‬would be 10$). The case law on section 2(4) deals with the term interest (‫ .)ריבית‬The case law dealt with the question if only (voluntary interest) ‫ ריבית רצונית‬is obligated in taxes according to section 2(4), 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, B is finally told to pay A x). The court has ruled that even with involuntary transactions, the interest is obligated in taxes. Regarding linkage differentials it isn’t self evident that it should be taxed. 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, 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, this was before the legislation of section 2(4). Already in the 1960s the court ruled that with regards to banks, insurance companies and other financial institutions, linkage differentials would be taxable because that is how they make their money. The next exception that was made was with regards to suppliers` credit (‫.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. Premium is when you pay an amount in addition to the ‫.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

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

way the business is run, than it to will have to pay taxes on linkage differentials. 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. 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). The court accepted the ‫.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% - in other words interest at 20% (including 15% inflation). In such a case the result as far as taxes in concerned in that given year would be 5% income/expense; (b) a nominal loan that is not indexed plus -5%. In this case the result as far as taxes are concerned would be that all of it (20%) would be considered income. Thus it is clear that the tax result (regarding linkage differentials) is illogical. Thus in 1975 after the Ben Shachar Commission, they added the section with regards to linkage differentials, as well as a corresponding section (17(1)) with regards to expenses. The problem that this created was that if in fact linkage differentials are a ‫ החזר הקרן‬in real terms, 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. Section 9(13) TO: Exemptions :‫פטורים ממס‬ :‫הפרשי הצמדה שקיבל יחיד בשל נכס, ובלבד שהתקיימו כל אלה‬ (13) ‫)1( הפרשי ההצמדה אינם הפרשי הצמדה חלקיים; לענין זה, "הפרשי הצמדה‬ ;‫חלקיים" – כפי שקבע שר האוצר באישור ועדת הכספים של הכנסת‬ ;‫)2( היחיד לא תבע ניכוי הוצאות ריבית או הפרשי הצמדה בשל הנכס‬ ‫)3( הפרשי ההצמדה אינם הכנסה לפי סעיף 2)1( ואינם רשומים בפנקסי‬ ;‫חשבונותיו או חייבים ברישום כאמור‬ ;‫הוראות פסקה זו לא יחולו על נכס שהוא חשבון בקופת גמל‬ .9 ] ‫]הכנסות פטורות‬ 8
‫הפרשי הצמדה על‬ ‫פיקדון בנקאי או על‬ ‫תכנית חיסכון‬ ((147 '‫תיקון מס‬ 2005 -‫תשס"ה‬

Class 13 67

Effy Stern Tax Law 13/12/11

Prof. Yishai Beer 2011-2012

We were in middle of discussing section 2(4). We explained the concepts of interest, dividend, linkage differentials, and discounts. We explained how linkage differentials was added to the TO in 1975. We mentioned the historical reason for the change, 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, this was an integral part of his business; the ‘integral test’ is a product of the pre-1975 case law). 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). We mentioned the ‫( מבחן הניתוק‬which was the trick that contractors came up with where they would have a third party (e.g. bank) provide the loan to the buyer, 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. All this brought us to 1975 where the legislature changed the law and added linkage differentials to the TO. According to the new legislation linkage differentials are obligated in tax. The problem is that this is illogical79! To deal with this the legislature introduced a list of exemptions, which are listed in section 9:
8 :‫פטורים ממס‬ .9 ] ‫]הכנסות פטורות‬ ‫הנשיא‬ .……… (1) (76 '‫)תיקון מס‬ 1988,-‫רשותתשמ"ח‬ ‫מקומית קופת‬ .……… (2) ‫גמל ומוסד ציבורי‬ (21 '‫)תיקון מס‬ ‫הפרשי הצמדה על‬ :‫הפרשי הצמדה שקיבל יחיד בשל נכס, ובלבד שהתקיימו כל אלה‬ (13) 1975‫פיקדון בנקאי‬ ‫תשל"ה- או על‬ (22 '‫)תיקון מס‬ ‫תכנית חיסכון‬ ‫)1( הפרשי ההצמדה אינם הפרשי הצמדה חלקיים; לענין זה, "הפרשי הצמדה‬ 1975 -‫תשל"ה‬ ((147 '‫תיקון מס‬ (37 '‫תשס" מס‬ ;‫חלקיים" – כפי שקבע שר האוצר באישור ועדת הכספים של הכנסת‬ 2005 -‫)תיקון ה‬ 1980 -‫תש"ם‬ ((133 '‫תיקון מס‬ ;‫)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

Effy Stern Tax Law

Prof. 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. The other test, the ‫( בסיס מסחרי‬which says that we look at the time that the actual transaction took place) is more reasonable. 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). However private persons (e.g. a shoemaker) could go according to the ‫ .בסיס המזומנים‬As we explained previously, there is a monetary advantage in postponing payment. With that being said, there are many mega law firms that choose to go according to the ‫ ;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. For this reason many such firms will go according to the ‫.)בסיס מסחרי‬ This raises the question, how does a person report taxes on interest according to the ‫?בסיס מסחרי‬ E.g. Ruben takes out a five year million dollar loan, 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. But being that interest accumulates from the very beginning, from an economic perspective it would be incorrect to say that the transaction took place at the end of the five years. 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, 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). We now went on the next step – linkage differentials. 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). In other words if you owe someone money, whether you are going to pay back this year, next year, or in five years, it doesn’t make a difference, we look at each year individually.
80

Say I receive merchandise today, but I only plan on paying for them in two moths from now (Feb 2012, or in other words next tax cycle) the question that this raises is when is income considered to have been generated, right now, 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, because the transaction happened now! 81 Supra at 32 82 Again we are dealing with a person/company that is going according to the ‫.בסיס מסחרי‬

69

Effy Stern Tax Law

Prof. 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. Before explaining how, he

reminded us of the realization principle (‫ ,)עקרון המימוש‬which states that you aren’t tax until you realize the right83 (e.g. if Ruben’s grandmother had a plot of land, 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), he wouldn’t be taxed, 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. Another reason why we don’t tax Ruben on this lot of land (which may have appreciated in value over the years) is because, 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, by taxing him you would inevitably be forcing him to sell, so that he could pay the tax.84. Back to the case; in this case a person deposited money in the bank, (which is another way of saying that money was lent to the bank). This took place during a period of high inflation and thus the value had just gone up. 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). In fact this is what the court ruled. The problem is that the court gave three reasons for why it came to this conclusion. Two of those reasons are correct, one of them was erroneous. The first reason given (Levin J.) 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). 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 ‫ .)נזילות‬If the court would have stopped here than everything would have been fine, but the problem was that the court went on to give a third reason. Levin J. 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. 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. For instance say I have a plot of land that is going up in value, so I mortgage the plot to the bank for a loan, and thus I didn’t use the land yet I manage to gain from its appreciating value, and thus I gain without having to pay taxes.

70

Effy Stern Tax Law according to the results not the intentions (‫!)מה שקובע זה התוצאה‬

Prof. Yishai Beer 2011-2012

beginning that you would profit) is irrelevant, 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, and generally reports their taxes according to the ‫ בסיס מזומנים‬should report according to the ‫.בסיס מסחרי‬ Section 8c TO:
‫של‬ ‫מועד החיוב 8ג. הכנסתו של אדם מהפרשי שער תיחשב כהכנסה בשנת המס שבה נצברה גם‬ ‫הכנסה מהפרשי שער‬ .‫)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. The company in which Mr. Lidor was a majority shareholder was obligated to loan money to the state, however the loan wasn’t scheduled to receive full interest and linkage (‫ )הצמדה‬in return. He explained that at the time there was a law that said that it was illegal to trade in such loans; but under the table they were in fact traded. The company needed liquid and the bonds weren’t scheduled to expire for several years. So despite the fact that bond trading of this sort was illegal, it went ahead and sold the bonds to the majority shareholder (i.e. Lidor). After several years passed Lidor cashed in on the bonds and received the profit. The question that arose was how to tax the profit. The majority opinion said that it should be exempt from tax ( ‫ .)מס רווחי הון ומרווחי פירות‬In the ‫ דיון נוסף‬Shamgar J. said that there is linkage differentials as well as interest and therefore it’s taxable according to section 2(4) TO. While the ruling was correct, Prof. Beer said that the justification given by Shamgar (that it was taxable based on linkage differentials and interest) was incorrect, for in fact the case was a situation of discount fees (‫.)דמי ניכיון‬

‫אנונה‬

Section 2(5) Benefits – pensions, usufruct, or annuity – ‫קיצבה מלוג או אנונה‬
85

See previous lecture for explanation of ‫מלוות חובה‬

71

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Usufruct (‫ )מלוג‬refers to child support (‫ .)הסדרי מזונות‬With regards to child support, while it would seem from here that it is taxable, section 9(22) states that it is exempt from taxes. Section 9(22) TO: ‫דמי מזונות שמקבל יחיד ממי שהיה נשוי לו או ממי שהוא נשוי לו וחי‬ (22) ‫בנפרד ממנו, ודמי מזונות שמקבל יחיד בעד ילדיו מההורה האחר, או תשלום‬ ‫שמקבל יחיד, בשבילו או בשביל ילדיו, מהמוסד לביטוח לאומי על פי חוק המזונות‬ ;1972-‫)הבטחת תשלום(, התשל"ב‬
‫דמי מזונות‬ (77 '‫)תיקון מס‬ 1988 -‫תשמ"ח‬

With regards to annuities he mentioned the question that asks, why should a person to be obligated to pay on the whole annuity, if anything all he should be obligated to pay taxes on is on profits (interests earned, etc)86? Class 14 18/12/11 Today we will conclude the subject of section 2 and hachnasa peyrutit. We were in middle of discussing section 2(5) which deals with pensions, usufruct, and annuity. 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. This solution states that according to section 2(5) we tax income annuity, meaning that you only have to pay tax on the income part of the annuity but not the principal. The obvious question that arises is how to configure the amount of the interest? In the US they used to have a linear system, meaning first you paid back the principal (‫ ,)קרן‬and than once the principal is repaid, the payments were fully taxed (e.g. A person buys an annuity policy and he begins to receive monthly payments. At the time that the payments cover the amount that he paid for the policy, we will begin to tax the monthly installments). He explained the economic fallacy in this system in that in reality each payment reflects part principal and part interest (e.g. When you repay a mortgage, you can’t say that some payments are repayment of the principal and the later payments are interest, rather each payment includes both). In light of this the actuary system was implemented. 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 ‫.אנונה‬

72

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

assessment of the life-span of the person. So in the US, 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. In Israel as we said the law says that annuity is taxable, we already mentioned one solution to understanding this legislation by saying that the law only means to tax income annuity. 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. 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. The case law as well as academia offers various solutions. The various cases we looked at dealt with settlement issues between divorced couples, where the man received the assets (i.e. the business) and than promised to pay the woman monthly installments. The issue raised in these cases is that the monthly payments the woman received is technically annuity and thus taxable. The problem is, the property was technically ‫רכוש משותף‬ and they made a compromise where he kept the business and she received payments, 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. in
322/69 ‫ .)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.e. instead of taking their share of the business they compromised and were willing to receive monthly installments instead). In the aforementioned case 322/69 ‫ ,שטרן‬Mani J. actually ruled that that the law is the law and the law says that annuity is taxable, thus all the money that the women receives is taxable! As we mentioned Vitkon J. did all that he could to avoid such a harsh solution.

87

In this case the woman legally had a percentage of the ‫ רכוש‬and she and her husband reached an agreement, wherein she received monthly installments. Vitkon J. (who went against all the rules of evidence law – he opened up the correspondence between the parties; 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

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫פנסיה ;‪) there are two kinds of pensions‬קצבה( ‪: Lastly, with regards to pensions‬קצבה – ‪Pensions‬‬

‫‪. The first refers to pension plans that obligate (the employer) to pay the‬פנסיה צוברת ‪ and‬תקציבית‬ ‫‪person monthly installments till their death. This form of pension is disappearing because of the‬‬ ‫.‪great costs incurred on the employer. 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. Sections 9A and 9B deal with how to tax‬‬ ‫.‪pension funds‬‬

‫:‪Sections 9A & 9B TO‬‬ ‫פטור לקיצבה 9א. )א(לענין סעיף זה –‬ ‫המשתלמת מאת‬ ‫מעביד או קופת גמל "קיצבה" – קיצבה המשתלמת מאת מעביד, או המשתלמת מאת קופת גמל וכן קצבה‬ ‫ולקיצבה המשתלמת‬ ‫על פי ביטוח מפני המשתלמת על פי ביטוח מפני אבדן כושר עבודה, כהגדרתו בפסקה )3א( להגדרה‬ ‫אבדן כושר עבודה‬ ‫)תיקון מס' 81( "הכנסה מיגיעה אישית" שבסעיף 1;‬ ‫תשל"ג- 3791‬ ‫תיקון מס' 351( (‬ ‫תיקון מס' 021(("קיצבה מוכרת" - חלק מקיצבה המשולמת על ידי קופת גמל לקיצבה המנוהלת בידי‬ ‫תש"ס- 0002‬ ‫תשס"ז- 7002 חברת ביטוח, או המשולמת בידי קופת גמל לקיצבה אחרת שהוקמה אחרי יום כ"ט בטבת‬ ‫תשנ"ה )1 בינואר 5991(, הנובע מתשלומים פטורים; לענין זה, "תשלומים פטורים" –‬ ‫)1( סכומים שחויבו בתשלום מס כאמור בסעיף 3)ה3(;‬ ‫)2( סכומים שהפקיד מקבל הקיצבה, ואשר לא היה זכאי בעבורם לניכוי כאמור‬ ‫בסעיף 74;‬ ‫(‬ ‫תיקון מס' 12("קיצבה מזכה" - אותו חלק מהקיצבה או מסך כל הקיצבאות שמקבל אדם ושאינו עולה על‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 52(005,21 לירות לחודש; קיצבה שחלק ממנה הוון - תבוא בחשבון לענין זה הקיצבה‬ ‫(‬ ‫7791‬ ‫תשל"ז-' 92(שהיתה משתלמת אילולא ההיוון;‬ ‫(‬ ‫תיקון מס‬ ‫תשל"ח- 8791‬ ‫לקיצבה אחרת‬ ‫פטור)תיקון מס' 339ב. %53 מההכנסה לפי סעיף 2)5( שמקבל אדם בהגיעו לגיל פרישה כמשמעותו‬ ‫(‬ ‫תיקון מס' 81(‬ ‫)תשל"ח- 8791‬ ‫)תיקון"מס' 43בסעיף 9א)א( או שמקבלים שאירים ואיננה קיצבה כמשמעותה בסעיף 9א)א( – פטורים‬ ‫תשל ג- 3791‬ ‫(‬ ‫תשל ג 3791‬ ‫תשל"ט- 9791‬ ‫ת"ט)תיקון"מס' 43ממס; סכום המתקבל עקב היוון קיצבה פטורה לפי סעיף זה – פטור ממס.‬ ‫(‬

‫תשל"ט- 9791‬ ‫)תיקון מס' 53(‬ ‫תש"ם- 9791‬ ‫)תיקון מס' 06‪The law states that it’s a reduced tax rate. He explained that the reason for the reduced rate is not‬‬ ‫(‬ ‫תשמ"ד- 4891‬ ‫תיקון‬ ‫) תשמס' 021(.‪economic rather it is for social welfare purposes – to allow more money to remain with the person‬‬ ‫"ס- 0002‬

‫‪Section 2(6): House, property and land (rent, royalties, key money, premiums and other profits‬‬ ‫דמי שכירות, תגמולים, דמי – )‪derived from house, property, land or industrial buildings‬‬ ‫מפתח, פרמיות ורווחים אחרים שמקורם באחוזת בית או קרקע או בניין תעשייתי‬

‫)6( דמי שכירות, תמלוגים, דמי מפתח, פרמיות ורוחים אחרים שמקורם‬ ‫באחוזת-בית או בקרקע או בבנין תעשייתי: בנה אדם אחוזת-בית והשכירה‬ ‫47‬

‫אחוזת בית וקרקע‬

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 -‫וקיבל בעד ההשכרה דמי מפתח או פרמיה ואחר ההשכרה מכר אותה אחוזת‬ ‫בית לאחר, במישרין או בעקיפין, על פי הסכם שנעשה בשעת ההשכרה או לפני‬ ‫כן, יראו את הקונה כאילו קיבל הוא ביום הקניה דמי מפתח או פרמיה באותו‬ ‫סכום; נעשתה הקניה תוך שנה לאחר ההשכרה יראו זאת כראיה לכאורה‬ ;‫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. Such a person would be taxed under section 2(1)88). He mentioned the event that took place several years ago where two lawyers and mega property owners (supermarket owners) were arrested because of ‫ .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 (‫ .)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, they set up consecutive contracts and they created subsidiaries, and for each contract a different subsidiary received the contract, 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). In light of these events the law was changed and any rent contract over twenty-five years would go under ‫.מס שבח‬ With regards to taxes according to section 2(6), there are two laws that ease the legislation. 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 4,790. meaning that if you rent an apartment for under 4,800 it isn’t taxable).

