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Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Regularization of
Undeclared Israeli Assets
Hagi Elmekiesse, CPA (ADV.) - Partner Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions
Ltd.
1
Academy & Finance Seminar
Geneva / Zurich, November 25 -26, 2014
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
1. The risks of non-regularization
2. How to regularize?
Voluntary disclosure procedure
2 steps in the voluntary disclosure procedure
Trust settlement
3. Settlement costs
4. Summary and conclusion
Table of content
2
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
CPA and Advocate (Israel).
Worked at the Israeli Tax Authority.
One of the founders of the International Tax Unit at
the Israeli Tax Authority (“ITA”), January 2001.
International Tax Partner at Artzi, Hiba, Elmekiesse,
Cohen - Tax Solutions Ltd.
Specializes in complicated tax settlements with the
ITA.
Personal background
3
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
The world becomes more “transparent”.
If you don’t disclose - the Israeli Tax Authority (ITA) will
eventually catch you.
Swiss bank account is not confidential as in the past.
Swiss authorities already transferred information
regarding thousands of Swiss bank accounts held by US
citizens/residents.
What are the options –
the risks of non-regularization
4
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Swiss banks require accounts holders to regularize their
assets, some also require confirmation that the account is
disclosed to the tax authorities.
Exchange of information between countries.
Recently the ITA published that its investigators arrested
a UBS bank adviser in Israel, and apprehended a list of
hundreds of Israeli’s bank account holders.
What are the options –
the risks of non-regularization
5
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Information theft is the greatest risk to the client !
We don't know it in advance > more difficult to defend.
The information arrives directly to the relevant authorities.
The authorities take immediate actions against those who
do not disclose information and income derived from
foreign bank accounts.
Examples:
In 2010, Germany paid 1.25M € for information stolen from a
financial institution (details of 1,500 customers).
Leak of Information / data theft
from financial institutions
6
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
In 2010, France acquires information stolen from HSBC
(details regarding 24,000 bank accounts).
In 2012, Great Britain acquires information stolen from HSBC
Jersey (details regarding 8,000 customers, among them
were 600 Israeli’s residents.).
In 2013, Germany paid 4.0M € for information stolen from a
financial institution (details regarding 40,000 customers).
Leak of Information / data theft
from financial institutions (cont.)
7
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
A. Individuals and corporate structures:
Course of action - voluntary disclosure procedure ( the
“Procedure”)
Anonymous procedure was published on September 7th,
2014 and is possible for a limited period of one year.
The Procedure grants protection from criminal sanctions.
How to Regularize?
8
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Two steps when dealing with a potential client:
Step 1: Gathering data and documents, and analyzing
the client’s tax exposure.
Step 2: Applying an request to the ITA to settle the
criminal and civil infringement.
Preparation of an application to
a voluntary disclosure
9
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
During this stage there is no contact with the ITA.
Gathering of all the facts to be used as background
when preparing the application,
Explanations regarding the funds’ origin (gift?
Inheritance? Trust distribution? etc.)
Preparation of supporting documents regarding the
funds’ origin and the funds’ yields.
Step 1: Gathering data & documents
and analyzing the tax exposure
10
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Required documentation:
Year-end statements
Income reports (interest, dividend, capital gain).
Information regarding current and previous bank
accounts.
Financial reports and tax returns prepared
/submitted to foreign tax authorities, if any.
Step 1: Gathering data & documents
and analyzing the tax exposure
11
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Analyzing the tax exposure:
Calculating the tax exposures in Israel regarding
incomes accrued in the account(s).
Evaluating the tax exposure, including income and
capital.
Step 1: Gathering data & documents
and analyzing the tax exposure
12
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Step 2: Applying to the ITA to
settle the criminal and civil
infringements
13
Settling the civil infringement:
Submitting a written application to the ITA which includes the
background, facts and details regarding the accrued income
not reported to the ITA.
Referral by the ITA to the civil tax assessing office.
Negotiating with the civil tax assessing officer
Reaching an agreement on the final tax due
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Settling the criminal infringement :
The ITA examines possession of prior information related to the
Voluntary Disclosure, in the ITA, other governmental authorities,
published media and judiciary documents.
Replying to questions / submitting clarifications to the investigating
unit and transferring documents, as requested.
Receiving an approval that no criminal prosecution will be
conducted against the client - an “Insurance Policy”.
Step 2: Applying to the ITA to settle the
criminal and civil infringements
14
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Temporary order - “Short Route”
15
Applies for cases when the value of the assets do not
exceed ILS 2,000,000 (approx. USD 520,000),
When the total tax due in the relevant period does not
exceed ILD 500,000 (approx. USD 130,000).
