tax law prof. yishai beer

Effy Stern Prof. Yishai BeerTax Law 2011-2012

Tax LawProf. Yishai Beer

2011-2012

*Lectures were given in Hebrew – this is a loose translation

Table of Contents

7...........................הבסיס החוקתי להטלת מיסים ואגרות; הכרת המאפיינים השונים של מס, אגרה ומחירThe role of the tax system – 7.........................................................................תפקידי מערכת המס

Financing government expenditure.........................................................................................8Equal distribution of wealth.....................................................................................................8Directing the conduct of the citizens.......................................................................................8

Basic concepts - הגדרות בסיסיות: .................................................................................................9(a) Direct tax/indirect tax – 9..........................................................................מס ישיר/מס עקיף(b) Tax, tolls, charges – 9..................................................................................מס, אגרה, מכיר(c) Relative tax, progressive tax, regressive tax – 10..........מס יחסי, מס פרוגרסיבי, מס רגרסיבי(d) Tax brackets – 11..................................................................................מס שולי, מדרגות מס(d) Tax deductions, tax credits – 12.................................................................ניכוי מס, זיכוי מס

Section 46 TO................................................................................................................12Choosing a fair and just tax structure:.......................................................................................13

Neutrality...............................................................................................................................13Horizontal justice & Vertical justice.....................................................................................15Utility.....................................................................................................................................15

Different forms of taxation (in the West):.................................................................................15(1) Head tax or per capita tax - 15.................................................................................מס גולגולת(2) Income tax - מס הכנסה: ........................................................................................................16(3) VAT – (מע"מ) ,17...................................................................................מס צריכה/מס הוצאות(4) Purchase tax – (מס קנייה).....................................................................................................18(5) Estate tax or property tax – 18....................................................................................מס רכוש(6) Business tax – 18...................................................................................................מס עסקאות

Fiscal policy, monetary policy – מדיניות מוניטארית, מדיניות פיסקאלית: ................................19The tax system in Israel: (distinction between peyrot and etzim)..........................................19

Different types of taxation (cont’d)............................................................................................20Income tax – 20..............................................................................................................מס הכנסה

Problems with the distinction between Etz and Peyrot.....................................................21

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Taxation in Israel (cont’d)..........................................................................................................22Income tax – 22..............................................................................................................מס הכנסהCorporate Tax – 22.........................................................................................................מס חברותBetterment tax – 22...............................................................................מס שבח/מס שבק מקרקעיןSocial security – ביטוח לאומי BL...............................................................................................23Employment tax – 23.................................................................................................מס מעסיקיםPayroll tax – 23.........................................................................................................מס שכר ורווחConsumption tax (VAT, purchase tax, customs) – (מע"מ, מס קנייה, מכס) 23............מיסוי צריכהOther taxes (Travel tax and money exchange tax – מס נסיעות)................................................24Estate tax or property tax – 24.........................................................................................מס רכושTransaction tax – 25....................................................................................................מיסוי עסקותStamp Tax – 25................................................................................................................מס בוליםPurchase tax – 25...........................................................................................................מס רכישה

26.....................................................................................................................................גישת המקורEconomics and Constitutional law regarding taxation – 26...........דינה החוקה הכלכלית ודיני המס

Compulsory loans..................................................................................................................2728...................................................................................................................נוחימובסקי28.............................................................................................................(קריב) 474/89

28.....................................................................................................................תקנת שעת חירוםSection 245 TO:.............................................................................................................29

Pre-Ruling..............................................................................................................................29Section 158A TO...........................................................................................................29

The state’s authority to tax (case law).......................................................................................3030..............................................................................................(עיריית הרצליה) 620/8230........................................................................................................(שופרסל) 154/8331.............................................................................................................(סגל) 5503/94

Section 36A TO.............................................................................................................31:הכנסה מחייבת – בירור ההכנסה לפי הפקודה ...................................................................................31

Question 1 – what type of tax – 32....................................................................מה סוג ההכנסהSection 6 TO:.................................................................................................................32

Question 2 - ‘who is the tax payer’ – 32......................................................שאלת זהות הנישוםQuestion 3 – regarding international standing – 32..........................................מעמד הבינלאומי

32.....................................................................................גישה פרסונאלית/גישה טריטוריאליתQuestion 4 - The question of timing (עיתוי)...........................................................................33

33...................................................................................................בסיס מזומנים/בסיס מסחריQuestion 5 – what is the chargeable income – הכנסה מחייבת? ............................................36

36.....................................................................................................................עיקרון המימושChargeable income (הכנסה מחייבת) – the American model..................................................36Chargeable income (הכנסה מחייבת)– the British/Israeli model (גישת המקור)......................37

Legislative source for taxation, section 2 – '2סעיפי המקור, ס ...........................................37Section 2 TO..................................................................................................................37Section 2(1): Business or vocation – 38...................................................עסק או משלח יד

38........................................................................................................(מחאג'נה) 134/9239.......................................................................................פס"ד גבריאלה שלו) 2308/08

Section 2(1) Business and vocation and section 2(10) “other sources”........................3939..........................................................................................................(משולם) 609/68

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136/67........................................................................................................................4041...........................................................................................................(פרומקין) 13/8241.......................................................................................................(ברנשטיין) 597/7541.......................................................................................................................פ"ד סמו42......................................................................................................:(מזל טוב) 1264/64

43.......................................................................................................עסקת אקראי בעלת אופי מסחריBritish case.................................................................................................................43

Section 2(1) cont’d – Incidental transactions of commercial character - עסקת אקראי:בעלת אופי מסחרי ...........................................................................................................43

Ways to test for an incidental transaction..................................................................................4445..................................................................................................................(פ"ד אמיד)45...................................................................................................................(פ"ד אסל)

Commodities trading and hedging.....................................................................................4546..............................................................................................................(מזרחי) 35/8246.................................................................................................(בן ציון ומיריון) 264/6447.....................................................................................................(חיימובסקי) 202/6547.......................................................................................................(צבי ברנר) 115/97

In Summary: the tests for incidental transactions..............................................................4848.........................................................................................הכנסת עבודה, הכנסה מעסק או משלח יד

Section 2(2) Employment - 48......................................................................הכנסת עבודהTests to help decide whether we are dealing with employment income (Section 2(2)) – 49...........................................................................................................................הכנסת עבודה

49..............................................................................................(הפועל תבריה) 5378/9050...............................................................................................................(פס"ד ליבנה)

Waiters – tips.........................................................................................................................5252...................................................................................................(אסתר כהן) 2105/06

53....................................................................................................הכנסה והוצאה רעיונית - אופציותImputed/conceptual income – 53.............................................................................הכנסה רעיונית

Section 2(2) TO: Employment.......................................................................................5456............................................................................................................................הלווה מוטבת

Section 3i TO:...............................................................................................................................57The problems with clause 3i..................................................................................................59

60...............................................................................................................(רימון) 32/8661..............................................................................................................(שפר) 247/6361..............................................................................................זילברשטיין ומינץ 533/89

Option 3 of section 3i............................................................................................................6262...........................................................................................................אלישע 8131/06

Section 3i: (cont’d)........................................................................................................6363.............................................................................................................(יאיר דר) 1/98

64.................................................................................................................הכנסות פיננסיות לסוגיהםWith regards to options given to workers as an incentive we mentioned section 102:.............64

Section 102 TO: Share allocation to employees – 64......................הקצאת מניות לעובדיםSection 2(4): Dividends, interest, linkage differentials, discounts – ,דיבידנד, ריבית67.......................................................................................................והפרשי הצמדה, ונכיון

68....................................................................................................(אחים רביב) 239/69Section 9(13) TO: Exemptions......................................................................................69

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At what point do we tax linkage differentials/interest – 70.....שאלת העיתוי הפרשי הצמדה/ריבית70................................................................................................בסיס המזומנים – בסיס המסחרי

71.....................................................................................................(פס"ד אלקטרוניקה)At what point do we tax exchange differentials– 71.............................שאלת העיתוי הפרשי שער

71.....................................................................................................דפוס המרכז 510/80Section 8c TO................................................................................................................72

At what point do we tax discounts fees – 73..............................................שאלת העיתוי דמי ניכוין73...............................................................................................................(לידור) 16/82

73...............................................................................................................................................אנונהSection 2(5) Benefits – pensions, usufruct, or annuity – 73...............קיצבה מלוג או אנונהSection 9(22) TO...........................................................................................................73

322/69 שטרן ...............................................................................................................75Pensions – 75.....................................................................................................................קצבה

Sections 9A & 9B TO....................................................................................................76Section 2(6): House, property and land (rent, royalties, key money, premiums and other profits derived from house, property, land or industrial buildings) – ,דמי שכירות7תגמולים, דמי מפתח, פרמיות ורווחים אחרים שמקורם באחוזת בית או קרקע או בניין תעשייתי6Section 2(7): Other assets (gains or profits derived from any asset other than house, property, land or industrial buildings) – 77...................................................נכסים אחריםSection 2(8): Agriculture (gains or profits derived from agriculture, land cultivation, afforestation, or crops) – 78.....................................................................הכנסה מחקלאותSection 2(9): Patent & Copyright – 78..................................................פטנט וזכות-יוצריםSection 8B TO: Income in advance...............................................................................79Section 3(b) TO.............................................................................................................79

Capital gains tax - 80................................................................................................מיסוי רווחי הוןTax rates (שיעורי מס) in Israel – before 2003 and after.............................................................81

Time line of taxes in Israel................................................................................................82The international dimension of capital income – 83.................המימד הבינלאומי של הכנסה הונית

Section 89(b) TO...........................................................................................................83Various concepts........................................................................................................................84

Deduction at the source (ניקוי במקור).....................................................................................84Deduction of expenses (ניכוי הוצאות).....................................................................................84

Section 91(g) TO...........................................................................................................84Section 97 TO................................................................................................................85