88 89

This is similar to what we said with regards to Sections 2(4) and 2(1). 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. 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.

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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. (E.g. say you have three [personal] apartments that you are renting out for 5000 each, than you could pay 10% and by this get off the hook91.92. Section 2(7): Other assets (gains or profits derived from any asset other than house, property, land or industrial buildings) – ‫נכסים אחרים‬ ‫)7( השתכרות או ריווח שמקורם בכל נכס שאינו אחוזת-בית ולא קרקע ולא‬ ;‫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)).

Section 2(8): Agriculture (gains or profits derived from agriculture, land cultivation, afforestation, or crops) – ‫הכנסה מחקלאות‬ ‫)8( השתכרות או ריווח שמקורם בחקלאות, בעבודת אדמה, בייעור או בגידולי‬ ‫קרקע, לרבות שוויה של תוצרת המתקבלת בשל השימוש בהון, בנכס, בזרעים‬ ‫או בחיות- בית לצרכי מקורות ההכנסה האמורים בפסקה זו, ולרבות חלק‬ ;‫ברווחים המתקבלים מן השימוש כאמור‬

‫חקלאות‬

This section is anachronistic being that it could technically have been included in section 2(1). Profits derived from husbandry received its own section because the TO is a copy from the British Tax Ordinances, and a century ago, husbandry was a significant if not primary source of income. He reminded us that there is no tax on services that one does for themselves; in other words if Ruben cleans his own house than he wouldn’t be taxed for it. However, section 2(8) states that someone involved in husbandry, is taxed for personal use of his farm93. 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.
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, rather he is taxed an annual global sum.

76

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Section 2(9): Patent & Copyright – ‫פטנט וזכות-יוצרים‬ ‫)9( תמורה המתקבלת בעד מכירת פטנט או מדגם על ידי הממציא, או בעד‬ ‫מכירת זכות יוצרים על ידי היוצר, אם הומצאה האמצאה או נוצרה היצירה שלא‬ ;‫בתחום עיסוקם הרגיל של הממציא או היוצר‬
‫פטנט וזכות-יוצרים‬

As we mentioned with regards to previous Sections of the TO, 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. 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% - in other words he receives a discount94.

‫על‬ ‫שיעור המס 521. על אף האמור בסעיף 121 הכנסה שנתקבלה ממכירת פטנט או מדגם על ידי‬ ‫'מכירת פטנט וכו‬ ‫]ד הממציא, או ממכירת זכות יוצרים על ידי היוצר, כשההמצאה או היצירה היו שלא בתחום‬ [29 ( ‫תיקון מס‬ .40% ‫תשל"א-' 61(עיסוקם הרגיל, 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 ‫ .בסיס משכרי‬He than asked us, what happens when the legislature changes the way taxes are to be reported. He mentioned section 8B: Section 8B TO: Income in advance ‫דינן של הכנסות 8ב. 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, וההוצאות שהוצאו בשנות מס‬ ( 1982 -‫תשמ"ב‬ ‫שלאחריה בייצורה של הכנסה לפי ההוראות האמורות יותרו בניכוי מכל מקור בשנת המס‬ ‫שבה הוצאו, ובלבד שאם לא ניתן לנכות את ההוצאות בשנת המס שבה הוצאו הן יותרו‬ ‫בניכוי בשנת המס שבה נתקבלה ההכנסה, ואת השומה לשנה האמורה יראו כמתוקנת‬ ‫בהתאם לכך, ואולם לא תחול בשל כך חובת תשלום ריבית והפרשי הצמדה על פי סעיף‬ .‫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.g. 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

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

taxes according to the ‫ ,בסיס מסחרי‬and today he received rent money from a tenant for the next five years, than according to the ‫ בסיס מסחרי‬Ruben would divide the money into five annual segments and each year he would report the relevant amount accordingly. According to section 8b however, Ruben has to declare income-in-advance (‫ )הכנסה מראש‬according to the ‫בסיס מזומנים‬ in the year that he received it. 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 (‫ ,)מחילת חוב‬and that debt rose out of deductible expenditure, than that debt shall be considered part of his income for that year, and thus taxable95. Section 3(b) TO: ‫)1( אדם שבשנת מס פלונית נמחל לו חוב או חלק ממנו, והחוב נובע מהוצאה‬ ‫שניכויה הותר בבירור הכנסתו החייבת, יראו את החוב כחלק מהכנסתו באותה‬ ;‫שנה‬
( (‫)תיקון מס' 12)ב‬ 1975 -‫תשל"ה‬

Class 15 20/12/11

Capital gains tax - ‫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. In Israel of 2011 ‫ הכנסה פירותית‬is taxed at about 45%, whereas capital gains are taxed at 20%! With regards to why this so, there is much dispute 96, 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, or at least we should apply a reduced tax rate, are;
95 96

I think he said that this only applies to business loans. Double check! He mentioned that its usually the upper classes that tend to posses capital assets (‫.)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 ‫ .פירות‬Netanyahu’s government position is along the lines of the aforementioned Republican policy.

78

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

(1) Capital (‫ )הון‬is usually a one time acquisition. In other words most people by capital once in their lives and thus it shouldn’t be taxable. (2) In light of inflation (linkage differentials) taxation would hurt the taxpayer (e.g. in the US a person that bought a house in the 1930s for 30k and sold it in the 1990s for 100k. If you look at linkage differentials between the 1930s and 1990s than in fact 30k of the 1930s was worth 100k in the 1990s, 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). (3) We want to encourage investment; specifically we want to encourage investment in etzim (profit producing mechanisms – i.e. factories, businesses, etc) so that they can produce peyrot. 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) .((‫ )נכסי הון‬Capital assets are easily movable, we want to encourage people to bring their assets to Israel, and not vise versa. (5) Efficacy – we want capitals assets to be in the hands of the persons that makes the most efficient use out it. For this reason a tax (albeit a reduced one) will be imposed to encourage the inefficient holder of capital assets to move them onward. (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, than technically we should tax him proportionally to the profit that he made over the course of the past forty years. 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. 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. 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. 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, we will see that the court decides that certain transactions are ‫הון‬ and others are ‫ פירותית‬and the way it does this is [seemingly] arbitrary. Meaning that any transaction could be considered ‫ הון‬or ‫.פירותית‬ 99 The Trachtenberg Report wants to raise the tax rates for ‫( נכסי הון‬double check!). 100 In 2010 there was another change but we don’t have to know it.

79

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

‫( השולי‬e.g. In the Israel prior to 2003 if Ruben sold capital assets and incurred a profit of 1,000,000, and he earns 100,000 as a teacher, than he would combine the 1,000,000 to the 100,000 and he would pay income tax according to his ‫.)מס שולי‬ Another difference pre 2003 was as follows: Until 1961 capital gains were exempt from taxes. In 1961 the government said that it is taxable. This led to a dramatic rise in prices. Thus, 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, you add an additional percent (so in 1949 the maximum would be 13%). This was relevant until 2003. 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, thus the government came to a compromise where it [only] taxed a fix rate of 10%) (E.g. 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. so 10% of that would be the rate that you pay). In 1994 inflation skyrocketed, 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; 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, and the rest would be exempt from taxes. Lastly, he mentioned that prior to 2003 there was a reduced tax rate of 10% on property in the form of (reputation) ‫ .מוניטין‬Until 2003 any contract would explicate the price for the reputation (e.g. if café Aroma decides to sell its franchise, 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 (‫ .)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

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from that it was reduced to 20%!)101. So if you sell property (‫ )נכס‬in 2011 that you bought in 2004 than you would apply the reduced rate of 20%. But if you bought the property in 1970 and you profited 1,000,000 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 ‫.201מס שולי‬ Time line of taxes in Israel Capital gains exempt from taxes Capitals gains are taxable. Regarding people that bought property prior to 1948, the tax would be 12%, rising in increments of 1% each year (i.e. someone that bought property in 1949 would be taxed 13%, 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%. 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). Israel switched from the territorial approach (British) to the persona approach (US) 2005 (Section 89(b) TO). In 2005 the capital gains tax was reduced yet again to 20% Currently the tax on reputation is 25%

1948 - 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. 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, thus if you made money outside of the state (in the case of Israel, if you made money in Egypt) than you wouldn’t be obligated to pay taxes. This was Israel’s approach up till 2003. The American approach is the ‫ .גישה פרסונאלית‬According to this approach we don’t look at the territory but rather we look at the persona. 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, because while we have a high ‫( מס שולי‬in the highest bracket it ends up at almost 60%), 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. The court goes by a linear approach, in other words we divide the profit into annual segments and than we impose the taxes accordingly.

81

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Prof. Yishai Beer 2011-2012

(report) taxes on income no matter where you live in the world. After 2003 Israel adopted this approach (e.g. 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 ‫ .))פרסונאלי‬He mentioned that if an American buys a business (i.e. ‫ )נכס הון‬in Israel and than sells it for a profit; it would be subject to taxes in Israel103. We looked at section 89(b): Section 89(b) TO:
‫רווח‬ ‫דין תמורה ודין 98. )א(דין תמורה כדין הכנסה לפי סעיף 2 ודין ריווח הון כדין הכנסה חייבת, והכל‬ ‫הון‬ ‫תיקון מס' 6(בשינויים המחוייבים לפי הענין ובאין פירוש אחר מפורש או משתמע מהוראות חלק זה או‬ ( 1965 .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; לענין זה, "תושב ישראל" – לרבות אזרח ישראלי כמשמעותו‬ ‫בפסקאות )1(, )3( ו-)4( להגדרה " אזרח ישראלי" בסעיף 3א, שהוא תושב‬ ;‫אזור כהגדרתו בסעיף האמור‬ ‫)ב( הנכס הנמכר נמצא מחוץ לישראל והוא בעיקרו זכות, במישרין או‬ ‫בעקיפין, לנכס, או למלאי או שהוא זכות בעקיפין לזכות במקרקעין או לנכס‬ ‫באיגוד מקרקעין הנמצא בישראל ) בסעיף זה - הרכוש(, לענין חלק‬ ;‫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. 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). Basically whenever you have international tax issues you need to check the tax ordinances as well as any relevant treaties. Various concepts Deduction at the source (‫ :)ניקוי במקור‬With ‫ הכנסה פירותית‬an employee (‫ )עובד שכיר‬pays taxes, but the obligation to deduct the taxes is upon the employer. With regards to capital income (

103

This seems to demonstrate a territory approach?

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Prof. Yishai Beer 2011-2012

‫ )הכנסה הונית‬it’s the opposite, 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 ‫ .הוצאות פירותיות‬We will also discuss capital gains (‫ )רווח הוני‬and capital losses (‫ .)הפסד הוני‬When discussing ‫ רווח הון‬there is a [limited] possibility to spread out the profit over the preceding four years105. 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. Section 91(g) TO: ‫)ז( המס שיחול על ריווח הון בהפקעת נכס הוא מחצית המס המתחייב על פי סעיפים‬ .(‫קטנים )א( עד )ו‬ Section 97 lists several exemptions for capital gains tax (‫ .)מס רווחי הון‬One exemption is with regards to olim chadashim (for the first seven years upon their arrival).Another exemption is when you sell to a relative. 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 ;‫ניתנה בתום לב ובלבד שמקבל המתנה אינו תושב חוץ‬ .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, 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). As we mentioned above with regards to reputation (‫ )מוניטין‬tax there used to be a reduced rate of 10%, but that was changed, now the tax for reputation is fixed at 25%.

104

He referred to this as a ‫ .חיוב מקדמה‬In some situations the ‫ חיוב‬will be on the seller, in other instances it will be on the buyer. It will depend on the nature of the transaction (he didn’t elaborate). 105 It used to be six years.