Faster procedure
Disadvantages:
No anonymity
no certainty regarding the final tax due!
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Trust Settlement
16
On January 1,2006 legislation regarding trust taxation
enacted for the first time and inserted to the Israeli tax
ordinance (“ITO”).
The ITA offered settlement regarding the taxation of
trusts which were created before 2006.
In January 1st, 2014, the legislation undergone a major
amendment
The significant change: equalizing the taxation of trust
where its settlor is foreign, to the taxation of gifts.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Trust Settlement
17
Option to tax “Relatives Trust”:
30% tax levy distribution from the trust.
Or alternatively, 25% tax levy on current income.
the ITA offers settlements for trusts which already
existed in December 31st, 2013, and were classified as
“Foreign Settlor Trust”.
The possibility to submit an application for tax settlement
regarding “Foreign Settlor Trust” is available only until
December 31st, 2014 (it is possible that the deadline will
be postponed).
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Trust Settlement - In General
18
Application is submitted anonymously.
Only a civil process - do not need to submit a request to
the investigating unit of the ITA.
Expertise in the ITA - only two assessing offices are in
charge of trusts.
Settlement procedure – same as voluntary disclosure:
Step 1: Gathering data & documents.
Step 2: Submitting a request to the ITA.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Life Insurance Settlement
19
Procedure to set-up:
A person established a life insurance policy.
A significant amount of money was transferred to the policy,
held under the name of the insurance company.
The insured person / the policy holder / their finanacial
advisors could influence the way the assets are managed
and/or perform investment by themselves.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Life Insurance Contract
Settlement
20
Tax advantage:
Taxation only upon the redemption of the insurance policy
(possibly many years after establishing the policy).
Possibility to offset losses retroactively :
In Israel capital losses can only be carried forward and
offset against future capital gains.
Because we are dealing with a life insurance policy - closed
instrument (“Black Box”) – prior year losses will be offset
against gains that will be derived in future years.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Life Insurance Contract
Settlement
21
Tax advantage - example:
Gain/Taxable
income year
2010 2009 2008 2007
Regular
situation 150 (100) 100 (50) 100
Life
insurance
policy 50 (100) 100 (50) 100
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Cost of Settlement
22
Tax payment in voluntary disclosure procedure:
Our firm dealt with hundreds of voluntary disclosure and trust
settlements.
In most cases, the tax due was in a range of 5% to 18%.
In cases where the principal capital accrued in the past
decade, the tax rate was higher.
The main issue in the settlements is prove to the ITA the source
of the funds.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Cost of Settlement
23
In corporate structures, the tax implications of the following have
to be examined:
CFC Rules (Controlled foreign corporation).
Vocation company.
Management and control.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Cost of Settlement
24
Settlement in life insurance policies:
The subject is not commonly dealt by the ITA.
The ITA intends to settle it with new legislation.
The existence of the insurance policy can be disregarded and
achieve a tax settlement as in the voluntary disclosure
regarding bank accounts (still, there is an issue regarding the
origin of the funds deposited in the policy).
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Trust settlement
25
New settlements until December 31st. 2014:
Temporary call to reach an agreement with a tax rate of 3% to
6% of the trust assets value on 31.12.2013; the rate depends to
the influence of the beneficiaries and the relations between
the settlor and the beneficiaries.
Or, alternatively:
Taxation of the trust accrued income of the trust in the years
2006 to 2013, at a rate of 33% to 67% from the regular
applicable tax rate.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Trust settlement
26
Trusts that are not classified as “Foreign settlor Trust”:
No time limit for setting a settlement with the ITA (requests
can be submitted after the deadline of 31.12.2014).
Usually applies to Israeli resident settlor with Israelis residents
beneficiaries.
The tax rate in such cases is usually between 6% to 18%.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l
Summary and Conclusion
27
The risk in holding a foreign undisclosed bank account is
higher than in the past.
It is expected that a foreign bank holder who does not
disclose, the ITA will eventually obtain information regarding
his bank account.
An anonymous application to the ITA is possible both in the
routes of the voluntary disclosure procedure for bank accounts
and for trusts – in both cases it is still possible to achieve
favorable tax settlements.
Art
zi, H
iba,
Elm
ekie
sse,
Coh
en
www.ahec-tax .co . i l 28
Thank you !
You are welcome to visit our website:
www.ahec-tax.co.il
Hagi’s e-mail: [email protected]