What is considered a capital asset (Section 88) – 85..............................................הגדרת נכסי הוןClause 88 TO:................................................................................................................85Section 88 TO................................................................................................................86

88.............................................הבחנה בין הכנסה הונית לבין הכנסה פירותית; שינוי יעוד; עיתוי; מוניטיןIndemnity – 88....................................................................................................................פיצוייםSeverance pay – 88...................................................................................................פיצויי פיטורים

)171/67 (גורדון ............................................................................................................89)24/72 (סולר ...............................................................................................................89

Taxation on reputation – 89........................................................................................מיסוי מוניטין)4/92 (שפרירי ..............................................................................................................90

90........................................................................................(פס"ד בעניין דניאל בריילובסקי)

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Transferring assets – 91.................................................................................................שינוי ייעודSharkey v. Wernher...................................................................................................9393..............................................................................................................(בן צבי) 20/6393...............................................................................................................(כהן) 217/65

94.......................................................................................(Sections 85 & 100 ) שינוי הייעוד בחוקSix types of situations of שינוי ייעוד: ......................................................................................94

Section 85 TO................................................................................................................94Section 100 TO..............................................................................................................94

95...........................................................................................................עיתוי של השינוי ייעוד96.................................................................................................פרשנות דיני המס; עסקה מלאכותית

Artificial transaction ( Section 86) – 96...............................................................עסקה מלאכותיתInterpretation of the Tax code – 96............................................................................פרשנות המס

)165/82 (חצור .............................................................................................................96Section 86 TO................................................................................................................96

Rubenstein (3415/97).................................................................................................97Herzikovitch:.............................................................................................................9999..........................................................................................................(איסמר) 102/5999...............................................................................................................(מפי 265/67)99...........................................................................................................(אבנעל 761/77)100.....................................................................................................(תעש מור 390/80)100..................................................................................(ת.מ.ב תחזוקת מפעלים) 83/81

Section 95 TO..............................................................................................................101In Summary – the tests for artificial transactions:...........................................................103

103....................................................................................................................הוצאות מותרות בניכויDeduction of expenses (Section 17) – ניקוי הוצאות: ................................................................103

Section 17 TO..............................................................................................................103105....................................................................................................:(ורד פרי) 4243/08

Section 32 TO..............................................................................................................106108............................................................................................................................השתלמויות

108......................................................................................................(לילי וולף 141/54)Section 46 TO:.............................................................................................................109Section 85 TO..............................................................................................................110

In summary: tests whether deduction will be allowed – 111................הוצאות מותרות בניכויMixed expenses – 111..........................................................................................הוצאות מעורבות

112...........................................................................................................(ערביה 54/84)Timing and deduction – 112.....................................................................כללי העיתוי של ההוצאה

113............................................................................................................................חוב מותנה - תלוי113................................................................................................................חובות מותנה/חוב תלוי

113............................................................................................................(פס"ד ארקיע)Warranties – 113........................................................................................................כתבי אחריותBusiness entities that have cases pending against them - גופים עסקיים שיש כנגדם תביעות114.......................................................................................................................משפטיות פתוחות

Deduction of expenses (cont’d) and relevant legislation (Section 17) – ניכוי הוצאות ותתי17סעיפים חשובים תחת ס' ............................................................................................................114

Section 17(1) TO.........................................................................................................114115..........................................................................................................(חלף) 3196/93

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Section 17(2) TO.........................................................................................................116Section 17(3) TO.........................................................................................................116Section 17(4) TO.........................................................................................................116Section 17(7) TO.........................................................................................................117Section 17(8) TO.........................................................................................................117Section 17(11) TO.......................................................................................................118

Section 30 TO: Restrictions on reductions:.............................................................................118Section 31 TO: Regulations on the deduction of expenses & תקנות מס הכנסה (ניכוי הוצאות119.......................................................................................................................................מסוימות)

Section 2 TMNHM......................................................................................................119120......................................................................................................(לילי וולף 141/54)

Section 2(2a)(a) TMNHM...........................................................................................120Section 2(3) TMNHM.................................................................................................120Section 2(4) TMNHM.................................................................................................120Section 2B TMNHM...................................................................................................121Section 3 TMNHM......................................................................................................121

Section 32 TO: Deductions that are not to be allowed – 121........................ניכויים שאין להתירםSection 32(1) TO.........................................................................................................123Section 32(2) TO.........................................................................................................124Section 32(7) TO.........................................................................................................124Section 32(15) TO.......................................................................................................124Section 32(16) TO.......................................................................................................124

125.............................................................................מגבלות כמותיות להוצאה המוכרת; קיזוז הפסדיםSetting off losses – 125..............................................................................................קיזוז הפסדים

Offsetting profits – 125.............................................................................................קיזוז פירותיSection 28(a) TO..........................................................................................................125Section 28(b) TO:........................................................................................................126

Offsetting capital – 127................................................................................................קיזוז הוניSection 92 TO..............................................................................................................127

Regarding the exam.........................................................................................................128

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Class 130/10/11

* 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.

הבסיס החוקתי להטלת מיסים ואגרות; הכרת המאפיינים השונים של מס, אגרהומחיר

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 יסוד) of 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 כלכלים) (e.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 (צדק חברתי/צדק חלוקתי)(3) ;1 and to direct the conduct of the citizens (e.g.

charging a tax on imports).

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

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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 חלוקתי)

in light of principles of social justice (צדק חברתי). With regards to this function of taxation, there

is much disagreement. Disagreements with regards to questions such as how to divide the cake

(i.e. who to take from? how much to take? and who should receive? etc.).

Directing the conduct of the citizens

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).

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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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 - בסיסיותהגדרות :

(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 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 (הון) than we

will consider it a direct tax, if the tax is a tax on consumption (צריכה) (e.g. VAT (מס ערך מוסף)

the 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 (מס) refers 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 (אגרה) refers 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

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between the individual taxpayer and the benefit dispensed (e.g. אגרת השידור; Joe, 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 מכיר.

This 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 (אגרה) because 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 is what we call a negative tax. An opposite example would be where the

state would charge 200$ for the visit to the ER, this would be an example of positive tax (i.e.

tax).

(c) Relative tax, progressive tax, regressive tax – מס יחסי, מס פרוגרסיבי, מסרגרסיבי

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

3 This seems like מכיר?

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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 and מס שולי he explained that any tax system that is not a relative tax :מדרגות מס

system, needs to establish tax brackets. If it’s a relative tax than we don’t need to establish

brackets 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 שולי with 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 שולי) and 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 השולי is 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 שולי or incremental tax wherein the tax percentage

progresses in increments.

Class 21/11/11

4 Number is arbitrary

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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 מס) with 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 הכנסה). So 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 מס) this refers to the amount that reduces the חשבון המס. He explained that the tax

system 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:

שקלים310 על העולה סכום פלונית סמ בשנת םרשת םאדא( ).46 לענין ( שקבע2)9 ףעיבס וכמשמעות ריוביצ וסדלמ לאומית, או לקרן חדשים

בו חייב שהוא מהמס יזוכההכנסת, של הכספים ועדת שורבאי האוצר שר זהמסכום35% של בשיעור שנה באותה ובשיעור הוא אם – התרומה יחיד, דבלבו, אדם-בני-חבר הוא אם – התרומה )א( מסכום126 בסעיף הקבוע

30% על העולה תתרומו לש ללכו כוםס בשל פלונית מס בשנת זיכוי יינתן אלשאו באותה הנישום של ייבתחה הסהכנהמ שקלים7,636,000 על שנה,

לפי סכוםלזיכוי( התקרה – )להלן מביניהם הנמוך חדשים, על ולהעה ; ףעיס ותאלהור םתאבה מהמס מס, יזוכה שנת באותה שנתרם לזיכוי ההתקר

אחת כלב יכויז תןיני אשל דזו, ובלב אחר בזו ותהבא המס שנות שושלב הז ההתקר על הלועה תרומות של כולל סכום מור, בשלאכ המס ותנש משלוש

זיכוי.ל

5 In light of the Trachtenberg report the corporate tax will be raised to 26-27% (currently it is 24% of profits).

12

למוסד רומהתיבוריצ

( 65מס' תיקון )1984שמ"ד-ת

( 96מס' תיקון נתש (1994-"ד

( 124ס' מ תיקון ) 2000תשס"א-

( 147מס' תיקון ) 2005תשס"ה-

( 154מס' תיקון ) 2007תשס"ז-

( שעה הוראת ) 2009תש"ע-

תשע"א- הודעה


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 מס). Regarding which is better for the

taxpayer, a deduction, or a credit, the answer is that it depends on the of the person מס השולי

(e.g. there are two groups of tax payers, one group pays מס שולי of 40% and the other group pays

20%. Both of these groups donated 1000$ each: The group that pays 40% would choose a tax

deduction (ניכוי)6; the 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 (ניכוי) works 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 (זיכוי) system.

Choosing a fair and just tax structure:

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

6 If this group was earning 1 million, than ניקוי would 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 זיכוי would only be worth to them 350 (the law says that with donations the tax is 35%), thus they would rather ניקוי.

13


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 שולי is 50%) than the rational decision would be for her 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 (דיור) and 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

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 רעיונית; this term refers to all work wherein the reward is in שווה כסף such as a housewife. 8 This very issue was dealt with in the case 4243/08 ורד פרי. See infra at 1009 It’s a reduced tax [שיעור מופחת] rate but nonetheless there is a tax.

14


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, 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 36/11/11

15


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 - גולגולתמס

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 נסיעות,

but 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 on stocks, they are taxable); inflation10; lastly, with income tax there is no averaging (מ

To explain the concept of averaging he gave an example of a doctor that invested 30 years .(יצוע

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 (

(כלכלי perspective 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.