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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" - כל רכוש, בין מקרקעין ובין מיטלטלין, וכן כל זכות או טובת הנאה‬ – ‫ראויות או מוחזקות, והכל בין שהם בישראל ובין שהם מחוץ לישראל, למעט‬ ‫)1( מיטלטלין של יחיד המוחזקים על ידיו לשימושו האישי או לשימושם‬ ;‫האישי של בני משפחתו או של בני-אדם התלויים בו‬ ((13 '‫תיקון מס‬ ;‫)2( מלאי עסקי‬ 1968 -‫תשכ"ח‬ ‫)3( זכות חזקה במקרקעין - בין שבדין ובין שביושר - המשמשים לצרכי‬ ;‫מגורים ולא לשם השתכרות או ריווח‬ ‫)4( זכויות במקרקעין וזכויות באיגוד כמשמעותם בחוק מס שבח‬ ‫מקרקעין, תשכ"ג-3691, שעל מכירתם מוטל מס שבח או שהיה עשוי‬ ;‫להיות מוטל אילולא הפטור לפי החוק האמור‬
The section states that an asset (with regards to this section) includes property (real or movable), as well as any vested right or benefit (‫ )זכות‬whether they are in Israel or abroad entitlement (‫601)זכות‬ is considered a capital asset (‫ .)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, whether in law or in equity, of real estate used for residential purposes, and not for profit (4) real estate rights and association rights, within their meaning in the Land Appreciation Tax. According to section 88 movables used for personal use would not considered a capital asset (e.g. personal lap top). 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. 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, and we would need to evaluate if it was indeed used for personal use. He gave another example of a collectors car (missing an engine)
106

E.g. a ‫ זכות תביעה‬would be considered a capital asset

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sitting in the driveway, 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 ‫ .שימוש אישי‬And once we categorize an item as ‫ שימוש אישי‬than selling that item would not be taxable107. We looked at the term ‫ מכירה‬in section 88: Section 88 TO:
( ‫תיקון מס' 31(,"מכירה" – לרבות חליפין, ויתור, הסבה, העברה, הענקה, מתנה, פדיון, וכן כל פעולה או‬ 1968 -‫תשכ"ח‬ ‫תיקון מס' 741(אירוע אחרים שבעקבותם יצא נכס בדרך כל שהיא מרשותו של אדם, והכל בין במישרין‬ ( 2005 -‫תשס"ה‬ ;‫ובין בעקיפין, אך למעט הורשה‬

He explained that the definition given is a very wide definition. So (to use an extreme example) if your car was stolen, than according to this clause, being ‘that the car was taken out of your possession’ it would be considered a sale! Another example would be a forced sale (e.g. expropriation). He said that this doesn’t mean that in the example of the car you would actually be taxed, we will discuss this later when we discuss deduction of losses and expenses (‫ניכוי הפסדים‬ ‫.)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 ;‫תיקון מס' 741(נקי מכל שעבוד הבא להבטיח חוב, משכנתה, או זכות אחרת הבאה להבטיח תשלום‬ ( 2005 -‫תשס"ה‬ ‫אולם אם פקיד השומה שוכנע, 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; והכל בניכוי הוצאות המכירה‬ ‫שהוציא הנישום באותה מכירה; בפדיון איגרת חוב או נייר ערך מסחרי, יראו את הפרשי‬ ;‫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). The section says that the exception is looking at the subjective price; in general we look at the objective price. For instance, say the average price for a four room apartment in Herzliya is 1.5 million (based on the sale of the last hundred apartments). If Moshe sells his apartment in Herzliya for 800,000, the tax authorities will tax this

107

What about a yard sale? In a yard sale you are selling items that were used for ‫ ,שימוש אישי‬but on the other hand you are holding a sale?

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Effy Stern Tax Law burden of proof on Moshe to prove that he sold at this (low) price in good faith. Lastly with regards to the term ‫( קרוב‬relative) (in section 88) it says as follows:

Prof. Yishai Beer 2011-2012

transaction according to 1.5 million. However the section allows for an exception. But it puts the

( :‫תיקון מס' 741("קרוב" – כל אחד מאלה‬ 2005 -‫תשס"ה‬ ‫)1( בן זוג, אח, אחות, הורה, הורה הורה, צאצא וצאצא של בן זוג, ובן זוגו של‬ ;‫כל אחד מאלה‬ ;‫)2( צאצא של אח או של אחות, ואח או אחות של הורה‬ ‫)3( חבר-בני-אדם שבהחזקת אדם או קרובו, אדם המחזיק בו וחבר-בני-אדם‬ ‫המוחזק בידי אדם המחזיק בו; לענין הגדרה זו, "החזקה" – במישרין או‬ ‫בעקיפין, לבד או יחד עם אחר, ב-%52 לפחות באחד או יותר מסוג כלשהו של‬ ;‫אמצעי השליטה‬ ‫)4( נאמן כהגדרתו בסעיף 57ג, 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 ;(2)-‫1( ו‬

He stressed that when checking of someone is a relative, we need to check of they are a relative according to section 88.

‫הבחנה בין הכנסה הונית לבין הכנסה פירותית; שינוי יעוד; עיתוי; מוניטין‬
With regards to the previously mentioned distinction between the etz and the peyrot, as we said, in reality this distinction is problematic. There are many cases that deal with the distinction but at the end of the day, it seems arbitrary and it seems that many cases where the court decides that it is ‫הון‬ (i.e. etz) it could have just as easy been categorized as peyrot and vice versa. 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). The

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Effy Stern Tax Law distinguish between damages to damages to hon and damages to peyrot. Severance pay – ‫פיצויי פיטורים‬

Prof. Yishai Beer 2011-2012

barge received two heads of damages. 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. So if Ruben works at Bank Leumi, than both Ruben and the bank include in their calculations the possibility of needing to pay out severance pay. Thirty years later Ruben is fired and receives thirty months of severance. How do we treat the payout? On the one hand, he received the indemnity after he finished working, thus it could hardly be considered income!), rather it is ‫עובדן מקום‬ ‫ .העבודה‬On the other hand, 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; the result has been conflicting case law on the matter. The bottom line is that most judges treat severance pay as hachnasa peyrutit. 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. Here too, there are those that would argue that its peyruti because it is an integral part of business (that industries are privatized and sold, etc); and there are those that would argue that it is ‫ הוני‬because you are loosing a safety in your incomeproducing-mechanism. He mentioned several examples from the case law: 171/67) ‫ :)גורדון‬Gordon wrote a commentary on the Bible. The agreement with the publisher was that they needed to sell a certain amount of copies. The agreement was breached. The court ruled that in addition to indemnity for breaching the contract, the publisher also needs to indemnify Gordon for breaching his copyright. What we see from here is that the court treated the indemnity as capital (‫( .)הוני‬As a side point he mentioned that technically we could have categorized it either as capital (‫ )הוני‬or peyruti, the court decided to categorize it as capital (‫.)הוני‬ 24/72) ‫ :)סולר‬This case dealt with a lawyer whose license was suspended. 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. Here we could categorize this as peyrutit because it is money being made out of his vocation (‫( )משלח יד‬i.e. if the lawyer’s license wouldn’t have been suspended he would have been earning the money, thus this money is simply ‫ .)עובדן משלח יד‬On 87

Effy Stern Tax Law

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the other hand it could easily have be viewed as capital assets (‫ .)נכסי הון‬The court “arbitrarily” decides to categorize the event as ‫( הוני‬that his work/money making mechanism was lost – ‫עובדן‬ ‫ )מקור הכנסה‬and taxes him accordingly. Lastly we mentioned the English case, Oliver. This case dealt with the actor, Lawrence Oliver. 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. 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 ‫ .הונית‬The House of Lords ruled that it was to be treated as ‫ .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 ( ‫ .)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. 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.g. the accumulation of a client list). 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, than for the sake of tax purposes he has a reputation claim. 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(. People more or less go to the station that is closest to them when they need it. A case similar to this actually came up, 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, and it listed part of the price under reputation, so that it could enjoy the low taxes). The court ruled that you can’t apply reputation to such a transaction. 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. He put a different twist on the definition. When the reputation is not based on the person himself but rather on the enterprise. He gave an example with the law firm S. Horowitz. Shalom Horowitz has been dead for fifty years, but many high profile clients will procure the firms services based on its
108

What if there was more than one café on campus?

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reputation. On the other hand a gas station is used, mainly because of its location. He gave a final example with big enterprises like Tnuva. 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, they indemnified the distributers. 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. 4/92) ‫ )שפרירי‬This case dealt with an accountant that sold his business. 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. He than gave an example where you have two real estate lawyers, Ruben and Simon. Ruben is the cheapest lawyer in town, Simon is the most expensive. A basic service by Ruben will cost 1000$ and the same service by Simon will cost 10000$. In such a case, he asked us if Simon could claim that 1000$ 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, it wouldn’t be accepted because the court has ruled (‫ )פס"ד בעניין דניאל בריילובסקי‬with regards to a soccer player, that his reputation is part and parcel of his persona (and in order to consider reputation it needs to be separate from his persona). 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. So back to the example of Simon the lawyer, 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. 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, 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, but if the person is not dead yet, how do you prove it? 111 See above question (what if Ruben and Simon were actually law firms, in that case Simon’s services would be procured regardless of Simon, just like with S Horowitz).

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With regards to tax law it is possible for a person to sell something to himself and the transaction will be taxable112. 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; after twenty years he decides to sell the watch. In such a case the ‫ ייעוד‬of the watch was changed from ‫ נכס הוני‬to ‫נכס‬ ‫ הכנסה‬and it would be taxable as a business transaction. However if the same storeowner brought the watch home and than sold it, 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 ‫ ;)עסקי‬if the owner has a painting hanging in his office (to give prestige to the gallery) that is not for sale, than it would 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, than the transaction ( ‫ )מיטלטלין בשימוש אישי‬would not be taxable. If the same owner brought the painting to the store to sell it there, 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. Say the contractor has offices where he conducts his business as well as a home which he lives in. 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 ‫ .מלאי עסקי‬Likewise if he decides to take one of the apartments (that he is selling) for himself to live in, than it would be considered ‫ שינוי ייעוד‬and there would be tax ramifications114. The seeming discrepancy represented in these cases will be the basis of today’s discussion. He explained the dilemma as follows: Say Ruben has a painting which he inherited from his grandfather who bought the painting for 100$. The family has been holding on to the painting for eighty years. If a neighbor walks in the house and buys the painting for 100,000$ than being that it
112

From a contractual perspective this is illogical, but in the realm of tax law, such a transaction would be logical. 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)). Say Ruben wants one of the watches in his store for himself, from a legal contractual or property perspective nothing happened (Ruben didn’t have to ask anyone permission, 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, and there are tax manifestations. 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, because in such a situation we are dealing with two separate legal entities and thus there would be a clear cut transaction! Here, we are dealing with a private person that owns a private store. 114 What if someone lives in his office, 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. In response to someone’s question he said that ‫ נכס הון‬is everything other than ‫.מיטלטלין בשימוש אישי‬

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is ‫ מיטלטלין בשימוש אישי‬it would be exempt from taxes. However if the situation was the same only that Ruben brought the painting to his gallery, than it would be considered ‫ מלאי עסקי‬and it would be taxable. This doesn’t seem just! Because if Ruben would have sold the painting to Simon’s gallery, than the rise in value of the painting would be exempt from tax, but if he sells it in his gallery than it would be taxable! In other words, for all the years that the painting was appreciating in value, it was exempt from taxes, and now when he sells it we are taxing him (for all the years of appreciation when the painting was used for private use), and the only reason we are taxing him is because instead of being smart and selling it from his home, he sold it from his gallery! To put it differently, if all we look at is the final stop ("‫ ,)"תחנה סופית‬than if Ruben had a painting (for sale) in gallery for ten years, and than brings it home and sells it, than according to the ‫ תחנה הסופית‬doctrine, the sale would be exempt from taxes! Clearly, such a doctrine doesn’t seem just. 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, 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, and thus all the appreciation value of the painting would be exempt from taxes. This explains why in the realm of tax law we could say that a person could sell himself something (‫לצורכי מס, אדם קונה‬ ‫ .)מעצמו‬To sum up what we said, in order to resolve the aforementioned unjust outcome, we would have to recognize the concept of ‫ שינוי ייעוד‬and the ability for a person to sell something to himself115.
Sharkey v. Wernher: For years the case law acknowledged the aforementioned problematic

outcome. One of the first cases to deal with this was an English case Sharkey v. Wernher. This case dealt with ‫ .שינוי ייעוד‬The House of Lords recognized the ‫ שינויי ייעוד‬doctrine and the ability of a person to sell something to himself for tax purposes. In Israel the case law dealt with this issue for years, 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. We mentioned the case
115

He gave another example: Ruben had a painting in his house for eighty years. On the day that he brings the painting to the gallery it is worth one million. We said that in order to avoid an unjust outcome, when he brings it to his gallery it is as if he sold it to the gallery, and thus the sale to the gallery would be exempt from taxes. He than added that, in this case, the painting sat in the store for two years till it got sold, and it was sold for a million two hundred. If we accept the ‫ שינוי ייעוד‬doctrine than, 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, 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).

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20/63 (‫ .)בן צבי‬In this case Ben-Tzvi a (a teacher) bought a peace of land in 1932 for one hundred

shekels116. He lived there untill 1960 at which point the value of the property appreciated to one million shekels. Clearly, if he would have decided to sell his private property to someone else than it would be considered a private transaction117; 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), and thus the tax authorities wanted to tax him on the transaction as if he sold ‫.מלאי עסקי‬ In other words the tax authorities weren’t willing to recognize ‫ .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). 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, but in order to do so the court would have to recognize the doctrine of ‫ ,שינוי ייעוד‬in the beginning the court didn’t want to accept this doctrine, but ultimately in 217/65 ‫ כהן‬it did. ‫ ( 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. )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 ( 1968 -‫תשכ"ח‬ ;‫)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. Regardless of whom he sold it to. 118 He hinted that a problem with the legislation is that it doesn’t deal with all six alternatives.

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Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 .‫מלאה, וכן מלאי עסקי בעסק שהפכוהו לנכס קבוע באותו עסק‬

However this section only seems to deal with the first two alternatives (i.e. it states that when business stock is converted into fixed assets or private property it will be considered ‫.)שינוי ייעוד‬ Section 100 TO which also deals with ‫:שינוי ייעוד‬ Section 100 TO:
‫העברת נכס למלאי‬ ‫001. שוכנע פקיד השומה שאדם העביר נכס שבבעלותו לעסקו כמלאי עסקי911 או שהפך‬ ‫עסקי‬ :‫)תיקון מס' 31נכס קבוע בעסקו למלאי עסקי שבעסקו )בסעיף זה - העברה(, יחולו הוראות אלה‬ ( 1968 -‫תשכ"ח‬ ‫)1( חלפו ארבע שנים מיום שרכש הנישום את הנכס עד יום ההעברה, יראו‬ ‫את ההעברה כמכירה, אולם הנישום לא יחוייב בתשלום המס עליה אלא בעת‬ ‫מכירת המלאי העסקי האמור, כולו או מקצתו; ובלבד שאם מכר מקצתו, לא‬ ;‫יהא חייב בתשלום מס בסכום העולה על התמורה שקיבל באותה מכירה‬ (21 '‫)תיקון מס‬ ‫)2( לא חלפו ארבע שנים כאמור, לא יראו את ההעברה כמכירה ויראו את‬ 1975 -‫תשל"ה‬ .‫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). It states that to recognize ‫ שינויי ייעוד‬the possessor of the asset needs have had the asset for a minimum of four years. Thus, for instance (option 5) if a gallery owner has a painting in his house; if he had it in his house for twenty years and than brought it to his gallery, being that he had it in his house for over four years, 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). Another example: if he bought the painting for 100$ and he had it in his house for ten years, and than he brought it to the gallery when it was worth 100000$, there would be ‫ שינוי ייעוד‬and it would be exempt from taxes. With regards to option 3, he gave the following example: Ruben owns a gallery. He has a painting hanging in his office for ten years (not for sale), the value when he bought it was 1 million. After ten years it worth 10 million, and he decides to sell it for 30 million. Two years later he manages to sell it to Simon for 35 million. So according to option 3 we have two sales; a sale from Ruben to Ruben (i.e. from fixed asset to trading stock) valued at 29 million and a sale from Ruben to Simon valued at 5 million. The first sale is ‫ שינויי ייעוד‬and thus exempt from taxes, the second sale is considered revach peyruti and would be taxable. The section provides (Ruben) with two benefits; firstly it recognizes ‫.שינויי ייעוד‬ Secondly, it postpones the tax until a buyer comes along. If however four years didn’t pass than all
119

Alternatives 3 and 5

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the profit will be treated as peyruti and thus taxable. If four years didn’t pass than we go according to the tachana hasofit – the last transaction (e.g. how the painting was sold, if it was sold as business stock than it would be considered peyruti). With regards to whether ‫ )שינוי ייעוד )הלכת בן צבי/כהן‬applies to alternatives 4 and 6 its unclear, there is no case law on the matter. ‫ :עיתוי של השינוי ייעוד‬he explained that usually it’s not clear when the ‫ שינוי ייעוד‬takes placed120 (examples of this were in, 2/91 (‫ ,)קול‬and 105/86 (‫.))דנקנר‬

Class 18 08/01/12

‫פרשנות דיני המס; עסקה מלאכותית‬

Artificial transaction ( Section 86) – ‫עסקה מלאכותית‬ He mentioned the distinction between ‫ הימנעות ממס‬and ‫ ,השתמטות ממס‬the latter is considered illegal. An example of the latter is say when you pay the cab in cash. The first includes all the legal loopholes that one finds in the tax system so that they could pay less taxes, this is legal. 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, whereas the simple cab driver can’t afford such services and thus either he pays in full or resorts to illegal methods. Interpretation of the Tax code – ‫פרשנות המס‬ Regarding interpretation of the tax code there are two basic approaches. One approach, the ‫גישה‬ ‫ ,הישנה‬says that when the tax authorities ask for money from the tax payer, the burden of proof is on them and thus if there is a doubt (‫ ,)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. On the
120

Not all cases are clear cut like in the aforementioned gallery examples or in the cases 20/63 and 217/65.

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other hand there is the newer approach, the ‫ ,גישה חדשה‬which is based on Barak’s approach of purposeful interpretation (‫ .)פרשנות תכליתית‬This is more of a functional approach. We ask questions on the macro level – what is the law trying to achieve, in the decision of the court in
165/82) ‫ ,)חצור‬Barak J. explained this point. Prof. Beer explained that even according to Barak’s

approach there is an element of doubt which could serve in favor of the tax payer, however it’s not automatic, that is, its only after looking at the purposeful interpretation of the law, etc. 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. Section 86 TO:
‫סמכות להתעלם‬ ‫68. )א(היה פקיד השומה סבור, כי עסקה פלונית המפחיתה, או העלולה להפחית, את‬ ‫מעסקאות מסוימות‬ ‫סכום המס המשתלם על ידי אדם פלוני היא מלאכותית או בדויה, או שהסבה פלונית אינה‬ [28] ( ‫תיקון‬ ‫)תשכ" מס' 31מופעלת למעשה, או כי אחת ממטרותיה העיקריות של עסקה פלונית היא הימנעות ממס‬ 1968 -‫ח‬ ‫או הפחתת מס בלתי נאותות, רשאי הוא להתעלם מן העסקה או מן ההסבה, והאדם הנוגע‬ ‫בדבר יהא נישום לפי זה. הימנעות ממס או הפחתת מס ניתן לראותן כבלתי נאותות אפילו‬ .‫אינן נוגדות את החוק‬ .‫לענין זה, "עסקה" - לרבות פעולה‬ 153-158 ‫)ב( שום דבר האמור בסעיף זה אינו מונע מהשיג בערעור, בהתאם לסעיפים‬ .(‫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. He explained that there are similar peaces of legislation on other tax statutes (‫ ,חוק מיסוי מקרקעין‬etc). He asked us, what would have happened if we wouldn’t have had this section (e.g. in England they don’t have this clause)121. He went on to see how section 86 has been applied by the courts. Section 86 says that the tax assessor can ignore an artificial transaction. In the case law, up till the courts decision in
Rubenstein (3415/97), there were two parallel approaches taken by the court. One approach was a

narrow approach. 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. He gave an example of a case (‫שפאר‬ 271). During that period if you have a villa you needed to pay ‫ .מס רכוש‬This lawyer listed the house as a ‫בית‬ ‫( משותף‬and not a villa) and thus he didn’t have to pay ‫ .מס רכוש‬He than went to the tax authorities and said that he doesn’t have to pay ‫ .מס רכוש‬He explained that at this time there was no section like section 86 in ‫חוק מס רכוש‬ (now there is). So in this case ‫ שפאר‬did a ‫ מהלך‬and being that there was no legislation regarding ‫ עסקה מלכותית‬and thus he tried to pull off this stunt. With this being said, nothing stopped the court from ruling that the tax assessor was able to ignore the transaction (the ‫ מהות‬overrides the formality ‫ .)המהות גובר על הפורמליסטקה‬Likewise in England where there is no legislation like section 86, the courts have had no problem from ruling that ‫עסקות‬ ‫ מלאכותיות‬could be ignored.

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obligated to let the parties know – and he must let them know right away. Parallel to this approach, 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. The main way that he could do this is by classifying the transaction as something other than what the parties called it. He gave an example with a leasing transaction122. 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, etc) rather he can apply his basic understanding of tax law. He gave an example of a real rent transaction (here the transaction wasn’t artificial). But in this case say the transaction was for thirty years. So though the rent transaction may be a real rent transaction, the tax ordinances states that a rental transaction that is for thirty years is to be treated as a sale for tax purposes. Thus in this case the assessor, 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 ‫ .עסקה מלאכותית‬As we explained, up till Rubenstein (3415/97), both these approaches were used concurrently by the courts. With one approach saying that the assessor needs to resort right away to section 86, and the other approach saying that section 86 is a last resort if he can’t find statutes to properly categorize the transaction. In Rubenstein (3415/97) the court ruled as follows: There was a fish company. The company was loosing money. 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. The court said that the assessor has two options when checking a transaction. One if the ‫מסלול הדין הכללי‬
123

(i.e. in this case company’s law) the other approach is according to section

86. Barak explains that both options are relevant, and the assessor can choose whichever he wants. Of course choosing one or the other will have its ramifications.

122

Ruben leases an expensive car (it’s written in the contract that it is a leasing transaction) from Shlomo Leasing. It’s a thirty month lease, in which a hefty amount of 19000 is paid each month. In the contract it’s written that after thirty months the leaser can buy the car for a small fee of 1000 shekel. In reality this is a ‫( חוזה מכר‬it’s basically financing the car or in plainer terms, financing a car in payments). If such a transaction comes before the assessor, 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. So what this approach says is that the assessor puts on his civil glasses and calls the transaction what it is. So when the assessor categorizes the transaction for what it is, he doesn’t have to call the transaction an ‫ עסקה מלאכותית‬all he has to do is apply his basic knowledge of civil law, and calls the transaction what logic says that it is. 123 What we said above – civil law.

96

Effy Stern Tax Law We again looked at section 86:

Prof. Yishai Beer 2011-2012

‫סמכות להתעלם‬ ‫68. )א(היה פקיד השומה סבור, כי עסקה פלונית המפחיתה, או העלולה להפחית, את‬ ‫מעסקאות מסוימות‬ ‫סכום המס המשתלם על ידי אדם פלוני היא מלאכותית או בדויה, 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, רשאי הוא להתעלם מן העסקה או מן ההסבה, והאדם‬ ‫הנוגע בדבר יהא נישום לפי זה. הימנעות ממס או הפחתת מס ניתן לראותן כבלתי נאותות‬ .‫אפילו אינן נוגדות את החוק‬ .‫לענין זה, "עסקה" - לרבות פעולה‬ 153-158 ‫)ב( שום דבר האמור בסעיף זה אינו מונע מהשיג בערעור, בהתאם לסעיפים‬ .(‫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 (‫ ;)מלאכותית‬fictitious (‫ ;)בדויה‬or a transaction whose principal objective is improper avoidance, or improper reduction of taxes. 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.g. say Abraham and his wife Sarah work in the same grocery) will be treated as if they have one source of income124. In this case the couple has an electronics company. The woman worked from day to night. But in light of section 66 their income was treated as combined income. To solve this problem, the couple opened a subsidiary company (substantially speaking there was no change in the company, she sat at the same desk, 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). The court ruled that it was an artificial transaction whose goal is tax evasion. We see that the court didn’t use the option of saying that the goal of the transaction was to avoid taxes, 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, as we said above, 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).
124

This would mean that each party is not taxed according to how much they make, rather they are taxed according to what they make in total. 125 Because there are transactions which although their purpose is to avoid taxes, the transaction is nonetheless legit!

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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. This is a problematic test, because what does a deviation from the norm mean! Something that is a norm today may not be the norm tomorrow, and vice versa, 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 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, first he wants to buy the land, and than a week later he will buy from them the structure on the property127. From a legal perspective, both transactions accomplish the same thing as if it was done in one transaction. He explained that Ruben would do this because if a person buys both at the same time he pays purchase tax (‫ )מס רכישה‬on everything, whereas if a person brings a contractor to build on property that is his than he doesn’t have to pay purchase tax. 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, in order for Ruben’s transaction to be recognized) he has to provide a compelling commercial reason (‫ )טעם מסחרי‬for his transaction. 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). The judges didn’t accept his claim. The majority opinion ruled that it was clearly an artificial transaction for the purpose of avoiding taxes. The minority opinion (Ohr J.) doesn’t mention the term ‫ ,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.

126 127

Could a ‘compelling reason’ be tax evasion? Usually you buy both the property and the structure in the same contract.

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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.

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Effy Stern Tax Law

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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?

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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

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬ ‫:ניקוי הוצאות – )71 ‪Deduction of expenses (Section‬‬

‫‪Prof. 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. לשם בירור הכנסתו החייבת של אדם ינוכו, זולת אם הניכוי הוגבל או לא הותר על‬ ‫א(-)ח( )י()יי(()1(11[‬ ‫])) פי סעיף 13, יציאות והוצאות שיצאו כולן בייצור הכנסתו בשנת המס ולשם כך בלבד,‬ ‫כ‬ ‫(‬ ‫תיקון מס‬ ‫תשל"ב-' 71(לרבות –‬ ‫2791‬ ‫ריבית והפרשי‬ ‫)1( )א( סכומים המשתלמים בתור ריבית או הפרשי הצמדה על כסף שלווה, אם‬ ‫הצמדה‬ ‫נוכח פקיד השומה שהם משתלמים על הון ששימש בהשגת הכנסה;‬ ‫)תיקון מס' 22(‬ ‫תשל"ה- 5791‬ ‫)ב( נישום התובע ניכוי ריבית או הפרשי הצמדה על פי פסקת משנה )א(‬ ‫תיקון מס' 62((‬ ‫תשל"ז- 7791‬ ‫בשנה שבה קיבל ריבית או הפרשי הצמדה פטורים ממס על פי סעיף 9)42(,‬ ‫)תיקון מס' 23(‬ ‫תשל"ח- 8791‬ ‫לא יותר לו לניכוי סכום השווה לסכום הריבית והפרשי ההצמדה הפטורים‬ ‫)תיקון מס' 45(‬ ‫תשמ"ב- 2891‬ ‫כאמור, למעט הגבוה משני אלה:‬ ‫)1( סכום שקיבל בשל מס יתר ששילם משום שפקיד השומה דרש ממנו‬ ‫לשלמו או שנוכה ממנו במקור;‬ ‫)2( סכום שקיבל בשל אותו חלק ממס היתר שאינו עולה על %51 מהמס‬ ‫המגיע ממנו על פי שומתו העצמית;‬ ‫דמי שכירות‬ ‫)2( דמי שכירות ששילם שוכר קרקע או בנין שהיו תפוסים בידו לשם השגת‬ ‫ההכנסה;‬ ‫תיקונים‬ ‫)3( סכומים שהוצאו לתיקונים של חצרים, מוצבה או מכונות, ששימשו בהשגת‬ ‫ההכנסה, וכן לחידושם, לתיקונם או לשינויים של כלי מלאכה, כלי שרת או חפצים‬ ‫ששימשו כאמור;‬ ‫חובות רעים‬ ‫)4( חובות רעים שנתהוו בעסק או במשלח-יד והוכח להנחת דעתו של פקיד‬ ‫השומה, שהחובות נעשו רעים בשנת המס, וכן חובות מסופקים במידה שנאמדו,‬ ‫להנחת דעתו של הפקיד, כחובות שנעשו רעים בשנת המס, אף אם זמן פרעונם של‬ ‫החובות הרעים או המסופקים חל לפני תחילתה של שנת המס; אלא שכספים שנגבו‬ ‫בשנת המס לחשבון סכומים שנמחקו או שנוכו לפני כן בשל חובות רעים או‬ ‫מסופקים, ינהגו בהם לענין פקודה זו כמו בתקבוליו של העסק או משלח-היד לאותה‬ ‫שנה;‬ ‫תשלומי מעביד‬ ‫)5( סכומים ששילם מעביד - 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- 8691‬ ‫ידי המנהל לענין פסקה זו, וכן סכומים בשיעורים ובתנאים כאמור אך בשינויים‬ ‫)תיקון מס' 23(‬ ‫תשל"ח- 8791‬ ‫המחוייבים על פי הענין ששילם מעביד למדינה, לרשות מקומית או לגוף אחר שקבע‬ ‫תיקון מס' 241((‬ ‫תשס"ה- 4002‬ ‫שר האוצר לענין זה, לשם שמירת זכות הפנסיה של עובדו וכן כל סכום או חלק‬ ‫תיקון מס' 841((‬ ‫ממנו ששילם מעביד - באישור המנהל - לקופת גמל כאמור או למוסד או לגוף‬ ‫תשס"ה- 5002‬ ‫כאמור שלא בתור השתתפות שנתית סדירה;‬ ‫תשלומים לקרן‬ ‫סכומים ששילם יחיד לקרן השתלמות לעצמאים, לאחר שהופחת מהם‬ ‫)5א(‬ ‫השתלמות לעצמאים‬ ‫סכום השווה ל-%5.2 מהכנסתו הקובעת; סכומים כאמור לא יעלו על %5.4‬ ‫)תיקון מס' 801(‬ ‫תשנ"ו- 5991‬ ‫מהכנסתו הקובעת; לענין זה –‬ ‫"הכנסה קובעת" - הכנסתו החייבת של היחיד מעסק או ממשלח יד, לפני הניכוי לפי‬