10 See next paragraph

16


Regarding the aforementioned disadvantage of inflation, he explained that when there is inflation

the tax system gets crushed (מתרסק). Basically 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)

for 2011 will be 500,000$. Simon on the other hand is more sophisticated. While he (מחייבת

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 30 th 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 – (מע"מ) ,מס צריכה/מס הוצאות

We than went on to מיסוי צריכה or מס הוצאות. We 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

17


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

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

18


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 (עסקה) means 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

Shepar was one of the best lawyers in the country, he had a fancy villa. In the 90s they :((שפאר

started taxing villas. So he went and turned his villa into three apartments and listed his house as

a condominium complex (בית משותף) so 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 (

.of the estate (מהות) rather we go by the essence (רישום

Fiscal policy, monetary policy – מדיניות מוניטארית, מדיניות פיסקאלית:

Monetary policy is decided by the head of the bank. Fiscal policy is decided by the government.

He explained that budget (תקציב) is 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 He explained the absurdity that results from this concept. He gave an .הוצאות מס

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

19


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 הכנסה). If he sells the field than he will receive a

one time fee, this would be הכנסה מאץ. This is the (British) distinction between income from the

fruits (income that repeats each year), and income from the tree (or הכנסה מהון).

4th Class8/11/11

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.

20


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 פירותית) whereas if he decided to sell his boat than the

money he makes would be considered like the tree (הכנסה הונית) and 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 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.

11 Just to clarify: – הכנסה פירותית tax on the yield of the business; – הכנסה הונית the sake of the profit-yielding apparatus.

21


Another example which demonstrates the problematic nature of the distinction between peyrot

and etz would be with bond washing 12כיבוס אגרות חוב. For 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

Israel has income tax and it is a progressive tax (at the pinnacle the tax rate ( is 45%). In (מס שולי

light of the Trachtenberg Report the מס שולי will 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).

12 A bond is a loan with שיעבוד (insurance – such as a mortgage on my house).

22


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 .13רווח הון על עסקות נדל"ן This 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 and on הכנסת הון hachnasa peyrutit

which are both established in the tax ordinances פקודת מס הכנסה (TO) and for real estate there is

a tax which is established in חוק מס שבח מקרקעין. He 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 הכנסה and the plan was to nullify

the חוק מס שבח מקרקעין, but 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 לאומי BL

Another tax in Israel is He explained that BL has tax aspects and insurance .(BL) ביטוח לאומי

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 מעסיקים. This 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 was paying the worker. So if he was paying the worker 100k and the e tax rate was 10% than

he would have to pay 10k taxes for the additional worker that he hired)14.

Payroll tax – מס שכר ורווח

In Israel there is a payroll tax based on מוסף ערך מס which חוק is levied on non-profit

organizations ( .at a fixed rate of 7.5%15 of the salaries that it paid ( מלכ"ר–מוסד ללא כוונת רווח

13 tax levied on the increase in the value of real estate from the time it is purchased to the time it is sold14 He explained that there is a tax called מס ערך מוסף which still exists and it is similar to the מס הכנסה. 15 Or is it 6.5%?

23


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 אביב) at 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 מוסף levied on

regular businesses. This tax is based on section 2(2) TO.

Consumption tax (VAT, purchase tax, customs) – ,מיסוי צריכה (מע"מ, מס קנייהמכס)

One such tax is VAT (מע"מ). This 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 קנייה) which is relevant

to select products17 (e.g. cigarette and liquor). Another form of consumption tax is customs duties

.(מכס)

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

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).

16 He explained that when we buy gas there are 3 taxes; מס ערך מוסף, מס קנייה , and בלו which 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).

24


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 רכוש .מס Last 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 בנייה)). As we said this tax no longer exists.

Transaction tax – מיסוי עסקות

This category of taxes includes inheritance tax (מס עיזבון) and presents tax (מס מתנה). As 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.

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!

25


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 רכישה)). This 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 עסקה and there is a purchase tax (this is despite the fact that there is no מס מתנה

in 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 (אגרה) because 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 השתתפות). What is the validity of these taxes?

5th Class13/11/11

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?

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 רכישה rate!?

26


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 המדינה which states

that there can be no taxation without legislation (חקיקה ראשי). Thus 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, מלוות חובה, אגרות , and תשלומי חובה, we

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 - חובהמלוות . This 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

taxes the state can collect. (For instance in the 60s the מס שולי was 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 חובה. This basically meant that the state forced the citizens to lend it money. Unlike

with taxes, with מלוות חובה the government pays back the money that it took.

Compulsory loans

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

27


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 - This category of .תשלומי חובה

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:

that you need to pay to (אגרה) This case which took place in the 50s regarding the fee :נוחימובסקי

open up a file in the court. Mr. Nachomovsky was claiming that the mandatory fee is not

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 חובה and it seems

strange than look to see who sent you the tax and if they were authorized to do so.

The background of this case was the financial crises of the 80s wherein inflation :(קריב) 474/89

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

28


all fees. Shortly thereafter the broadcasting authority (רשות השידור) came along and imposed a

fee (a television tax). So in this case Mr. Kriv, a מתרגל for 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).

However there is a caveat; and that is that the state has the ability to impose :תקנת שעת חירום

taxes in a situation of emergency תקנת שעת חירום. Under 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:

ולא או םניכויי יותרו לאא( ).245 היטורפ נותיינ קיזוזים, או מסמ חותנם, בחוק. מוגדרת סמכות מכוח או בחוק במפורש נקבעו אם ת, אלאואחר הקלות

של יםפהכס תעדו ורבאישהאוצר, רש )א( רשאי טןק יףבסע רומהא אף עלב()להתקיןכה אולםוכאמ הקלות למתן תותקנ נסת, שלושה וםבת פקעי תקפן ר,

ןתקפ את ךלהארי כאמור, רשאי האוצר, באישור ששר פרסומן; ובלבד מיום חדשים.ופורסמ שבה המס תנש תום עד

מס שנת לכל עלקבו יאשרכנסת, ה לש םיפסכה תדעו רושהאוצר, באי שר(1)ג() הוא המס, ורשאי שנתב א20-ו 20 סעיפים ילפ נתנוישי מס תבוהטל הקרת

חיפושי בשל הטבות לענין הטבות; תקרה לסוגי ותנפרד תרותק לקבועת;יוהתשת גיהרהאנ שר םע התייעצות לאחר תיקבע נפט

סמ בשנת א20 וא 20 םיפיעס ילפ אישור ינתןי לאו ותתקנ יותקנו לא(2) תהובא הניתנות סהמ טבותה כל ךס את לדיגהל כדי בהם יש אםלונית, פהאוצרכוס תקרתל אמורים, מעברה םיפיעסה מכוח נהש שר שקבע ם

29

נחותה מתן יסוראתווהקל

( 22מס' תיקון )1975של"ה-ת

( 24מס' תיקון ) 1976תשל"ו-

( 82מס' תיקון ) 1990ש"ן-ת


מס.לאותה שנת

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:

יינתן א ול145 סעיף פי על הטהשפי ביטמ יפל מהשו תיעשה לא. )א(א158טענותיו. להשמיע סבירה תונהזדמ םושלני שניתנה , בלי152 סעיף לפי צו

The state’s authority to tax (case law)

authorizing the municipality to (חוקי עזר) In this case there were bylaws :(עיריית הרצליה) 620/82

impose fees, and participation fees (דמי השתתפות, אגרות, והטלים), but 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 of the road23. So the court went and checked to see if the municipality was authorized to

impose the payment (תשלום). (If 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.

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

30

מתןו טענות מיעתשנימוקים( 22מס' תיקון )

1975של"ה-ת


(איגוד ערים) As a way of background he explained the concept of urban union :(שופרסל) 154/83

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 ערים which authorizes the municipality to

impose payments (תשלומים) for the functions that the legislature obligated it to do. Anyways a

change was made to the חוק איגוד ערים. Originally 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.

In this case the claimant was arguing against the fact that along with the annual :(סגל) 5503/94

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 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

based on the fact that the state is taking money from him for no reason. The majority (אדם

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

31


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:

.כוייז נקודת1/2 בחשבון תובא השא של המס בחישוב.א36

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 615/11/11

: בירור ההכנסה לפי הפקודה–הכנסה מחייבת

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 מחייבת)? What is

the international position (מעמד הבינלאומי) of Mary? And who is considered the tax payer (

?(עיתוי) If they receive one million every January, at one point do they get taxed ?(נישום

Question 1 – what type of tax – מה סוג ההכנסה

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

Section 6 TO:

שנה. התבאו אדם של חייבתה הכנסתו על טלוי מס שנת לכל מסה.6

32

לאשה יכויז( 108מס' תיקון ת (

1996שנ"ו-

[6] מס נתש


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 הנישום). The case law

will provide us with tools regarding how to check.

Question 3 – regarding international standing – מעמד הבינלאומי

this is a complex מעמד בינלאומי Regarding the question of the :גישה פרסונאלית/גישה טריטוריאלית

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 פרסונאלית. According 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 world24. After 2003 Israel

adopted the US approach.

Question 4 - The question of timing (עיתוי)

מסחרי מזומנים/בסיס :בסיס He 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

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.

33


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 עיתוי is a strong question and there is much case law on the topic. (He gave

an example to illustrate the complications that arise regarding :עיתוי Bank 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 המזומנים.

He explained that the מבחן המזומנים is 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 המסחרי. This 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 עיתוי raises 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 שולי (tax 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 שולי many lawyers and the like are asking their clients to pay up now (so

that they could 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.

25 We will discuss later on the aforementioned issue of checks that may bounce or customers that won’t end up paying.

34


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 (פטור) from the tax on the interest that accumulates on the קרן המס (e.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

Ruben (pays on time) He begins with 100,000 and than

he pays 50% tax (100,000/2) =

50,000. He deposits the money.

The bank pays him interest (10%)

being that the money was in the

bank. The interest amounted in

5,000 and than he had to pay 50%

tax on the interest which means

2,500. Thus he ends off with

52,500.