‫201‬

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬ ‫פסקה זו, ועד לסכום של 000,651 שקלים חדשים בשנה;‬ ‫"קרן השתלמות לעצמאים" – קרן השתלמות המיועדת ליחיד שיש לו הכנסה מעסק‬ ‫או ממשלח יד;‬ ‫)6( הוצאות בנקיטת אמצעים למניעת סחף-קרקע ונגד שטפונות ופגעי טבע אחרים‬ ‫שייקבעו;‬ ‫)7( הוצאות בנקיטת אמצעי זהירות מפני התקפות מן האוויר;‬ ‫)8( ניכוי בעד פחת כאמור בסימן ב';‬ ‫)9( סכומים שאגודה שיתופית החזירה לחבריה בתור הטבה שנתית, לפי יחס‬ ‫עסקאותיה עם כל חבר, ובלבד –‬ ‫)א( שלא יותר ניכוי בסכום העולה על אותו חלק מהכנסתה החייבת לפני‬ ‫החזרת ההטבה, שיחסו לכלל הכנסתה החייבת הוא כיחס סכום עסקאותיה עם‬ ‫חבריה לסך-כל עסקאותיה;‬ ‫)ב( שההטבה ניתנה לחברים תוך תשעה חדשים מתום שנת החשבון שאליה‬ ‫היא מתייחסת או במועד מאוחר יותר שקבעו המנהל;‬ ‫)ג( שהטבות ייחשבו כאילו נתקבלו על ידי החברים ביום תום שנת החשבון‬ ‫שאליה הן מתייחסות;‬ ‫)נמחקה(;‬ ‫)01(‬ ‫)א( הוצאות בקשר להכנת הדו"חות והטיפול בקשר למס בכל הליכי שומה‬ ‫)11(‬ ‫וערעור, 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; נפסקו הוצאות משפטיות לטובת הנישום, 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 ‫חשבונות;‬ ‫דמי שכירות ששילם יחיד בעד דירה ששכר בישראל ושאליה עבר לגור‬ ‫)21(‬ ‫לרגל עבודתו או עיסוקו, במשך חמש שנים מיום שעבר לגור בדירה האמורה; דמי‬ ‫שכירות אלה יותרו לניכוי מדמי השכירות שהוא מקבל בשל השכרת דירת הקבע‬ ‫שלו באותה תקופה;‬ ‫)א( סכומים ששילם נישום בעד לינה או שכירת דירה באזור שנקבע‬ ‫)31(‬ ‫כשטח פיתוח על פי סעיף 11, אשר בו עובד הנישום דרך קבע אך אינו גר בו‬ ‫עם משפחתו שעמה היה גר אילולא עבד שם;‬ ‫)ב( שר האוצר רשאי לקבוע את תקרת הסכום שיותר לניכוי על פי פסקת‬ ‫משנה )א( ואת תקופת הניכוי;‬ ‫ניכויים אחרים שייקבעו בתקנות לפי פקודה זו;‬ ‫)41(‬ ‫)51( היטל ששולם לפי חוק מיסוי רווחי נפט, התשע"א-1102, על ידי מי שחב בו‬ ‫לפי אותו חוק.‬
‫תיקון מס' 841((‬ ‫תשס"ה- 5002‬ ‫נזקי טבע‬ ‫התקפות מהאויר‬ ‫פחת‬ ‫הטבות באגודה‬ ‫שיתופית‬

‫תיקון מס' 241((‬ ‫תשס"ה- 4002‬

‫תיקון מס' 35((‬ ‫תשמ"ב- 2891‬ ‫הוצאות הכרוכות‬ ‫בתשלום המס‬ ‫)תיקון מס' 22(‬ ‫תשל"ה- 5791‬

‫דמי שכירות שמשלם‬ ‫יחיד שעבר זמנית‬ ‫תיקון מס' 34((‬ ‫תשמ"א- 1891‬

‫דמי לינה או שכירות‬ ‫באזור פיתוח‬ ‫)תיקון מס' 52(‬ ‫תשל"ז- 7791‬

‫ניכויים אחרים‬ ‫)תיקון מס' 22(‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 481((‬ ‫תשע"א- 1102‬

‫‪ to mean that only business‬והוצאות שיצאו כולן בייצור הכנסתו ‪The case law understands the words‬‬ ‫‪expenses can be deducted, but personal expenses can’t be deduced. We will obviously have to‬‬ ‫301‬

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Prof. Yishai Beer 2011-2012

understand what is considered personal expenditure. The words ‫ בשנת המס‬mean that if you have an expense that is ‫ הונית‬than it too can’t be treated as a ‫ .הוצאה פירותית‬So you first need to check if the expense is a business expense (‫ )עסקית‬and that it is not ‫ .הונית‬The case law fine tunes these criteria, and in certain areas the statute expands the list of what could be deduced. With regards to personal expenditure, he gave an example: Dana goes to the grocery and spends 1000$ can she write off the expense? It will depend; if she spent 1000$ on food for a business meeting than possibly she would be able to deduct the expense; 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; here to it would depend if he bought the tie because he needs it for his work, than possibly it will be viewed as a business expense and thus deductable, if it is demonstrated that it was for personal use than it wouldn’t be. In general food is considered a personal expense. Regarding the claim that ‘I need food in order to work!’ this is not true, because you would eat even if you weren’t working! With regards to expenditure on transport to work, English case law has ruled that this is not business expenditure, because if you choose to live far from work that is your personal decision. So to, in Israel transportation is not treated as a business expense134. 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. With regards to expenses in raising children, until the case 4243/08 raising children (i.e. playgroup, babysitter) was considered a personal expense136; in the case
4243/08 (‫ :)ורד פרי‬the court recognized that raising children could be considered a business

expense. In this case Mrs. Peri was a lawyer and she claimed that in order for her to work she needs to send her kids to a playgroup. According to the logic until this case, we would have said that this is a personal expense, 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. Peri’s claim to have the expense deducted. However in this landmark decision the court accepted the claim of Mrs. Peri. He explained that the difference between food and raising children is that with food, you
134

If you are an appraiser and you need to travel from place to place than that would be considered a business expense. What we are discussing is transport from home to work to home! 135 A job that requires special clothing (e.g. goggles, helmet, etc) or equipment would be considered a business expense. 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!

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Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

would eat food regardless. However with raising children, if you didn’t work, than you wouldn’t need to send them to a playgroup (true, you would need to stay home with the children, but you wouldn’t have to send them to a playgroup and thus there is a difference). The court ruled that if you want to get a ‫ תוצאת מס אמת‬in this case, 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. With regards to how to separate between the expense of the playgroup and the additional paid-for amenities supplied by the playgroup, the court deals with this by explaining how to dissect the expenditure (we will discuss this next lecture). Immediately following this ruling, 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, לרבות‬ ‫הוצאות הבית, הוצאות פרטיות, הוצאות אש"ל731, הוצאות שהוצאו לשם הגעה‬ ‫למקום ההשתכרות ולשם חזרה ממנו, והוצאות שהוצאו לשם טיפול בילד או השגחה‬ ,‫עליו או לשם טיפול באדם אחר או השגחה עליו; בפסקה זו‬ ‫"הוצאות כרוכות ושלובות בתהליך הפקת ההכנסה" – הוצאות המשתלבות בתהליך‬ ‫הטבעי של הפקת ההכנסה ובמבנהו הטבעי של מקור ההכנסה, והמהוות חלק בלתי‬ ;‫נפרד מהם‬ ‫" הוצאות אש"ל" – הוצאות שהוציא יחיד בשל ארוחותיו, שהוצאו בין במקום‬ ‫ההשתכרות ובין מחוצה לו, ולמעט הוצאות בשל ארוחת בוקר הכלולה במחיר לינה‬ ;‫המותרת בניכוי‬ ;‫)2( תשלומים או הוצאות, שאינם כסף שהוצא כולו לייצור ההכנסה ולשם כך בלבד‬
‫ניכויים שאין להתירם‬ .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. 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, it too wouldn’t be deductable138. The second thing that section 17 states is that you can’t deduct capital expenditure ( ‫)הוצאות הוניות‬ (e.g. say you are a carpenter, and you buy a new saw. Though this is an expense for this business,
137

This refers to food expenses outside of the home. E.g. a lawyer is sent to Eilat, and while in Eilat he buys a sandwich to eat. 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). He explained that in the past there was legislation which said you could deduce up to three shekel (this was old legislation, based on old numbers). The court ruled that in fact the amount didn’t reflect reality. Either way, with the passing of section 32 food expenses are considered a private expense. (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?

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Prof. Yishai Beer 2011-2012

this saw will last ‫ מעבר לשנות המס‬and thus it is considered ‫ הוני‬and not deductable. Likewise if you build a factory for your business, being that it last beyond the tax year, it will be considered a capital expense (‫ )הונית‬and thus not deductable139. He than gave a different example where you have a book publisher. The publisher spends 500,000$ on a printing press, and 500,000$ on a stage to hold a book fair for an upcoming book. In this case the first expense would be considered ‫הונית‬ and thus not deductable, 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. However, 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. For there are capital (‫ )הונית‬expenses that can’t be deduced but you will be able to consider them when you sell the property (‫ .)נכס‬There are other ‫ הוצאות הוניות‬wherein you could do a partial deduction via amortization (‫( )פחת‬i.e. a certain percentage of the value of the saw could be deduced each year, being that with time it goes down in value, or in other words, each year it produced for you a certain amount of peyrot). The case law expanded ‫ הוצאות פירותית‬to include expenses whose goal is maintaining what is already in existence (‫ .)שמירה על הקיים‬Expenditure towards maintenance will be treated as peyrutit, and thus deductible. 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. With regards to the first expansion (‫ )שמירה על הקיים‬he gave several examples from the case law (expenses on insurance – e.g. say you insure your office or your property, despite the fact that you are insuring ‫ נכס הון‬it will still be considered as peyrutit and thus deductable; lobbyists – expenses spent on lobbying, this to the court has considered ‫שמירה על‬ ‫ ;041הקיים‬legal expenses; expenses spent on protexia ‫.)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. It than wanted to write off the expenses that were spent in bribing the girls school to move. 141 One of the cases we read dealt with a person that had a garbage truck circuit, 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. The court ruled that if its grey area than it will allow the deduction, if there is a clear criminal offense going on than it wouldn’t recognize the deduction (e.g. bribery wouldn’t be recognized as a deductable expense). 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.

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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).

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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

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012 ‫של חברה שחברים בה כל בעלי העסק באופן המקנה להם זכויות לנכס‬ ‫כזכויותיהם בעסק, אם ההעברה לחברה היתה בהתאם לדרישת מינהלת‬ .‫מרכז ההשקעות כמשמעותה בחוק העידוד‬ ‫)2( בנין או מגרש שהוקם עליו בנין, אשר לאחר שהחילו לגביהם את הוראות‬ ,‫פסקה )1( נמכרו, כולם או חלקם, בידי מי שקיבל אותם בנסיבות האמורות בה‬ ‫ועל המכירה חלים חוק מס שבח מקרקעין, תשכ"ג-3691, או סעיף 4 לחוק‬ -‫מס הכנסה )עידוד להשכרת דירות( )הוראת שעה ותיקוני חוק(, תשמ"א‬ ‫1891, או פרק שביעי 1 לחוק העידוד, יהיו יום הרכישה ושווי הרכישה בידי‬ ‫המוכר לענין החוקים האמורים, היום והשווי שהיו נקבעים אילו נמכר הנכס בידי‬ .‫מי שהעבירם למוכר; לענין זה, "בנין" - 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; 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. It would seem that mixed expenses are not deductable. However, in reality most expenses are mixed, and the case law has ruled in favor of the tax payer (e.g. Ruben is an electronic engineer for Intel. He is sent to Amsterdam for a week. He spends the week working from sunup to sundown. After the week is over, he spends an additional week in Amsterdam to enjoy himself. On the one hand he went to Amsterdam for business (and thus it should be ‫ ,הוצאה כרוכה‬on the other hand he spent a week for pleasure purposes. If you read the statute literally being that this wasn’t "‫ "כולה‬a business expense, 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,
147

In this case a fire broke out and caused significant damage to a neighboring property. The court ruled that the possibility of a fire and the need to indemnify is a built-in expense

110

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

(whereas the personal expenses wouldn’t be deductable). The plane ticket would be deductable in its entirety because regardless of the vacation, he would have had to buy a return ticket (had he left immediately upon finishing his business, he would have still had to fly back). However in a case where the business reason given for flying abroad is seemingly fictitious (e.g. a citrus grower fly’s to England, and claims that he went there to see how Marks and Spencer’s puts out its fruit), the court wouldn’t accept the claim. As we mentioned previously advertisements are considered a built-in expense ( ‫ ,)הוצאה כרוכה‬thus Coca Cola’s advertising campaign for Coke would be considered built-in. However, if Coca Cola begins an advertising campaign for a new line of product, than it wouldn’t be considered built-in. Though, here too, if this was a mixed expense (‫ )הוצאה מעורבת‬than we would scrutinize the transaction and separate the personal expense from the business expense148. There will be cases wherein a transaction is based on a de minis crime and the court will allow the deduction e.g.
(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 (‫ ,)ניכוי‬the same two approaches that we mentioned above concerning taxation – ‫ בסיס מסחרי‬and ‫ ,בסיס מצטבר‬apply (e.g. Ruben sells the furniture to IDC. In December 2011 he sold IDC a thousand chairs, for which he will be paid in February 2012. In December 2011 he also received a rent bill for the factory, as well as a corporate tax bill. He also bought inventory in 2011 (which he will pay for in 2012), and he received his insurance policy (which will be valid till Dec 2012), 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). All these expenses are deductable (‫ .)מותר בניכוי‬The question with all of these expenses is with regards to, 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, we don’t care about when you paid the lawyer, or when you paid the rent, or when you paid the corporate tax. What we do care is the ‫( התאמה הכלכלית לתשלום‬e.g. with regards to the insurance policy, we would look at the
148

We go by the majority, if the majority of the expense was a business expense (i.e. advertising) than we would allow you to separate between the personal expense and the business expense and deduct the business expense. But, if say Coke Cola started a new line of product (e.g. wine) and began an advertising campaign on it, than we wouldn’t allow the expense to be deducted.

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period that the policy applies to. So if it is a twelve month policy, than if only one month in 2011 is covered, and the remaining eleven months are in 2012, than we would divide it accordingly, and you would be able to write off one month for 2011 and eleven months for 2012; with regards to the corporate tax, it would depend to what year the tax is based on, if its for 2011 than the deduction will be in 2011 even if he actually paid it in 2012. With regards to the inventory, 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.

‫חוב מותנה - תלוי‬

‫חובות מותנה/חוב תלוי‬ ‫ חובות מותנה‬refers to expenses which are ambiguous (e.g. Severance pay – according to the law you are obligated to pay severance pay. In almost all cases (besides for a worker that steals) the employer will have to pay severance. 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. This is considered a ‫ חוב תלוי‬because the employer isn’t going to pay the severance now; rather it will be paid years from now (when the employee retires/gets fired). On the other hand it’s possible that the employer will end up committing a crime and will loose his entitlement to severance pay, therefore its considered ‫ .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.g.
(‫ .))פס"ד ארקיע‬A solution for a company that wishes to deduct a ‫ חוב תלוי‬is simply to set up a

subsidiary149. Warranties – ‫כתבי אחריות‬ With regards to warranties (e.g. Honda sells 10,000 cars a year and every car comes with a guarantee) and whether the costs (e.g. 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 100,000 miles, in this case the argument was that the first 50,000 miles should be written off for this year (because there is a ‫חוב‬ ‫ )תלוי‬the court ruled that you cant have a ‫ חוב‬to yourself. Thus a simply solution to bypass the ruling is to set up a subsidiary.

112

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deducted (e.g. 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, 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, than that expense will be viewed as built-in (‫ )כרוכה‬and we will allow for it to be deducted at the time of sale151. Business entities that have cases pending against them - ‫גופים עסקיים שיש כנגדם‬ ‫תביעות משפטיות פתוחות‬ With regards to business entities that have cases pending against them (e.g. say a real estate company sells thousands of apartments a year. According to the statute of limitations, such a company is exposed to possibly claims for the next seven years (for problems that may come up with the apartments). Such a company needs to file claims and financial statements, with regards to this exposure, how does it evaluate the potential suits that may arise? This question is especially pronounced with insurance companies (in medical law, statute of limitations – i.e. exposure, could be up to twenty-five years!). 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!). 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, and these professionals need to estimate the chances of a suit being filed in each type of situation. So in a case involving a medical issue, the medical insurance company would need to procure both medical and tort experts to evaluate the amount of the potential suit. 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. 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, because there is a slight chance that there will be a liability. Obviously we would allow you to write it off if two years later the customer returned it to be fixed, the point here is that we are allowing you to write of the expense already at the time of sale.

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Section 17 is the primary section that deals with deductions. It’s a rather lengthy section containing many sub-sections, some of which are relevant and some of which aren’t. 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. לשם בירור הכנסתו החייבת של אדם ינוכו, זולת אם הניכוי הוגבל או לא‬ [11(1)((‫א(-)ח( )י()יי‬ ‫]) כ‬ ‫תיקון מס' 71)(הותר על פי סעיף 13, יציאות והוצאות שיצאו כולן בייצור הכנסתו בשנת המס‬ ( 1972 -‫תשל"ב‬ – ‫ולשם כך בלבד, לרבות‬ ‫ריבית והפרשי‬ ,‫)1( )א( סכומים המשתלמים בתור ריבית או הפרשי הצמדה על כסף שלווה‬ ‫הצמדה‬ (22 '‫)תיקון מס‬ ;‫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(, לא יותר לו לניכוי סכום השווה לסכום הריבית והפרשי ההצמדה‬ 1982 -‫תשמ"ב‬ :‫הפטורים כאמור, למעט הגבוה משני אלה‬ ‫)1( סכום שקיבל בשל מס יתר ששילם משום שפקיד השומה דרש‬ ;‫ממנו לשלמו או שנוכה ממנו במקור‬ 15% ‫)2( סכום שקיבל בשל אותו חלק ממס היתר שאינו עולה על‬ ;‫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. We stressed the importance of the term ‫ הון‬in the clause. We also mentioned that the term loan is interpreted in a wide fashion (i.e. overdraft in the bank is considered a loan. For example, a storeowner buys inventory, 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. He than gave another example: The owner of a café buys a coffee maker for the café; according to the case law on this section though it is a capital asset (‫ )נכס הון‬it deductable (‫ .)מותר בניכוי‬He gave another example: assume that someone takes out a loan to build a new hotel. It will take four years for the hotel to be built. This is different than the coffee machine example, for in the coffee machine example, the coffee machine immediately starts generating income the moment it is purchased. Whereas in this case the loan wont result in the “immediate” generation of income, and therefore it is not deductable. He explained that this doesn’t mean that the (interest) expenses will be lost; rather they will be included in the expenses of the final costs of the building of the hotel (this is important with 114

Effy Stern Tax Law

Prof. 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). With regards to someone whose profession is to provide loans (i.e. banks) interest expense can de deducted. However with regards to someone that loans money for the sake of investment (i.e. 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, regarding a person who takes out a loan on building a hotel – upon the completion of the project). We mentioned the decision of the court in the case
3196/93 (‫ .)חלף‬In this case Ruben took out a loan to purchase ‫ .מלאי עסקי‬What was unique about

this case was Chalef requested a loan of one million, and the banker told him that he can have a million on condition that he takes two million (this was illegal). Needless to say the bank charged interest on the second million. 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. In what Prof. 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, 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 thus they allowed him to write it off). Section 17(2) TO: deals with rent:

‫)2( דמי שכירות ששילם שוכר קרקע או בנין שהיו תפוסים בידו לשם השגת‬ ;‫ההכנסה‬

‫דמי שכירות‬

This sub section is redundant because, we already know that it is permitted to deduct expenses towards the creation of income. Section 17(3) TO: deals with repairs:

‫)3( סכומים שהוצאו לתיקונים של חצרים, מוצבה או מכונות, ששימשו‬ ‫בהשגת ההכנסה, וכן לחידושם, לתיקונם או לשינויים של כלי מלאכה, כלי‬ ;‫שרת או חפצים ששימשו כאמור‬

‫תיקונים‬

This sub section is also redundant, because as we learned elsewhere money spent for the generation of income or towards maintenance (‫ )לשמור על הקיים‬is deductable. 115

Effy Stern Tax Law Section 17(4) TO: deals with bad debts:

Prof. Yishai Beer 2011-2012

‫)4( חובות רעים שנתהוו בעסק או במשלח-יד והוכח להנחת דעתו של פקיד‬ ‫השומה, שהחובות נעשו רעים בשנת המס, וכן חובות מסופקים במידה‬ ‫שנאמדו, להנחת דעתו של הפקיד, כחובות שנעשו רעים בשנת המס, אף אם‬ ‫זמן פרעונם של החובות הרעים או המסופקים חל לפני תחילתה של שנת‬ ‫המס; אלא שכספים שנגבו בשנת המס לחשבון סכומים שנמחקו או שנוכו‬ ‫לפני כן בשל חובות רעים או מסופקים, ינהגו בהם לענין פקודה זו כמו‬ ;‫בתקבוליו של העסק או משלח-היד לאותה שנה‬

‫חובות רעים‬

He gave an example of a check cashing business, which naturally has some bad checks, or any business that has a customer or two that doesn’t honor its debts. In such cases the section is stating that those expenses can be deducted. This would obviously apply to banks as well. He stressed that you need to distinguish between a bad debts ( ‫( )חוב רע‬e.g. loan or credit that is not honored by the debtor) which could be written off and a ‫( השקעה כושלת‬a bad investment, which is considered a ‫ .הוצאה הונית‬E.g. Say I invest in a restaurant that goes bust) which can’t be written off. Section 17(7) TO: deals with expenditure on air-raid precautions:

;‫)7( הוצאות בנקיטת אמצעי זהירות מפני התקפות מן האוויר‬

‫התקפות מהאויר‬

This section refers to the building of a shelter (‫ .)מקלט‬He explained that this is a novel clause, because of two potential issues; firstly we are not dealing with a profit-making-mechanism, and secondly we are dealing with something that is honiy (i.e. it will provide a benefit beyond the given tax year)! He gave an example to demonstrate the question; say Ruben builds a shelter which just so happens to be his home, would he be able to deduct the expense? Or to put it differently, say I build the whole house as a shelter, 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, 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, but it would allow the deduction in the example with the forty story building (See 401/93 ‫.)גולדברג‬ Section 17(8) TO: deals with deductions for depreciation/amortization

;'‫)8( ניכוי בעד פחת כאמור בסימן ב‬

‫פחת‬

116

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Prof. Yishai Beer 2011-2012

1941 - ‫ תקנות מס הכנסה פחת‬deals with depreciation expenses (‫ .)הוצאות פחת‬In the ‫תקנות מס‬ ‫ )הכנסה )פחת‬it lists the depreciation rates as well as different types of property (‫ )נכסים‬and the relevant depreciation that applies. He gave an example, El Al buys a Bowing 747 this is considered as ‫ הוצאות הונית‬and thus can’t be written off. However according to the ‫ תקנות‬the amortization of aircraft could be written of at 30%. He explained that when El Al decides to sell its plane, ‫לצורכי‬ ‫ מס‬it will be valued according to the established depreciation rate, meaning regardless of the market value, we will configure taxes according to the depreciation of the plane. He gave another example: say Ruben spent a million on a dry cleaning machine. The ‫ תקנה‬says that such a machine has 10% depreciation (‫ .)פחת‬This means that for the given year there is a ‫הוצאה פירותית‬ that could be written of 100,000 (10% of 1 million). Three years later ‫ לצורכי מס‬the machine is worth 700,000. If Ruben than decides to sell the machine, for 750,000 than there is capital gain ( ‫ )רווח הון‬of 50,000, if he sells it for 650,000 than there is a capital loss (‫ )הפסד הון‬of 50,000. To sum of if you buy such a machine you can’t write of the expense, but you could write off the annual depreciation each year. 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, 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; נפסקו הוצאות משפטיות לטובת‬ ;‫הנישום, 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 ;‫חשבונות‬

‫הוצאות הכרוכות‬ ‫בתשלום המס‬ (22 '‫)תיקון מס‬ 1975 -‫תשל"ה‬

He explained with an example. Ruben makes earns income of 1,000,000$ a year (before taxes but after all expenses), he than pays 400,000$ in taxes, obviously he can’t consider his taxes as a deductible expense. However according to this sub section he could deduct expenditure towards preparing his tax statements (e.g. procurement of an accountant)! He explained that like with section 17(7) (shelter) this section is a novelty clause, and without this section we wouldn’t have allowed it to be written off.

117

Effy Stern Tax Law Section 30 TO: Restrictions on reductions:

Prof. Yishai Beer 2011-2012

‫סייג לניכויים‬ ‫03. לא יותר כל ניכוי בשל הוצאות לפי סעיפים 72-71, בסכום העולה על הדרוש‬ [11(2)] ( '‫תיקון מס‬ ;‫תשס"ה-241(לפי צרכי ייצור ההכנסה של הנישום; ובכל שאלה לענין סעיף זה יכריע המנהל‬ 2004 ‫ובלבד ששום דבר האמור בסעיף זה לא יתפרש כמונע כל אדם הרואה עצמו מקופח‬ .153-158 ‫על ידי החלטת המנהל מלערער עליה בהתאם לאמור בסעיפים‬

He explained that without this clause, we would still have known this from section 17. He mentioned that there is a procedural question that is dealt with in the case law, because section 17 states that any tax assessor (‫ )פקיד שומה‬can decide whether or not to recognize the deduction ( ‫ .)ניכוי‬However section 30 specifically states that only the ‫ מנהל רשות המס‬could decide whether or not to allow the deduction. Without saying what the final ruling of the case law is, he said that the case law deals with this question extensively. The section states “extravagant expenses (‫ :”)הוצאות מופרזות‬He explained that the assessor wouldn’t be authorized to disallow regular business practices (e.g. 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. What section 30 is dealing with when it says ‫ מופרז‬is situations such as where a mother pays her son 20,000 to be an intern in her firm (e.g. He mentioned the ‫ ליבנה‬case: The two brothers that were the majority shareholders of the company, and took out an exorbitant loan from the company, in the form of charging their company rent. The court didn’t accept what they did). Again he pointed out that the same conclusion reached by the court could have been achieved via section 17. Section 31 TO: Regulations on the deduction of expenses & ‫תקנות מס הכנסה )ניכוי‬ ‫)הוצאות מסוימות‬
‫ניכוי‬ ‫תקנות בדבר 13. שר האוצר רשאי, באישור ועדת הכספים של הכנסת, להתקין תקנות - בין‬ ‫הוצאות‬ ( ‫תיקוןהמס' 6(דרך כלל ובין לסוגים של נישומים - בדבר הגבלתו או אי-התרתו של ניכוי הוצאות‬ 1965 - "‫תשכ‬ ( – ‫)תיקון" מס' 71מסויימות לפי סעיפים 71 עד 72, ובמיוחד בדבר‬ 1972 -‫תשל ב‬ ;‫)1( שיטת החישוב או האומד של ההוצאות‬ ;‫)2( סכומי ההוצאות שיותרו בניכוי, או שיעוריהן‬ ;‫)3( התנאים להתרת ההוצאות‬ .‫)4( דרכי הוכחת ההוצאות‬

118

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫‪) with regards to‬תקנות( ‪This section authorizes the Minister of Finance to enact regulations‬‬ ‫תקנות מס ‪). We mentioned some of the regulations listed in‬ניכוי הוצאות( ‪deductions of expenses‬‬ ‫‪ (refreshments [i.e. for a work‬כיבוד ‪) (TMNHM) section 2 deals with‬הכנסה )ניכוי הוצאות מסויימות‬ ‫:)]‪function‬‬ ‫:‪Section 2 TMNHM‬‬

‫ההוצאות המפורטות בפסקאות )1( עד )6(, יותרו לניכוי רק בהתאם לאמור‬ ‫)1( %08 מההוצאות שהוצאו לכיבוד קל במקום העיסוק של הנישום;‬ ‫לענין זה, "כיבוד קל" - שתיה קרה או חמה, עוגיות וכיוצא באלה;‬

‫3‬ ‫'‬ ‫)תקה-)מס' להלן:‬ ‫תשל" 5791‬

‫תנאים לניכויים‬ ‫2.‬ ‫והגבלתם‬

‫תק' תשנ"ז- 7991‬ ‫כיבוד‬ ‫תק' תש"ס- 0002‬ ‫תק' תש"ס- 0002‬

‫)2(2 ‪ (cookies, soft drinks) could be written off. 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, ובחבר-בני-אדם שחל עליו‬ ‫סעיף 3)ז( לפקודה - אם היו הכרחיים לפעילותו, 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- 4891‬ ‫תק' תשנ"ג- 3991‬

‫‪). 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). We‬‬ ‫‪also mentioned that expenses for a degree abroad aren’t recognized. 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. Section 2(2a)(a) says that expenditure on lodging and breakfast could be deducted but like‬‬ ‫.‪with airfare there are limits‬‬ ‫:‪Section 2(2a)(a) TMNHM‬‬

‫)א( הוצאות לינה שהוציא נישום בישראל או באזור, 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, ואולם הוצאות‬ ‫שהוציא נישום ללינה במקום המרוחק פחות מ-001 קילומטרים‬ ‫ממקום מגוריו או ממקום עיסוקו העיקרי, לא יותרו בניכוי, זולת אם‬ ‫שוכנע פקיד השומה שהלינה היתה הכרחית לייצור ההכנסה של‬ ‫הנישום;‬ ‫)ב( על אף האמור בפסקה )3(, יותרו בניכוי הוצאות שהוציא נישום‬

‫הוצאות לינה וארוחת‬ ‫בוקר‬ ‫תק' תש"ס- 0002‬

‫911‬

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫בשל ארוחת בוקר הכלולה במחיר לינה המותרת בניכוי, כאמור‬ ‫בפסקת משנה )א( לעיל;‬ ‫)ג( הוראות פסקה זו לא יחולו על הוצאות לינה שהוציא הנישום‬ ‫במסגרת השתתפות בכנס בתחום עיסוקו;‬
‫‪. This section was nullified, 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 ‫.)‪lunch it is not a deductable expense‬‬ ‫:‪Section 2(4) TMNHM: deals with presents‬‬