After two years of the money

sitting in the bank he will have

made 5,250 interest, again

50% tax on that and he ends

up with 2,625 and thus he

ends up with 55,125 net.

Simon (pays 2 years late) He begins with 100,000. However

unlike Ruben he deposits the full

100,000. After a year he receives

10% interest, thus he ends up with

110,000 (on the interest he also

doesn’t pay taxes till two years are

Here he will make 11,000 in

interest and thus he will have a

total of 121,000. Now he has

to pay 50% tax. 50% of

121,000 is 60,500! (Thus he

ends up with 5,625 more than

35


up). Ruben).

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.

Year 1 Year 2

Levi He deposits 100,000. He pays

50%. Thus he is left with

50,000, plus 5,000 in interest.

Thus he is left with 55,000

He deposits 55,000. the next

year he receives another 5000

on the principal (קרן) and 500

on the interest and thus

according to this חישוב he 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 (פטור) from

the tax on the interest that accumulates on the קרן המס from 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?

המימוש :עיקרון This 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 much taxes he should pay. In simplest terms you calculate how much

36


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 (מימוש) (e.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 (עיקרון המימוש)26. Again income is created only when there is !מימוש

From 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 (

until that point he wouldn’t have to pay tax and he wouldn’t realize any changes in tax (מימוש

rates should there be any.

Chargeable income (הכנסה מחייבת) – the American model

He explained that in the West there are two different accepted approaches regarding how to

categorize הכנסה חייבת. One model is the American model. This approach says that any income

is מחייבת unless there is a law that says that this specific form of income is exempt from tax.

Chargeable income (הכנסה מחייבת)– the 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 המקור). So 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 720/11/11

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

26 Infra at 70

37


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:

וריםעבשי מס, שנת זו, לכל פקודה להוראות ם, בכפוףלמשת יהא הכנסה סמ.2 בישראל שנצמחה או שהופקה ישראל תושב אדם של הכנסתו להלן, על טיםרהמפו

בישראל, שנצמחה או שהופקה חוץ תושב םאד לש הכנסתו ועל לישראל מחוץ או:הלא ורותקממ

זמן תקופת בו שעסקו משלח-יד או עסק מכל חריוו או השתכרות(1)רי;חמס יאופ בעלי אקראי מעסק או הקסעמ ואכלשהי,

שניתנו קצובה או אההנ תטוב ה; כלמעבוד חריוו או השתכרות)א((2) הוצאותיו, לרבות לכיסוי דובלע נותינש םימולשת; ממעבידו לעובד

רכישת או לארץ לחוץ עותיטלפון, נס או בכר זקתחה בשל מיםותשלאך או מקצועית ספרות המותרים כאמור תשלומים למעט ביגוד, שהועמד נייד טלפון דיורב או ברכב ושמשי של יוו; שוהכהוצא לעובד

ין, בכסף הוושב ןיבו ףסבכ שניתנו - בין העובד; והכל של לרשותולטובתו; רחאל נויתנש או ןיפיקעב וא במישרין לעובד שניתנו

שוויו את הכנסת, יקבע של הכספים ועדת האוצר, באישור שרב()העובד;לרשות כאמור עמדושה דניי טלפון ברדיו או ברכב השימוש של

)בוטלה(;(3)

ת,ביחברה, רי של הון רווחי מתוך המשתלם בידנדיד דיבידנד, לרבות(4)נכיון;רשי הצמדה או דמי הפ

ונה;נא וא וגלקיצבה, מ(5)

שמקורם אחרים ורוחים מפתח, פרמיות ים, דמיגשכירות, תמלו דמי(6) הריכשוה חוזת-ביתא אדם בנה: יתייתעש בבנין או בקרקע או באחוזת-בית

אותה מכר ההשכרה ואחר פרמיה או מפתח דמי ההשכרה בעד קיבלועל או שריןמי, בחרלא אחוזת-בית תבשע הששנע סכםה פי בעקיפין,

ימד ההקני ביום הוא קיבל כאילו הקונה את יראוכן, פניל או הרכשהה הההשכר רלאח שנה ךתו הקניה סכום; נעשתה באותו פרמיה וא חתפמכאמור; הסכם היה שאמנם הרואכל כראיה זאת אורי

קעקר ולא בית-אחוזת שאינו נכס בכל קורםשמ ווחרי או השתכרות(7)תעשייתי; ןינב ולא

או אדמה, בייעור בחקלאות, בעבודת שמקורם חריוו או השתכרות(8) בהון, השימוש בשל המתקבלת צרתות של שוויה קרקע, לרבות בגידולי

בפסקה האמורים ההכנסה מקורות לצרכי בחיות- בית או יםעבנכס, בזרר;כאמו השימוש מן המתקבלים ווחיםבר קחל זו, ולרבות

הממציא, או ידי על מדגם וא טנטפ ירתכמ בעד המתקבלת תמורה(9) הוצרנ או האמצאה האצמוה היוצר, אם ידי לע יוצרים זכות רתמכי בעד

38

)5] נסהכה קורותמ1])

( 132' סמ יקוןת ) 2002תשס"ב-

די משלחו סקע

בודהע( 22מס' תיקון )

1975של"ה-ת( 129מס' תיקון )

2002-"בסתש

( 129מס' תיקון ) 2002תשס"ב-

( 13מס' תיקון ) 1968שכ"ח-ת יבידנד, ריביתדהצמדה הפרשיו


ימלאותג

קרקעו בית חוזתא

אחרים כסיםנ

קלאותח

םיזכות-יוצרו טנטפ


היוצר; או ממציאה של הרגיל עיסוקם בתחום שלא היצירה

(1) ותקאפסב כלול שאינו אחר מקור מכל חריוו או השתכרות(10) בכל או זו ודהקבפ טורפ ויעל ניתן ולא רושיבפ םמה אהוצ לא (, אך9) עדאחר. דין

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


means vocation. This raises the question of what is meant by a vocation. We mentioned משלח יד

two cases that dealt with this question:

This case dealt with a janitor (whose job was to clean stairwells). He claimed – (מחאג'נה) 134/92

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).

This case dealt with Prof. Shalev that taught abroad and was also .(פס"ד גבריאלה שלו) 2308/08

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

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

39

אחרים קורותמ



Israel’s approach to international taxation issues – persona rule!). In other words the question

was if arbitration 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 – “עסק.” (However in

2308/08 it would indeed have made a difference [at the time] because the section regarding

income from abroad differentiates between עסק and משלח יד). So 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 מעסק and 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.

This case dealt with an architect that won a prize for an architect contest. He :(משולם) 609/68

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

40


to them by their profession. Thus we would say that it is part of their profession, and therefore

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

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]

41


be outside influences influencing the gift, in order for the gift to exempt from taxes it needs to be

a pure gift.

provides yet another example of the courts employing section 2(10). This case (פרומקין) 13/82

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.

This case dealt with a teller of a bank that (as a side job) brokered deals :(ברנשטיין) 597/75

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

In this case there was a cab driver that drove an old lady to her home. During the ride :פ"ד סמו

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 הציבור. So 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.

42


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

In this case there was a store that sold lottery tickets. The deal was that if it had :(מזל טוב) 1264/64

leftover tickets than it has to pay the lottery ticket company (מפעל פיס) for 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 827/11/11

עסקת אקראי בעלת אופי מסחרי

Last lecture we discussed the difference between sections 2(1) and 2(10), we also discussed the

term עסק and what it means. He than asked if the intent to earn a profit is a necessary condition

He gave several examples to illustrate the point; (e.g. 1) Ruben bought sweaters ?לקיומו של עסק

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. 33 Now the law has changed and lottery wins are taxable. 34 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 ייעוד (infra 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.

43


for 20$ and than a while later (when they are already out of style) he decides to sell them for

100$. Would this be considered a עסק? (e.g. 2) A café decides to give out free coffee free (5$

value) as a marketing scheme. Would this be considered an עסק? We 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 עסק

even 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 .עסק However 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 עסק. So if the coffee store or the sweater store is giving out merchandise

and there is no way to make profit out of the situation than we won’t consider it a עסק. Likewise

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 עסק. Likewise 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:




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 אקראי) (עסקת and 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 (עסק) and an incidental

transaction is imprecise and though we will learn various tests applied by the case law came up

44


( 132' סמ יקוןת ) 2002תשס"ב-



with regards to incidental transactions, the difference between them remain vague. Lastly he

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 שומה) will 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 עסקה in 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

Thus according to her .עסקת אקראי and עסק אקראי that made a distinction between (פס"ד ברנר)

there are four categories, the two mentioned and משלח יד and עסק. We 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 ) The logic behind this test is that there are assets .מבחן טיב הנכס

that are usually held for commercial purposes and there are assets that are usually held by (נכסים

private persons (an apartment is an example is a capital asset (נכס הון) which 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 הכמות) we 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 הכמות and said that it was מסחרי). He than gave another example from

the case law:

This case dealt with a French oleh (a teacher) that bought a container of carpets (from :(פ"ד אמיד)

France) and sells them. Seemingly this would smell like an incidental transaction in light of the

45


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 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 (עסק) however 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

this would (possibly) be considered an incidental transaction. We mentioned the case (התדירות

In this case the fellow sold his apartment five times in ten years. However, he was :(פ"ד אסל)

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

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!

46


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 (עסק). In the case

the tax assessor said that Mizrahi was obligated to pay (income) taxes (he said that :(מזרחי) 35/82

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.

In this case there were two real estate lawyers that were involved in a :(בן ציון ומיריון) 264/6436

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 (מזרחי): The court ruled that ידע באחריות שלוחית is 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 E.g. a long term mortgage on a .(how the transaction is financed) אופן המימון

house usually signifies a private transaction, whereas a short-term loan usually signifies

36 He switched around the case a but for the sake of the example

47


commercial transactions. But once again, it’s all dependent on the circumstances of the

transaction (e.g.

.((חיימובסקי) 202/65

Another test that court will use is משך החזקה – the 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 הנכס: he 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 On the weekends these guys tinker with their old .עסק

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 (מומחיות) in 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 עסק) and thus the income earned on the sale of the yacht was subject to taxation.

Brenner was involved in future contracts :37(צבי ברנר) 115/97 He made sixteen .חוזים עתידיים

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.

37 He changed around the case a bit

48


In Summary: the tests for incidental transactions

1) מבחן טיב הנכס

2) מבחן הבקיאות

3) מבחן משך החזקה

4) מבחן השבחת הנכס

5) 38מבחן סעיף המטרות שבתזכיר

6) 39מבחן ייעוד התמורה

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 929/11/11

הכנסת עבודה, הכנסה מעסק או משלח יד

Section 2(2) Employment - עבודההכנסת

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 מעסיקים)41; withholding tax at the source (ניכוי מס במקור)42; setting off

losses (קיזוז הפסדים); and issues of international taxation (מיסוי בינלאומי)43. These are some of the

consequences of categorizing a source of income as employment, but there are more.

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 שולי if say I have one business that is successful and one isn’t, will I pay the same on both? Do you need to pay tax if you lost money? In light of the ambiguity of incidental transactions, is it מס שוליconsidered a felony if someone is caught not paying taxes on an incidental transaction?

41 Supra at 2242 When you receive your pay certain [additional] things are taken off automatically such as He was .ביטוח לאומי 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 מעסק or הכנסה מעבודה.

49


Tests to help decide whether we are dealing with employment income (Section הכנסת עבודה – ((2)2

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).

The claim was that they are not .מס מעסיקים In this case they didn’t pay :(הפועל תבריה) 5378/90

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

50


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 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 his44; or

were there possible business reasons for his giving her or him such a handsome amount).

In this case there were two brothers that were the controlling shareholders of a :(פס"ד ליבנה)

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 תבריה) we 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.

44 In which case we would say that it was given privately45 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).

51


With regards to the second question that we asked based on the case 5387/90 (הפועל תבריה) (what

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 reserve duty and receives money from social security (BL). In all these cases there is a

payment from a third party (תשלום מצד ג') the 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 שירות to 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.

52


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

voluntarily; on the other hand the tip is given because of the service (מתן שירות) that 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 (

and thus taxable according to the relevant section (2(1)). We mentioned the case) (משלח יד

:(אסתר כהן) 2105/06 This 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:






ין, בכסף הוושב ןיבו ףסבכ שניתנו - בין העובד; והכל של לרשותולטובתו; רחאל נויתנש או ןיפיקעב וא במישרין לעובד שניתנו


46 She was a widow and the court felt bad. 47 Again a difference between looking at a situation as or הכנסת עבודה is that if its משלח יד than the משלח יד 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.

53


( 132' סמ יקוןת ) 2002תשס"ב-




2002-"בסתש



Class 1004/12/11

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 של) השוק שווי

.(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

54


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 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 it50. 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



(1).……………



ין , ב כסף ה ו ו ש ב ן י ב ו ף ס בכ שניתנו - בין ; והכלהעובד של לרשותו לטובתו; ר ח א ל נו ית נ ש או ן יפי ק ע ב ו א במישרין לעובד שניתנו


48 We didn’t discuss the English approach at length, but basically their approach will be quicker to say that שווה כסף is like כסף and thus taxable. 49 See infra at 116 regarding deducting expenses. 50 In response to someone’s question he reminded us that with income tax we pay meaning that the מס במקור 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?

55


( 132' סמ יקוןת ) 2002תשס"ב-




2002-"בסתש



He mentioned the term הילך חוקי (legal 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.

We explained that imputed income is a benefit given in kind (שווה כסף). He 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

52 Supra at 1253 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 קיזוז where 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).

56


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.

He explained this concept with an example: There is a worker that is an asset to :הלווה מוטבת

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 רעיונית) there are two transactions;

here the two transactions are; משכורת רגילה, and לווה מלווה. The 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 רימון case next class).

Class 1106/12/11

55 Just to reiterate: with this עסקת הלווה there are two transactions; הכנסת עבודה and עסקת הלווה. With regards to the עסקת הלווה the 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 עבודה in 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’.

57


As we said income in paid in kind (שווה כסף) is 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:

היה המימוש , ובעת שירות או נכס לרכישת בעבר יבל ק ש זכות אדם מימש(1)ט() המחיר לבין שירות או נכס אותו בעד לגיכר המשתלם המחיר בין הפרש

או שריןיבמ לו שניתנה אה, ביןווהל םאד לביק וא, 56דםא אותו םלששי וכהנמ בריבית או 57ביתרי ללא היא לטובתו, וההלוואה לאחר או בעקיפין בין הכנסת של הכספים ועדת באישור 58האוצר שר זה לענין שקבע משיעור

את יראו שונות, למטרות תאוווהלל או הלוואות לסוגי ובין כלל דרך59– ההפרש

- כהכנסת ומעביד עובד סיליח רבקש תנוישנ לוואהבה או ותבזכא();הדובע

- םשירותי לו מספק אשהו ממי אדם שקיבל 60הבהלווא או בזכותב()זולת1)2 ףסעי לפי כהכנסה עם קשר ללא שניתנו הוכיח אם (

;61שסיפק השירותים

חלות אינן )ב( )א( או משנה תאוסקשפ הבהלווא או בזכות62ג() - כהכנסה תויטשבשל רהב, מחורובק או, הטשלי לעב שקיבל עליה

– זה עניןל(; 4)2 ףסעי לפי

(;1()ד)76 בסעיף קרוב" - כהגדרתו"

בעקיפין, או לרכוש, במישרין איכז או שמחזיק שליטה" - מי בעל"מאלה: קרובו, אחד עם ביחד או לבדו

56 This is referring to an option. He gave an example of a call option רכישהתאופציי : a 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 רכישה wherein they pay a certain premium and than they receive the right to buy the apartment (in x amount of years) at today’s price. אופציית מכירה is the same idea from the vantage point of the seller. A home owner is unsure whether to sell to he buys an אופציית מכירה wherein they pay a premium to someone that is willing to buy the house in X amount of years at today’s price. section 3 )רישה (ט deals with אופציית רכישה. 57 This refers to a הלווה מוטבת (we mentioned this term in a previous lecture). 58 He said that this is dealing with רבית אחידה. He explained that its only called רבית מסובסדת if the interest on the loan is less than 4% + מדד . IF it’s the same or more than this than its not considered מסובסד. 59 The section presents three alternatives: הלווה מסובסדת 6061 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 הוכיח...) is saying that the transaction is taxable unless it was proven that the loan given in the private sphere62 As an intro to this sub- Section he explained that dividends can be received either in cash or in שווה כסף. He 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 ( this is the) ( רעיונידדיווידנ.(case in the syllabus זילברשטיין ומינץ

58

( 66מס' תיקון ) 1985-השמ"ת

( 67מס' תיקון ) 1985תשמ"ה-


שהוצא; תוהמני ןמהו תחופ ל5%(1)

;הבחבר עהההצב מכוח לפחות 5%(2)

בעת נכסיהמ או החברה רווחימ ותלפח 5% קבלל ותכז(3)פירוק;

ל.מנה למנות זכות(4)

– הז קטן סעיף עניןל

לרבות כל חוב, למעט אחד מאלה:–הלוואה" "

א;85עסקה בין-לאומית כמשמעותה בסעיף )1(

במרס5) א' התשס"ח באדר כ"ח יום עד שניתנה הלוואה(2) בשל תיאומים חוק לפי המלווה בידי קבוע נכס (, שהיתה2008

(, או2007 בדצמבר31) התשס"ח בטבת כ"ב אינפלציה, ביום כ"ג שמיום בתקופה החל במועד המלווה בידי קבוע נכס שהיתהבינואר1) התשס"ח בטבת עד2008 א' באדר כ"ח יום (

במרס5) התשס"ח בשל תיאומים חוק הוראות (, אילו2008 תקופה; אותה לגבי חלות היו אינפלציה

דה.מהצ הפרשי ריבית" - לרבות"

כאילו כאמור זכות במימוש הפרש על המס יחושב הנישום בקשת לפי(2) םשניה רפסכמ שמספרם שווים שנתיים בחלקים נתקבלהש סהכנה היה

בשנת המסתיימות שנים ששמ יותר לא אך ושהימלמ עדו תוהזכ מתן מיוםשהמימוש;

) בפסקאות האמור ההפרש חישוב דרך את בועקל רשאי האוצר שר(3)זה; לצורך הנחוץ נתון כל של בוושיח ךרד את ( וכן2( ו-)1

)נמחקה(;(4)

)(ג) לא יחולו על הלוואה שקיבל בעל שליטה שהוא חבר1הוראות פסקה ()5)בסעיף כמשמעותה משפחתית חברה שאינו אדם שקופה64בני חברה או א

.1א64כהגדרתה בסעיף

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

59


( 66ס' מ תיקון )1985שמ"ה-ת

( 164מס' תיקון ) 2008תשס"ח-

( 185מס' תיקון ) 2011תשע"א-



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)).

(2) A receives an option (e.g. a lawyer receives an option from his client, the בעל משלח יד

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 יד than 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

63 This option was added later on, it is discussed in the case 533/89 זילברשטיין מינץ.

60


exchange for his services), however clause 3i only focuses on the receiver, thereby baffling the

courts regarding how to tax the giver!