‫)4( מתנות שנתן נישום, ובלבד שסכום הניכוי לא יעלה על סכום של‬ ‫003,2 שקלים לשנה לאדם אחד אם ניתנו בישראל, ועל סכום של 51‬ ‫דולר של ארצות הברית לשנה לאדם אחד אם ניתנו מחוץ לישראל ובלבד‬ ‫שנרשמו פרטי זיהוי המקבל, מקום נתינת המתנה וקבלות לאימות‬ ‫ההוצאה;‬

‫מתנות‬ ‫)תק' )מס' 3‬ ‫תשל"ה- 5791‬ ‫)תק' )מס' 4‬ ‫תשל"ט- 9791‬ ‫)תק' )מס' 2‬ ‫תשמ"ד- 4891‬

‫.‪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, ואולם אם לא ניתן להשתמש בביגוד שלא לצורכי עבודה - יותרו‬ ‫ההוצאות כאמור במלואן; בפסקה זו, "ביגוד" - בגדים, לרבות נעליים,‬ ‫שנועדו לשמש לצורכי עבודה ומתקיים בהם אחד מאלה:‬ ‫)1( ניתן לזהות בהם, באופן בולט, השתייכות לעסקו של הנישום;‬ ‫)2( על פי דין קיימת חובה ללבוש את הביגוד;‬

‫הוצאות ביגוד‬ ‫תק' תש"ס- 0002‬

‫‪We already mentioned that 80% of the expenses will be recognized as a deductible expense. This is‬‬ ‫‪with regards to clothing that could be used both during work and after work (e.g. a lawyer whose‬‬ ‫‪told by his boss that he must buy a fancy suit). With regards to cloths that could only be used for‬‬ ‫‪the job (say the uniform of a: steward, or a cop, or a teller that has a shirt that states Bank‬‬ ‫‪Hapoalim on it) 100% of the expense could be written off. Section 2B deals with telephone‬‬ ‫:)‪expenses (and the restrictions thereof‬‬ ‫:‪Section 2B TMNHM‬‬
‫טלפון‬ ‫)שיחותמס' 2ב. )א( לא יותרו בניכוי הוצאות בשל החזקת טלפון שאינו נייד במקום מגוריו של‬ ‫3‬ ‫תק' )‬ ‫תשל"ה- 5791‬ ‫הנישום או של בעל שליטה בנישום, זולת אם הוכיח הנישום או בעל השליטה‬ ‫תק' תש"ס- 0002‬ ‫בנישום, להנחת דעתו של פקיד השומה, כי בית המגורים משמש את עיקר עסקו או‬ ‫משלח ידו של הנישום; הוכיח כאמור, יחולו הוראות אלה:‬

‫021‬

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬ ‫:הוצאות אירוח ‪Section 3 TMNHM: deals with‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫אירוח‬ ‫ניכוי בשל 3. לא יותר ניכוי הוצאה בשל אירוח בארץ, למעט ניכוי הוצאה סבירה לאירוח‬ ‫אדם מחוץ-לארץ.‬

‫‪The expense will only be deductible if the clients are from abroad (e.g. say Chinese clients of‬‬ ‫‪Ruben the lawyer come in to close a big deal. If Ruben takes them to dinner, it will be considered‬‬ ‫‪, this will depends on each individual‬הוצאה סבירה ‪as a deductible expense). The section states‬‬ ‫.‪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,‬ ‫לרבות הוצאות הבית, הוצאות פרטיות, הוצאות אש"ל, הוצאות שהוצאו לשם‬ ‫הגעה למקום ההשתכרות ולשם חזרה ממנו, והוצאות שהוצאו לשם טיפול‬ ‫בילד או השגחה עליו או לשם טיפול באדם אחר או השגחה עליו; בפסקה זו,‬ ‫" הוצאות כרוכות ושלובות בתהליך הפקת ההכנסה" – הוצאות המשתלבות‬ ‫בתהליך הטבעי של הפקת ההכנסה ובמבנהו הטבעי של מקור ההכנסה,‬ ‫והמהוות חלק בלתי נפרד מהם;‬ ‫"הוצאות אש"ל" – הוצאות שהוציא יחיד בשל ארוחותיו, שהוצאו בין במקום‬ ‫ההשתכרות ובין מחוצה לו, ולמעט הוצאות בשל ארוחת בוקר הכלולה במחיר‬ ‫לינה המותרת בניכוי;‬ ‫)2( תשלומים או הוצאות, שאינם כסף שהוצא כולו לייצור ההכנסה ולשם כך‬ ‫בלבד;‬ ‫)3( הון שניטל או סכום כסף המשמש, או נועד לשמש, הון;‬ ‫)4( עלות ההשבחה;‬ ‫)5( כל הפסד או הוצאה הניתן להיפרע על פי ביטוח או חוזה שיפויים;‬ ‫)6( דמי שכירות ועלות תיקונים, של חצרים או של חלק מהם, ששולמו או‬ ‫שנגרמו שלא לשם ייצור ההכנסה;‬ ‫)7( סכומים ששולמו, או שיש לשלמם, כמס הכנסה;‬ ‫)8( )בוטל(;‬ ‫)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, כמשמעותה בסעיף 67, לבעל שליטה שהוא‬ ‫חבר בה או לאחר במקומו, בשל שנות עבודה עד שנת 5791;‬

‫ניכויים שאין להתירם‬ ‫23.‬ ‫]21[‬ ‫תיקון מס' 071((‬ ‫תשס"ט- 9002‬ ‫תיקון מס' 971((‬ ‫תשע"א- 1102‬

‫תיקון מס' 22((‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 31((‬ ‫תשכ"ח- 8691‬ ‫תיקון מס' 12((‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 23((‬ ‫תשל"ח- 8791‬

‫121‬

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫)2( תשלומים לקופת גמל ששילמה חברה כאמור בפסקת משנה )‬ ‫1( בשל חבר, למעט תשלומים לקופת גמל לפיצויים או לקצבה‬ ‫בשיעורים ובתנאים שנקבעו בתקנות לענין סעיף 74, אך לא יותר מ-‬ ‫000,52 לירות לשנה ולמעט תשלומים לקרן השתלמות, ובלבד‬ ‫שלא יותר בניכוי סכום העולה על %5.4 ממשכורתו הקובעת של‬ ‫החבר;‬ ‫הוראות פסקאות משנה )1( ו-)2( יחולו גם לגבי מי שטרם חלפו‬ ‫שנתיים מיום שחדל להיות חבר. על אף האמור בפסקה זו רשאי‬ ‫המנהל להורות אחרת אם ראה לעשות כן לפי הנסיבות; לענין זה –‬ ‫"בעל שליטה" - מי שמחזיק, במישרין או בעקיפין, לבדו או ביחד עם‬ ‫קרובו באחת מאלה:‬ ‫)א( ב-%01 לפחות מהון המניות שהוצא או ב- %01 לפחות‬ ‫מכוח-ההצבעה;‬ ‫)ב( בזכות להחזיק ב-%01 לפחות מהון המניות שהוצא או ב-‬ ‫%01 לפחות מכוח-ההצבעה או  בזכות לרכשם;‬ ‫)ג( בזכות לקבל %01 לפחות מהרווחים;‬ ‫)ד( בזכות למנות מנהל;‬ ‫"קרובו" - כמשמעותו בסעיף 67)ד(;‬ ‫"חבר" - בעל שליטה שיש לו לבדו או יחד עם בן-זוגו, או שיש לבן-‬ ‫זוגו, במישרין או בעקיפין, לפחות %5 מהון המניות שהוצא או מכוח‬ ‫ההצבעה או מהזכות להחזיק או לרכוש כל אחד מאלה או מהזכות‬ ‫לקבל רווחים; ובלבד שלא יובאו בחשבון לענין זה זכויותיו של בן-זוג‬ ‫שנרכשו לפני הנישואין או שנתקבלו בירושה;‬ ‫"משכורת קובעת" - כהגדרתה בסעיף 3)ה(;‬ ‫)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 ‫000,52 לירות לכל שנת עבודה, הכל לפי הסכום הקטן;‬ ‫)01( )א( פרמיות ששילמה חברה לטובת עצמה לביטוח חייו של בעל‬ ‫שליטה בה כמשמעותו בפסקה )9(, למעט פרמיות כאמור ששולמו‬ ‫לקופת גמל;‬ ‫)ב( פרמיות ששילמה שותפות לטובת עצמה לביטוח חייו של שותף בה,‬ ‫או ששילם שותף לטובת עצמו לביטוח חייו של שותפו, כשיש למבוטח‬ ‫%01 לפחות מהונה או מהזכות לרווחיה;‬ ‫)11( הוצאות למתן טובת הנאה שנתן מעביד לעובדיו ואשר לא ניתן‬ ‫לייחסה לעובד פלוני, למעט הוצאות שהוכח כי לפי טיבן אינן מיועדות להעניק‬ ‫טובת הנאה אישית לעובד; הוצאות, בגבולות סכומים שנקבעו בתקנות על פי‬ ‫סעיף 13, להחזקת רכב שבהחזקתו של מעביד והמשמש את עובדיו, ולא‬ ‫ניתן לייחס את טובת ההנאה מהשימוש בו לעובד פלוני; הוצאות שאינן‬

‫תיקון מס' 43((‬ ‫תשל"ט- 9791‬ ‫)תיקון מס' 53(‬ ‫תש"ם- 9791‬ ‫תיקון מס' 801((‬ ‫תשנ"ו- 5991‬ ‫תיקון מס' 241((‬ ‫תשס"ה- 4002‬ ‫תיקון מס' 841((‬ ‫תשס"ה- 5002‬

‫תיקון מס' 23((‬ ‫תשל"ח- 8791‬

‫)תיקון מס' 801(‬ ‫תשנ"ו- 5991‬ ‫תיקון מס' 12((‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 92((‬ ‫תשל"ח- 8791‬ ‫תיקון מס' 33((‬ ‫תשל"ח- 8791‬ ‫)תיקון מס' 53(‬ ‫תש"ם- 9791‬ ‫תיקון מס' 12((‬ ‫תשל"ה- 5791‬ ‫תיקון מס' 52((‬ ‫תשל"ז- 7791‬ ‫תיקון מס' 241((‬ ‫תשס"ה- 4002‬ ‫תיקון מס' 841((‬ ‫תשס"ה- 5002‬

‫תיקון מס' 22((‬ ‫תשל"ה- 5791‬

‫221‬

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫ניתנות לניכוי כאמור לא ייראו כהכנסת עבודה בידי העובדים;‬ ‫)21( סכומים ששולמו בעד פעולה האסורה לפי סעיפים 5א ו-5ב לפקודת‬ ‫הטלגרף האלחוטי ]נוסח חדש[, התשל"ב-2791;‬ ‫)31( תשלומים ששולמו כתוספת לפי סעיף 971 לחוק הביטוח הלאומי‬ ‫]נוסח משולב[, תשכ"ח- 8691;‬ ‫)41( )א( הוצאה לרכישת ביטוח מפני אבדן כושר עבודה;‬ ‫)ב( על אף הוראות פסקת משנה )א(, היתה ההכנסה שבשלה נרכש‬ ‫ביטוח מפני אבדן כושר עבודה, הכנסה לפי סעיף 2)1( או )2(, והביטוח‬ ‫הוא ביטוח מועדף, יותרו ניכויים בשל הוצאה לרכישת הביטוח המועדף‬ ‫שהיא בסכום של עד %5.3 מההכנסה לפי סעיף 2)1( או ממשכורתו‬ ‫של העובד, לפי הענין, שהיא הכנסה חייבת, ובלבד שניכויים לפי פסקה‬ ‫משנה זו, לא יותרו בשל הכנסה כאמור, העולה על סכום השווה לסך כל‬ ‫השכר הממוצע במשק בשנת המס כשהוא מחולק ב-3; ואולם אם שילם‬ ‫המעביד בעבור עובדו לקופת גמל, על חשבון מרכיב תגמולי המעביד,‬ ‫סכום בשיעור העולה על %4 ממשכורתו של העובד, יופחת מהשיעור‬ ‫הנקוב ברישה, לגבי הכנסה לפי סעיף 2)2(, ההפרש שבין השיעור‬ ‫ששילם המעביד כאמור, לבין %4;‬ ‫לענין פסקה זו –‬ ‫" ביטוח מועדף" – ביטוח מפני אבדן כושר עבודה, ואם נרכש‬ ‫הביטוח בטרם מלאו למבוטח 06 שנים, התקיימו לגבי הביטוח גם‬ ‫שני אלה:‬ ‫)1( תקופת הביטוח, למעט ביטוח קבוצתי, נמשכת עד שימלאו‬ ‫למבוטח 06 שנים לפחות;‬ ‫)2( אם יקרה מקרה הביטוח בטרם ימלאו למבוטח 06 שנים,‬ ‫ישתלמו הכספים על פי הביטוח ממועד קרות מקרה הביטוח ועד‬ ‫תום תקופת אבדן כושר עבודתו או עד שימלאו למבוטח 06‬ ‫שנים לפחות, לפי המוקדם;‬ ‫"ביטוח מפני אבדן כושר עבודה" – כהגדרתו בסעיף 3)א(;‬ ‫" השכר הממוצע במשק" ו" מרכיב תגמולי המעביד" – כהגדרתם‬ ‫בסעיף‬ ‫3)ה3()2(;‬ ‫"משכורת" – הכנסת עבודה למעט שוויו של שימוש ברכב שהועמד‬ ‫לרשותו של העובד;‬ ‫"קופת גמל" – )נמחקה(;‬ ‫)51( הוצאות לימודים, לרבות הוצאות לרכישת השכלה אקדמית או‬ ‫לרכישת מקצוע, ולמעט הוצאות השתלמות מקצועית, שאינה לרכישת‬ ‫השכלה או מקצוע כאמור, לצורך שמירה על הקיים;‬ ‫)61( תשלומים, בין שניתנו בכסף ובין בשווה כסף, שיש יסוד סביר להניח‬ ‫שנתינתם מהווה עבירה לפי כל דין.‬
‫321‬

‫תיקון מס' 15((‬ ‫תשמ"ב- 1891‬ ‫תיקון מס' 95((‬ ‫תשמ"ד- 4891‬ ‫תיקון מס' 831((‬ ‫תשס"ד- 4002‬ ‫תיקון מס' 831((‬ ‫)תיקון( תשס"ד- 4002‬ ‫)תיקון מס' 351(‬ ‫תשס"ז- 7002‬ ‫תיקון מס' 361((‬ ‫תשס"ח- 8002‬

‫תיקון מס' 361((‬ ‫תשס"ח- 8002‬

‫)תיקון מס' 351(‬ ‫תשס"ז- 7002‬ ‫תיקון מס' 841((‬ ‫תשס"ה- 5002‬ ‫תיקון מס' 151((‬ ‫תשס"ו- 6002‬

‫תיקון מס' 271((‬ ‫תש"ע- 9002‬

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Here too (like in section 17) some of the sub-sections are superfluous. Section 32(1) was put in place in response to the case 4243/08 (‫ .251)ורד פרי‬It states: Section 32(1) TO:

,‫)1( הוצאות שאינן הוצאות הכרוכות ושלובות בתהליך הפקת ההכנסה‬ ‫לרבות הוצאות הבית, הוצאות פרטיות, הוצאות אש"ל, הוצאות שהוצאו לשם‬ ‫הגעה למקום ההשתכרות ולשם חזרה ממנו, והוצאות שהוצאו לשם טיפול‬ ,‫בילד או השגחה עליו או לשם טיפול באדם אחר או השגחה עליו; בפסקה זו‬
The sub-section states clearly that expenses on playgroup, etc won’t be recognized as a deductable expense.