The second problem is that section 3i gives a very arbitrary definition of :(זילברשטיין ומינץ 533/89)

what is considered a subsidized loan (based on the interest rates set by the minister of finance –

+ מדד 4% ). However 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

The third problem with 3i is that it results in double taxation. He explained that when :(דר 1/98)

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 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 שכר and עסקת הלוואה. With regards to

the lawyer עסקת שכר is receiving an imputed payment of 50,000 ands the client is paying

50,000. With regards to the הלווה the 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 (שפר) and 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

61


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)

from the parent agency הטבה ברבית Rimon was an insurance agency that received :(רימון) 32/86

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

interest in accordance with 364 ט meaning that he had a double tax obligation on the loan, both in

accordance with 2(4) and 3ט! Rimon claimed that (in light of what the court ruled in the case

we should pierce the veil) and in light of what we said above being that he used the (שפר) 247/63

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 as well as a conceptual expense הלווה רעיונית and they הוצאה רעיונית

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 3ט it simply ruled that you can’t be

taxed twice65.

In this case Ruben and Simon66 had a company and took out an interest :זילברשטיין ומינץ 533/89

free loan. The question that arose was how to we relate to a shareholder that takes out an interest 64 Basically the authorities said that he has an obligation to pay taxes both in accordance with Sections 2(4) and 3ט. 65 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

62


free loan (at the time of this case the 3 rd 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 3 rd

option wasn’t yet added to 3i).

Option 3 of section 3i

עליה חלות אינן )ב( )א( או משנה תאוסקשפ הבהלווא או בזכותג() לפי - כהכנסה תויטשבשל רהב, מחורובק או, הטשלי לעב שקיבל

– זה עניןל(; 4)2 ףסעי

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 –

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 (שפר)) and 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 (רימון) case and we saw the court had no clue what was going on. We

than mentioned the case 533/89 זילברשטיין ומינץ where the court finally said that section 2

includes conceptual income רעיונית .הכנסה However the court wasn’t willing to recognize

conceptual expenses הוצאה רעיונית.

8131/06 :אלישע Elisha 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 (פיקדון) for 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

63

( 66מס' תיקון ) 1985-השמ"ת



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 1211/12/11

We continued with the :case אלישע 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 רעיונית). The court pierced the veil and said that there are

two transactions here (שכר דירה רעיונית, and with regards to the (הלוואה בריבית the שכר דירה

renter is paying conceptual rent and the home is receiving conceptual rent. Likewise the renter is

receiving 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 רעיונית) it 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)

היה המימוש , ובעת שירות או נכס לרכישת בעבר יבל ק ש זכות אדם מימש(1)ט() המחיר לבין שירות או נכס אותו בעד לגיכר המשתלם המחיר בין הפרש

ביןווהל םאד לביק ואדם, א אותו םלששי או שריןיבמ לו שניתנה אה, וכהנמ בריבית או ביתרי ללא היא לטובתו, וההלוואה לאחר או בעקיפין בין הכנסת של הכספים ועדת באישור האוצר שר זה לענין שקבע משיעור

את יראו שונות, למטרות תאוווהלל או הלוואות לסוגי ובין כלל דרך– ההפרש

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

67 The relevant section for this obligatory tax is section 17(1) (infra at 110) 68 The court uses the words "הוצאה בשווה כסף"

64



be considered זכות אזם .מימש We 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!

In this case, this very issue came up! Dar tried to claim that as we learned in .(יאיר דר) 1/98

the court ruled that section 3i is supposed to provide the guidelines for section זילברשטיין 533/89

2, and (in דר’s claim) 3i also established the time of taxation (זמן עיתוי) which is at the time of

the realization of the benefit! So in this case דר was taxed when he received the benefits, but a

while later the options went down in value, and thus now (at the time that דר wants 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 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 yet70)71. So section

2 establishes the rule and section 3ט establishes the exception.

הכנסות פיננסיות לסוגיהם

With regards to options given to workers as an incentive we mentioned section 102:

69 As we already learned in the case, this claim is problematic for several reasons including the problem of רימון double taxation. But on the other hand, there is merit to the claim of the tax authorities as supposed to the claims of ,He gave an example: say I receive a benefit in the form of a car, and than two days later the car is stolen .דר obviously I wouldn’t be able to go to the tax authorities and demand that they give me my money back [the money I paid them in taxes]! We don’t care what happened to the benefit after you received it! So to in this case, דר received 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?

65


Section 102 TO: Share allocation to employees – הקצאת מניות לעובדים

– זה בסעיףא( ).102

ב–חירה" ב" מניות להקצאת מיסוי לילומס ימשנ באחד מעבידה ברהח לש ירהח הון; רווח מסלול או עבודה הכנסת נאמן, מסלול באמצעות דיםבלעו

(;9)32 עיףסב וגדרתה כ–" הטישל עלב"

דלעובד, ובלב מעבידה חברה של יותנמ אתהקצ –אמן" נ תבאמצעו ותינמ קצאתה"ה:אל לכ בה והתקיימו בעקבותיה או ההקצאה במועד בה שליטה בעל אינו שהעובד

ההקצאה במועד מכוחן, הופקדו המוקנית תוזכ לכ ותברלניות, מה(1)לפחות; התקופה תום עד נאמן בידי

לאישור הבקשת במסגרת בחירתה על השומה קידפל הודיעה ברהחה(2)ההקצאה; מועד לפני ותחלפ ימים 30 שהוגשה התכנית,

לא אם השומה, ואולם ידפק ייד על אושרו והנאמן אהצקהה ניתכת(3) תכנית את ההודעה, יראו קבלת מיום ימים 90 תוךב השומה פקיד השיב

הענין, כמאושרים; ילפ אמןהנ את או ההקצאה

אלה:מ אחד כל– " הבידעמ ברהח"

לה שיש חוץ בתשתו חברה או ישראל תתושב ברהח אוהש דביעמ(1)בישראל, אם מחקר מרכז או קבע מפעל המנהל תזא רישא ופיתוח, (;בידהמע – זה )לענין

בה; שליטה בעל שהמעביד או במעביד שליטה בעלת אישה רהבח(2)

ה;בו דיבעבמ שליטה בעל הוא דםא ותואש רהבח(3)

–ש" ומימ ועדמ"

מהנאמן המניה העברת דע- מו נאמן באמצעות מניות תצאהק ביגל(1)מביניהם; םקדמוה הנאמן, לפי ידי על המניה מכירת מועד או לעובד

מועד נאמן ותעאמצב שלא מניות תאצהק ביגל(2) המניה מכירת - ה;שתלרכי תכובז שמקורה מניה מכירת לרבות

;מניה לרכישת זכות לרבות –ניה" מ"

חלקן, או שמניותיה, כולן בחברה הנימ בותר ל–בבורסה" חרסלמ מהוהרש ניהמ"לישראל; מחוץ או בישראל בבורסה מסחרל ותומרש

ד;ובע זה, לרבות סעיף לצורך כנאמן אישרו שומהה דישפק י מ–אמן" נ"

שליטה; בעל למעט ךא רה,בחב הרשמ אושנ בותר ל–ובד" ע"

העובד שהוציא הוצאות ש, בניכויוהמימ עדובמ השווי וא מורהת הה" –בטהה וויש"וכן למועד ועד הוצאהה וםמי מתואמות כשהן המניה ברכישת הוצאות המימוש,

המכירה; בשל העובד אוציהש

:אלהמ אחד כל– ה" פוקהת וםת"

מיום חודשים12 של הפוקת- העבוד הכנסת במסלול רהבהח הרבח(1)אמן;נ בידי ודוהופק יותנהמ שבוהוקצו

שבו מיום דשיםחו 24 של - תקופה הון רווח במסלול הרבהח רהחב(2)נאמן; בידי ודופקהו המניות הוקצו

כאמור. הירמכ ועד מ -103 בסעיף כהגדרתה מרצון אלש כירהמב(3)

חויבת לא נאמן באמצעות מעבידה בחברה מניות הקצאתמ דעוב לש נסתוכה(ב)

66

מניות קצאתהעובדיםל

( 132 'מס תיקון ) 2002תשס"ב-

( 132מס' תיקון ת) (קוןי 2002-גס"שת (

( 147מס' קוןית ) 2005תשס"ה-






אלה: הוראות המימוש במועד ויחולו האההקצ עתב במס

הכנסתו את עבודה, יראו הכנסת ללומסב המעבידה הרבהח רהחב(1)או1)2 סעיף לפי כנסההכ דבהעו של לפי2) ( בסכום ( שווי הענין,

;ההטבה

עד במניות החזיק , והנאמןןוה וחור לולסבמ המעבידה הרבהח רהחב(2) שווי בסכום הון כרווח העובד לש כנסתוה את יראו, לפחות פההתקו תום

;25% של רעושיב במס עליו יחויב ההטבה, והוא

הרשומה מניה המוקצית מניהה תהי(, ה2) בפסקה רומאה אף לע(3) םימי 90 בתוך למסחר רשמונ ניותיהשמ בחברה מניה בבורסה, או למסחר

יראו עדמומ לש שוויין עממוצ ובהבג ההטבה שווי חלק את ההקצאה, להקצאה, או שקדמו המסחר ימי שלושים בתום בבורסה חברהה מניות הענין, לפי כאמור, למסחר הרישום שלאחר המסחר ימי יםוששל בתום שווי יתרת הענין, ואת ( לפי2) ( או1)2 סעיף לפי ההוצאות, כהכנסה בניכוי

עשנקב כוםשהס בלבד, ו25% של בשיעור במס חייבה ןהו כרווח ההטבה במועד ההטבה שווי על עלה ( כאמור, לא2) ( או1)2 סעיף לפי כהכנסה

ית,צמוקה המניה ברכישת עובד שהוציא ההוצאות וםיאת יןהמימוש; לענ למסחר, לפי הרישום יום או ההקצאה יום במדד כאמור הוצאות יוכפלו

הרישום, או ההקצאה מיום יתואם אה, והכלצוהה םוי דדמב הענין, ויחולקוהמימוש. למועד הענין, ועד לפי

ועדומ ןהו רווח במסלול החברה זה, בחרה בסעיף רומאה אף לע(4) ילפ נסההככ העובד של כנסתוה את התקופה, יראו תום לפני חל המימוש