((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, שאינם כסף שהוצא כולו לייצור ההכנסה ולשם כך‬ ;‫בלבד‬
This section is superfluous for we would have known this without the section. Section 32(7) which deals with amounts paid or payable as income tax is also redundant: Section 32(7) TO:

;‫סכומים ששולמו, או שיש לשלמם, כמס הכנסה‬
Section 32(15) TO: deals with educational expenses:

(7)

‫)51( הוצאות לימודים, לרבות הוצאות לרכישת השכלה אקדמית או‬ ‫לרכישת מקצוע, ולמעט הוצאות השתלמות מקצועית, שאינה לרכישת‬ ;‫השכלה או מקצוע כאמור, לצורך שמירה על הקיים‬
This section is also redundant, being that we were able to know this without the legislation. Section 32(16) TO: deals with expenses with a criminal nature:

((151 '‫תיקון מס‬ 2006 -‫תשס"ו‬

‫)61( תשלומים, בין שניתנו בכסף ובין בשווה כסף, שיש יסוד סביר להניח‬ .‫שנתינתם מהווה עבירה לפי כל דין‬
152

((172 '‫תיקון מס‬ 2009 -‫תש"ע‬

Supra at 105

124

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

Israel was obligated to add this section when it joined the OECD. It states in situations where there is a reasonable grounds to believe that the payment was made in offense of any law, such a payment can’t be deducted as an expense. Prior to the addition of this section the case law ruled out deductions of such expenses based on market overt principles (‫ .)תקנת השוק‬In grey cases (e.g. an arms dealer that bribed foreign official) the case law vacillated whether or not to consider the expense. 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.g. 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).

Class 22 24/01/12

‫מגבלות כמותיות להוצאה המוכרת; 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 (‫ .)קיזוז הוני‬We began with offsetting profits. He gave an example: Ruben opens a café. In 2010 the café sees profits of 1,000,000. In 2011 it sees losses of 1,000,000. Ideally the law should state that just like the tax authorities partnered with Ruben during the profitable year, they should also partner with him in the year that he incurred losses, 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, and if you reaped a profit the previous year, and in the current year you incurred losses than you could setoff (‫ )קיזוז‬the taxes you paid last year with this year). In Israel there is no backwards looking taxation as in the US, but there is side-ways taxation and forward looking taxation153; sideways taxation meaning that you can offset losses of one sources of income with another source of income (e.g. In 2011 Ruben’s café losses 1,000,000$, but his Laundromat profits 1,000,000$. Ruben can offset the loss and thus in this case he wouldn’t pay any taxes. E.g. (2) Ruben’s café looses 1,000,000$. He has a barbershop which saw profits of 300,000$. He also has a
153

I coined the terms ‘side-ways’, ‘forward’, and ‘backward’.

125

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬ ‫:‪will be 0 in taxes). This is mentioned in section 28(a) TO‬‬ ‫:‪Section 28(a) TO‬‬

‫‪Prof. Yishai Beer‬‬ ‫2102-1102‬

‫‪law firm which saw profits of 700,000$. 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. )א(‬ ‫])2‬ ‫(‬ ‫)תיקון" מס' 22ריווח היה נישום לפי פקודה זו, ניתן לקיזוז כנגד סך כל הכנסתו החייבת של אותו‬ ‫תשל ה- 5791‬ ‫אדם ממקורות אחרים באותה שנת מס.‬ ‫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- 7002‬

‫.‪the given tax year, so the law allows you to push off your losses to the subsequent tax year (e.g‬‬ ‫:)‪1,000,000$. The net result is 0 taxes. This is stated in section 28(b‬‬ ‫:‪Section 28(b) TO‬‬

‫‪Ruben’s café losses 1,000,000$. He offsets the losses to next year, where the café profits‬‬

‫)ב( מקום שלא ניתן לקזז את כל ההפסד בשנת מס כאמור, 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- 7002‬ ‫של אותו אדם באותן השנים מעסק או משלח יד, לרבות ריווח הון בעסק או משלח‬ ‫יד, או שיקוזז כנגד סך כל הכנסתו החייבת של אותו אדם, באותן השנים, לפי סעיף‬ ‫2)2( בהתקיים כל התנאים המפורטים להלן, והכל ובלבד שאם ניתן לקזז את‬ ‫ההפסד באחת השנים, לא יותר לקזזו בשנה שלאחריה:‬ ‫)1( לאותו אדם לא היתה הכנסה מעסק או ממשלח יד בשנת הקיזוז;‬ ‫)2( אותו אדם חדל לעסוק בעסק או במשלח היד שאת ההפסד שהיה לו‬ ‫בו הוא מבקש לקזז;‬ ‫)3( מקורו של ההפסד שהיה לאותו אדם אינו מחברת בית כמשמעותה‬ ‫בסעיף 46, מחברה משפחתית כמשמעותה בסעיף 46א או מחברה‬ ‫שקופה כהגדרתה בסעיף 46א1)א(.‬ ‫תיקון מס' 22((‬ ‫)ג( על אף האמור בסעיפים קטנים )א( ו-)ב(, אם ביקש זאת הנישום לא‬ ‫תשל"ה- 5791‬ ‫(‬ ‫)תיקון מס' 45יקוזז הפסד לפי סעיף זה כנגד ריווח הון שהוא סכום אינפלציוני או כנגד רווח הון‬ ‫תשמ"ב- 2891‬ ‫תיקון מס' 231(ריבית או דיבידנד אם שיעור המס החל עליהם אינו עולה על %02.‬ ‫(‬
‫תשס"ב- 2002‬ ‫תיקון( תשס"ג-(‬ ‫2002‬ ‫תיקון מס' 741((‬ ‫תשס"ה- 5002‬ ‫)תיקון מס' 22(‬ ‫תשל"ה- 5791‬

‫)ד( הפסד שהיה לאדם במטע הדרים שניטע מורכב, בשנים החמישית‬ ‫והשישית מתחילת שנת המס שבה ניטע, וקוזז כנגד הכנסתו מאותו מטע בלבד‬ ‫בשנה השישית והשביעית.‬ ‫)תיקון מס' 22(‬ ‫)ה( הפסד שהיה לאדם במטע הדרים שניטע לא מורכב, בשנים השישית‬ ‫תשל"ה- 5791‬ ‫והשביעית מתחילת שנת המס שבה ניטע, יקוזז כנגד הכנסתו מאותו מטע בלבד‬ ‫בשנה השביעית והשמינית.‬ ‫)תיקון מס' 22(‬ ‫)ו( הפסד שלא ניתן לקזזו כאמור בסעיפים קטנים )ד( ו-)ה( יחולו עליו‬ ‫תשל"ה- 5791‬ ‫הוראות סעיף קטן )ב(.‬
‫621‬

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

30 ‫)ז( לענין הסעיפים הקטנים )ד( ו-)ה( יראו מטע הדרים שניטע לאחר‬ ((22 '‫תיקון מס‬ 1975 -‫ה‬ .‫)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 .‫בשנים הבאות‬ ((54 '‫תיקון מס‬ .(‫)ט( )בוטל‬ 1982 -‫תשמ"ב‬ ((22 '‫תיקון מס‬ ‫)י( בסעיף זה, "הכנסה חייבת" ו"ריווח הון" - לרבות שבח כמשמעותו לפי‬ 1975 -‫תשל"ה‬ ( .(‫)תיקון מס' 52סעיף 6 לחוק מס שבח מקרקעין, תשכ"ג-3691 )להלן - שבח מקרקעין‬
Regarding section 28(b) TO, until 2008 section 28b said that you offset losses from a persons
1977 -‫תשל"ז‬ ((26 '‫תיקון מס‬ 1977 -‫תשל"ז‬

business (‫ ,)עסק‬vocation (‫ ,)משלח יד‬or capitals gains (‫ .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, according to the section such a person wouldn’t be able to offset their losses (e.g. Ruben’s café incurs losses. He decides to close the café and become a teacher. Being that a wage earner is not a business, according to section 28(b) he would not be able to set off his losses!) Thus, in 2008 the legislature amended the section and added salary (albeit with exceptions) (e.g. (1) in 2011 Ruben’s café incurred losses of 750,000$. In the same year he profited 200,000$ as a hired teacher, and 50,000$ as a private tutor. After offsetting his losses (in accordance with section 28(a)) he would have losses of 500,000$. E.g. (2) In 2012 Ruben closes the café but continues to teach. In addition he buys a Laundromat which sees profits of 600,000$. In light of the 500,000$ from 2011 his net profit would be 100,000$. E.g. (3) Ruben began 2012 with losses of 500,000$. His Laundromat saw profits of 300,000$, and his private tutoring brought him profits of 200,000$. After offsetting his losses his net profit for 2012 would be 0. E.g. (4) If Ruben began 2012 with losses of 500,000$, his teaching brought him profits of 150,000$, and his Laundromat brought in profits of 300,000$; than he would finish the year with a loss of 50,000$ which would be pushed off yet again to the subsequent year. In all these examples Ruben continued to own a business and thus was able to setoff his losses, 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.g. Ruben’s café incurs losses. He decides to close the café and become a wage earner (e.g. a teacher). Being that (until 2008) salary wasn’t included in the statute, he wouldn’t be able to write of his losses from the café! In light of the unjustness of this the legislature added salary, and so long that the three criteria (mentioned in the clause) are met one could offset the losses with their salary.
154

An example of capitals gains would be if say you sold the coffee machine of the café.

127

‫‪Effy Stern‬‬ ‫‪Tax Law‬‬
‫קיזוז הוני – ‪Offsetting capital‬‬

‫‪Prof. 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. )א(‬ ‫מס' (‬ ‫תשכ"ה- 5691‬ ‫הון היה מתחייב עליו במס, יקוזז תחילה כנגד ריווח ההון הריאלי וכל‬ ‫)תיקון מס' 22(‬ ‫תשל"ה- 5791‬ ‫שקל חדש של היתרה יקוזז כנגד שלושה וחצי שקלים חדשים של סכום‬ ‫)תיקון מס' 45(‬ ‫תשמ"ב- 2891‬ ‫אינפלציוני חייב; לענין זה רואים שבח והפסד כמשמעותם בחוק מיסוי‬ ‫)תיקון מס' 09(‬ ‫תשנ"ב- 2991‬ ‫מקרקעין, תשכ"ג-3691, כאילו היו ריווח הון או הפסד הון, לפי הענין;‬ ‫תיקון מס' 231((‬ ‫תשס"ב- 2002‬ ‫תיקון מס' 231((‬ ‫)2( )נמחקה(;‬ ‫תשס"ב- 2002‬ ‫תיקון מס' 231((‬ ‫)3( היה לאדם הפסד הון במכירת נכס מחוץ לישראל, ושאילו היה רווח‬ ‫תשס"ב- 2002‬ ‫היה מתחייב עליו במס בישראל, יחולו עליו הוראות פסקה )1(, ואולם‬ ‫הפסד הון מנכס כאמור יקוזז תחילה כנגד רווח הון מחוץ לישראל;‬ ‫תיקון מס' 741((‬ ‫)4( היה לאדם הפסד הון במכירת נייר ערך בשנת המס, יחולו עליו‬ ‫תשס"ה- 5002‬ ‫הוראות פסקאות )1( או )3(, לפי הענין, ואולם הפסד ההון יקוזז גם‬ ‫כנגד אלה:‬ ‫)א( הכנסה מריבית או מדיבידנד ששולמו בשל אותו נייר ערך;‬ ‫)ב( הכנסה מריבית או מדיבידנד בשל ניירות ערך אחרים, ובלבד‬ ‫ששיעור המס החל על הריבית או הדיבידנד שקיבל אותו אדם לא‬ ‫עולה על %52;‬ ‫תיקון מס' 741((‬ ‫)5( הוצאות בשל ניירות ערך, כפי שקבע שר האוצר באישור ועדת‬ ‫תשס"ה- 5002‬ ‫הכספים של הכנסת, שלא נוכו בשנת המס, ייחשבו לענין סעיף זה‬ ‫כהפסד הון מניירות ערך.‬ ‫)תיקון מס' 22(‬ ‫)ב( סכום שלא ניתן לקזזו, כולו או מקצתו, כאמור בסעיף קטן )א(, בשנת מס‬ ‫תשל"ה- 5791‬ ‫(‬ ‫'‬ ‫תיקון מסב-231(מסויימת, 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- 5002‬ ‫המס שבה היה ההפסד, כאמור בסעיפים 131 ו-231. היה הסכום שלא ניתן לקזזו‬ ‫הפסד ממכירת נכס מחוץ לישראל, יקוזז ההפסד תחילה כנגד רווח הון ממכירת‬ ‫נכס מחוץ לישראל.‬ ‫תיקון מס' 231((‬ ‫)ג( שר האוצר, באישור ועדת הכספים של הכנסת, רשאי לקבוע הוראות‬ ‫תשס"ב- 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, כולם או חלקם, או איסור‬ ‫על קיזוז כאמור, קביעת סדר קיזוז ההפסדים וייחוס הרווחים וכן דרכי הוכחה‬ ‫והוראות לביצוע סעיף זה.‬

‫,‪An example of a capital loss would be as follows: Ruben invests 1,000,000$ in a startup company‬‬ ‫‪shortly thereafter the company goes bankrupt. Another example would be: Simon buys a café for‬‬ ‫‪2,000,000$. The café isn’t successful and he is forced to sell it for 1,000,000$. Section 92 states‬‬ ‫‪). Just like‬רווח הוני( ‪) can be offset by capital gains‬הפסד הוני( ‪that as a general rule capital losses‬‬ ‫821‬

Effy Stern Tax Law

Prof. Yishai Beer 2011-2012

with offsetting profits, 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, however in 2008 the law was amended, and now capital losses can be pushed off ad infinitum.

Regarding the exam: The exam will be fair and it will only be based on what we discussed in the lectures. In the exam we will be required to try and draw out the relevant issues from the case. The main challenge will be to identify the issues that are relevant; the solution to the issues is of less importance. He stressed that we shouldn’t be verbose, 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. He also stressed that we should always spell out both sides to the transaction (e.g. if we are dealing with an artificial transaction than spell out both sides to the transaction).

129