נין.עה יפל (,2) ( או1)2 סעיף

,נאמן ותעבאמצ הקצאה שאינה תמניו צאתמהק עובד של נסתוכה(1)()ג פי( ל2) ( או1)2 סעיף הוראות לפי קצאה, כהכנסההה במועד במס תחויב

הענין. י לפ3ה חלק או ה בחלק כאמור - כהכנסה המימוש ענין, ובמועדה

תזכו של מהקצאה ובדע של סתוכנ(, ה1) בפסקה רומאה אף לע(2) מן, לאאנ צעותמאב שלא מניה לרכישת בבורסה למסחר רשומה הניאש

לפי כהכנסה במס תחויב מימושה ההקצאה, ובמועד עדובמ במס בתחויהענין. פי(, ל2) או( 1)2 סעיף

רתות(, 1( ו-)ג()3( ו-)1)ב() קטנים בסעיפים כאמור ותינמ קצאתהב(1)()דלחבר הוצ עובד שהוא ההמעביד הבניכוי, הקצאה בשל רכש תאבה,

ומיכס בגובה ( או2) ( או1)2 עיףס לפי בדהעו הכנסת הבבגו כאמור ה,המקצ המעבידה לחברה התחייבותה בשל ויבהח שבהם ההשתתפות

רהועבו העובד הכנסת בשל המס נוכה שבה המס בשנת הנמוך, והכל ילפהשומה. לפקיד

הרבהח בחרה שלגביה יהמנ מכירתב הוצאה ברהחל תותר אל(2) התקופה תום לפני המניה רהנמכ אם םג, ןהו רווח במסלול בידהעמה(.4)ב() קטן ףיבסע מוראכ

מעבידה בחברה ובדיםלע תיומנ הקצאת על יחולו )ט( לא3 ףיעס ראותוה(ה)כאמור; להקצאה התחייבות על לרבות

בידי החייב רווחה חלק על לשיחו המס עוריא, ש100 בסעיף רומאה אף לע(ו) הקבוע סהמ שיעור לפי יהיהסעיף, תובאו הגדרתו כישראל, תושב להיות לדחש דבועאלה:מ אחד , בכל121 סעיףב

67



במסלול החברה חרהב יהגבשל נאמן באמצעות ותינמ קצאתהב(1)עבודה; הכנסת

רווח במסלול ברהחה בחרה שלגביה נאמן באמצעות ותינמ קצאתהב(2);הפוקתה תום לפני מומשה הניהמ ולםוא הון

קטן סעיף הוראת חלה השעלי אמןנ באמצעות שלא ותינמ קצאתהב(3)(;2)ג()

הקצאת כל המניות, ועל הוקצו לו אשר עובד כל לע תחול הז עיףס יפל ירהחב(ז) לכלך, יוא הראשונה ההקצאה היתה שבה השנה תום לאחרש נהבש שבוצעה מניות

כן אם אאל אחרת רחובל רשאית תהיה לא אחרת; חברה החברה בחרה לא עוד לאחר שנעשתה ההראשונ ההקצאה היתה שבה השנה תוםמ תוחפל שנה חלפה

.תהקודמ הבחירה

מאלה: אחד כל לקבוע יאשר מנהלה(ח)

ההקצאה; ןינעל איםנת(1)

שנקבעו םיתנאה לגביו נתמלאו כשלא במס העובד חיוב יבגל ראותוה(2) שלא מכירהב מניות שוממי מקצתם, בשל או לפיו, כולם או זה בסעיףמרצון;

;)נמחקה((3)

תקופת חוץ, לגבי תושב שהוא לעובד תומני צאתקה ןינעל ליםלכ(4)בישראל; עבודתו

הדעבימה החברה ידי על דוחות ולהגשת במקור מס ויכינל ליםלכ(5).להגשתם מועדים וקביעת והנאמן

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 (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 עבודה) or the capital gains

course (מסלול רווח הון). Regarding 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

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.

68





transfer the benefits to a fiduciary (נאמן) of 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 הונית (which serves to his benefit with

regards to taxes). The first course is referred to as the and the second course is מסלול פירותי

referred to as the מסלול הוני. With regards to the מסלול פירותי he explained that the trustee needs

to hold on to the benefit for minimum of a year, in the מסלול הוני the 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 delayed 74, 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, והפרשיהצמדה, ונכיון



חברה, של הון רווחי מתוך המשתלם בידנדיד דיבידנד, לרבות(4)נכיון; דמי או הצמדה רשיהפת, בירי

This section deals with income based on interest, dividends, linkage differentials, and/or

discounts (נכיון). He 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 נקוב)

(e.g. bond that you paid 100$ and sell for 90$) than that is considered discount 75נכיון (i.e. so in

this case the דמי נכיון would be 10$).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 פירותי); the 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.

69


( 132' סמ יקוןת ) 2002תשס"ב-

יבידנד, ריביתדהצמדה הפרשיו



The case law on section 2(4) deals with the term interest (ריבית). The case law dealt with the

question if only (voluntary interest) ריבית רצונית is 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

In this 1000$ was borrowed and in light of inflation the borrower was :76(סיגריות לוד) 167/58

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 (אשראי

Here the case law ruled (this was in the 1960s) that businesses where credit is a major .78(ספקים

part of the 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 הניתוק which 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 רביב) :(אחים In 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 ניתוק from 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

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 )

70


options: (a) he will lend him the money index-linked (צמוד למדד) plus 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 in real terms, than the החזר הקרן

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

ממס: טוריםפ.9

אלה:הפרשי הצמדה שקיבל יחיד בשל נכס, ובלבד שהתקיימו כל (13)

זה, "הפרשי חלקיים; לענין הצמדה הפרשי אינם ההצמדה הפרשי(1) כפי שקבע שר האוצר באישור ועדת הכספים של הכנסת;–חלקיים" הצמדה

היחיד לא תבע ניכוי הוצאות ריבית או הפרשי הצמדה בשל הנכס;)2(

סעיף )3( לפי הכנסה אינם ההצמדה בפנקסי1(2הפרשי רשומים ואינם ( חשבונותיו או חייבים ברישום כאמור;

גמל;הוראות פסקה זו לא יחולו על נכס שהוא חשבון בקופת

Class 1313/12/11

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 ספקים) is also obligated in taxes

(because it is an integral part of their business). We mentioned the מבחן הניתוק (which was the

trick that contractors came up with where they would have a third party (e.g. bank) provide the

71

[8] ורותפט כנסותה

על הדהצמ פרשיהעל או יאבנק ןויקדפ

חיסכון תכנית( 147מס' תיקון )

2005תשס"ה-


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:

ממס: טוריםפ.9

(1).………

(2).………

אלה:הפרשי הצמדה שקיבל יחיד בשל נכס, ובלבד שהתקיימו כל (13)

זה, "הפרשי חלקיים; לענין הצמדה הפרשי אינם ההצמדה הפרשי(1) כפי שקבע שר האוצר באישור ועדת הכספים של הכנסת;–חלקיים" הצמדה

הנכס;היחיד לא תבע ניכוי הוצאות ריבית או הפרשי הצמדה בשל )2(ואינם1)2 סעיף לפי הכנסה אינם ההצמדה הפרשי חייבים או חשבונותיו בפנקסי רשומים (

כאמור ברישום

At what point do we tax linkage differentials/interest – שאלת העיתוי הפרשי הצמדה/ריבית

בסיס המסחרי–בסיס המזומנים

With regards to timing עיתוי we mentioned in a previous lecture two approaches – בסיס

is בסיס המזומנים We mentioned that the problem with the :80בסיס המסחרי and the המזומנים

that it doesn’t reflect reality81. The other test, the בסיס מסחרי (which says that we look at the time

that the actual transaction took place) is more reasonable. In Israel wherever they have trading

stock מלאי עסקי they are supposed to go according to the בסיס מסחרי (because that is how they

generally do business). However private persons (e.g. a shoemaker) could go according to the

המזומנים .בסיס As we explained previously, there is a monetary advantage in postponing

79 See above80 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 the income would be in 2012 if we go according to the בסיס מזומנים בסיס !it would be 2011, because the transaction happened now (!get correct name of test) מסחרי81 Supra at 32

72

[8] ורותפט כנסותה

נשיאה( 76מס' תיקון )

1988שמ"ח-ת ומית, קמ תושר מוסדו גמל ופתק

ציבורי( 21' מס תיקון )



1980ש"ם-ת( 133מס' תיקון )

2002תשס"ג-

על הדהצמ פרשיהעל או יאבנק ןויקדפ

חיסכון תכנית( 147מס' תיקון )

2005תשס"ה-


payment. With that being said, there are many mega law firms that choose to go according to the

reflects reality (if בסיס מסחרי the reason for this is because at the end of the day the ;בסיס מסחרי

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 מזומנים it 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

(תקופתי) we go by the period (עיתוי) that with regards to the question of timing (פס"ד אלקטרוניקה)

(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

In other words if you owe someone money, whether you are going to pay .(annually) תקופתי

back this year, next year, or in five years, it doesn’t make a difference, we look at each year

individually.

At what point do we tax exchange differentials– שאלת העיתוי הפרשי שער

With regards to exchange differentials (הפרשי שער) we mentioned the decision of the court in

He pointed out that in this case the court erred. Before explaining how, he :דפוס המרכז 510/80

reminded us of the realization principle (עקרון המימוש), which 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

82 Again we are dealing with a person/company that is going according to the בסיס מסחרי. 83 Supra at 35

73


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 הנזילות) which 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

In fact this is what the court ruled. The problem is that the court gave three .(annual) מבחן תקופתי

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 כימות – appraising).

Another reason given by the court is that there is no problem for the taxpayer (in this case דפוס

to go to the bank and ask them to transfer the dollars into the checking account (in other (מרכז

words there is no problem with If the court would have stopped here than everything .(נזילות

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 beginning that you would profit) is irrelevant, as we learned when it comes to

taxes you are taxed according to the results not the intentions (מה שקובע זה התוצאה)!

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 מזומנים should report according to the בסיס מסחרי.

Section 8c TO:

םג הנצבר שבה המס בשנת כהכנסה תיחשב שער ירשפמה אדם של הכנסתו.ג8

84 He pointed out that many people use the עקרון המימוש to ‘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.

74

לש החיוב ועדמ הפרשימ הכנסה

שער( 54מס' תיקון )

1982שמ"ב-ת


מזומנים.וח הוא על בסיס וידכשה

At what point do we tax discounts fees – שאלת העיתוי דמי ניכוין

This case dealt with :(לידור) Regarding discount fees we mentioned the case 16/82 :(לידור) 16/82

mandatory loans (85מלוות חובה) that 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 (הצמדה) in

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

Shamgar J. said that there is linkage differentials as well as דיון נוסף In the .(רווחי הון ומרווחי פירות

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

Usufruct (מלוג) refers to child support (הסדרי מזונות). With 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:

וחי לו נשוי שהוא ממי או לו נשוי הישה ממי יחיד לשמקב ונותזמ ימד(22) תשלום האחר, או מההורה ילדיו בעד יחיד שמקבל תנווזמ מידו, וממנ דבנפר

חוק יפ לע ילאומ לביטוח ילדיו, מהמוסד בשביל או יחיד, בשבילו שמקבל;1972ב-"התשל(, לוםשת תחהבט) המזונות

85 See previous lecture for explanation of מלוות חובה

75

תומזונ מיד( 77מס' תיקון )

1988שמ"ח-ת


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 1418/12/11

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 קרן (the 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 (קרן), and 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

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 (הוצאה) that was spent

on the policy. We will obviously have to understand how to configure the annuity policy and

86 Within an annuity there is the ריבית and the קרן so why does the section state that we need to pay on the whole .אנונה

76


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 בתשלומים! So if we understood section 2(5)

in the formal sense than being that this is סדרת תשלומים בהסכם it 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 שטרן 87). In 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 כסף) (i.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 שטרן, Mani 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.

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

The first refers to pension plans that obligate (the employer) to .פנסיה צוברת and פנסיה תקציבית

pay the 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.

87 In this case the woman legally had a percentage of the ,and she and her husband reached an agreement רכוש 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).

77


Sections 9A & 9B TO:

– זה סעיף לענין )א(.א9

קיצבה–קיצבה" " וכן גמל ופתק מאת המשתלמת עביד, אומ מאת המשתלמת א(3) בפסקה עבודה, כהגדרתו כושר אבדן מפני ביטוח פי על המשתלמת קצבה

;1 אישית" שבסעיף מיגיעה "הכנסה להגדרה

המנוהלת לקיצבה גמל קופת ידי על למתוהמש מקיצבה מוכרת" - חלק קיצבה" יום יראח הוקמהש תראח לקיצבה גמל קופת בידי המשולמת ביטוח, או חברת בידיהנובע1995 ינוארב 1) תשנ"ה בטבת כ"ט לענין םילומשמת (, זה, פטורים;

–" םירופט יםמולשת"

(;3)ה3 בסעיף כאמור מס שלוםתב בווישח םסכומי(1)

לניכוי בעבורם זכאי היה לא הקיצבה, ואשר למקב קידהפש םסכומי(2);47 בסעיף כאמור

ואינשו םדא לבשמק הקיצבאות כל מסך או הבמהקיצ חלק מזכה" - אותו קיצבה" הז יןנלע בחשבון - תבוא וןוה ממנה שחלק יצבהקלחודש; רות לי12,500 לע להעוההיוון; אאילול משתלמת התיהש הבציקה

כמשמעותו פרישה לגיל בהגיעו אדם לבקמש( 5)2 ףיעס יפל כנסה מהה35%.ב9 –א)א( 9 בסעיף כמשמעותה קיצבה ואיננה שאירים שמקבלים א)א( או9 ףבסעי

.ממס פטור – זה סעיף לפי הרפטו קיצבה היוון עקב לתקבמה ום; סכסממ פטורים

The law states that it’s a reduced tax rate. He explained that the reason for the reduced rate is not

economic rather it is for social welfare purposes – to allow more money to remain with the

person.

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

אחרים שמקורם באחוזת בית או קרקע או בניין תעשייתיםורווחי

שמקורם אחרים ורוחים מפתח, פרמיות ים, דמיגשכירות, תמלו דמי(6) הריכשוה חוזת-ביתא אדם בנה: יתייתעש בבנין או בקרקע או באחוזת-בית

אותה מכר ההשכרה ואחר פרמיה או מפתח דמי ההשכרה בעד קיבלועל או שריןמי, בחרלא אחוזת-בית תבשע הששנע סכםה פי בעקיפין,

ימד ההקני ביום הוא קיבל כאילו הקונה את יראוכן, פניל או הרכשהה הההשכר רלאח שנה ךתו הקניה סכום; נעשתה באותו פרמיה וא חתפמכאמור; הסכם היה שאמנם הרואכל כראיה זאת אורי

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

78

קרקעו בית חוזתא

לקיצבה טורפ מאת למתתמשה

ופתק או עבידמ ולקיצבה גמל

פי על המשתלמת אבדן מפני ביטוח

עבודה כושר( 18מס' תיקון )

1973של"ג-ת( 153מס' תיקון )

2007תשס"ז-

( 120מס' תיקון ) 2000תש"ס-

( 21מס' תיקון ) 1975תשל"ה-

( 25מס' תיקון ) 1977תשל"ז-

( 29מס' תיקון ) 1978תשל"ח-

( 33' סמ תיקון )1978של"ח-ת

( 34מס' תיקון )1979של"ט-ת

לקיצבה טורפחרתא

( 18מס' תיקון )1973של"ג-ת

1973תשל"ג- "טת( 34ס' מ תיקון )

1979של"ט-ת( 35מס' תיקון )

1979ש"ם-ת( 60מס' תיקון )

1984שמ"ד-ת( 120מס' תיקון )

2000תש"ס-


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

considered (חוק מיסוי מקרקעין in) was זכות במקרקעין He explained that at the time .חוזים מפוצלים

such that if you rented a property for over ten years than it would be taxable not according to מס

but according to הכנסה an example of a difference between the two forms of) חוק מס שבח

taxation would be that with חוק מס שבח your obligated to pay purchase tax (מס רכישה). In 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 חוק מס הכנסה פטורת מס הכנסה מדירת מגורים which 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).

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 חוב ידי as יוצא 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.

88 This is similar to what we said with regards to Sections 2(4) and 2(1). 89 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 שבח which 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. 91 If you had to pay according to section 2(1) than you would have to pay according to the which could מס שולי (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?

79


Section 2(7): Other assets (gains or profits derived from any asset other than house, property, land or industrial buildings) – נכסים אחרים

קעקר ולא בית-אחוזת שאינו נכס בכל קורםשמ ווחרי או השתכרות(7)תעשייתי; ןינב ולא

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

או אדמה, בייעור בחקלאות, בעבודת שמקורם חריוו או השתכרות(8) בהון, השימוש בשל המתקבלת צרתות של שוויה קרקע, לרבות בגידולי

בפסקה האמורים ההכנסה מקורות לצרכי בחיות- בית או יםעבנכס, בזרר;כאמו השימוש מן המתקבלים ווחיםבר קחל זו, ולרבות

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.

Section 2(9): Patent & Copyright – פטנט וזכות-יוצרים

הממציא, או ידי על מדגם וא טנטפ ירתכמ בעד המתקבלת תמורה(9) הוצרנ או האמצאה האצמוה היוצר, אם ידי לע יוצרים זכות רתמכי בעד

היוצר; או ממציאה של הרגיל עיסוקם בתחום שלא היצירה

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.

80

אחרים כסיםנ

קלאותח

םיזכות-יוצרו טנטפ


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-

time-situation 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 הון (and 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.

ידי על מדגם או פטנט ממכירת שנתקבלה הכנסה121 ףבסעי האמור אף לע.125 אלש היו היצירה וא ר, כשההמצאהיוצה ידי לע םיוצרי ותכז ממכירת הממציא, או

.40%ס על מה שיעור הליע הרגיל, לא עיסוקם חוםתב

With regards to at what point we tax the transaction (שעלת העתוי) we mentioned the בסיס מימוש

and the בסיס משכרי. He 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

בשנת ום ש הני ל ש בת י החי סתו נ בהכ ל יכל ת ( 7 ) ו א ( 6 ) 2 סעיף לפי הכנסה.ב8 בשנות שהוצאו , וההוצאות מראש הכנסה היא אם גם בפועל אותה קיבל שבה המס

רקומ מכל בניכוי יותרו האמורות ההוראות לפי הכנסה של בייצורה שלאחריה מס שבה המס בשנת ההוצאות תא נכותל ןנית לא שאם הוצאו, ובלבד שבה המס בשנתואהכנסה התקבלנ בהש מסה נתשב ויכבני יותרו הן הוצאו לשנה מהוהש תה,

ריבית תשלום חובת כך לשב לוחת אל םלואו, ךכל םאתבה תכמתוקנ יראו האמורה.א159 סעיף פי על מדההצ והפרשי

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 מזומנים (e.g. If Ruben reports his

taxes according to the בסיס מסחרי, and today he received rent money from a tenant for the next

five years, than according to the Ruben would divide the money into five annual בסיס מסחרי

segments and each year he would report the relevant amount accordingly. According to section

8b however, Ruben has to declare income-in-advance (הכנסה מראש) according to the בסיס

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)?

81

פיל הכנסות של ינןד(7) וא( 6)2 סעיף

( 54מס' תיקון ) 1982שמ"ב-ת

על סהמ יעורשווכ פטנט כירתמ '

[ד29]( 16מס' תיקון )

1971תשל"א-( 18מס' תיקון )

1973של"ג-ת


in the year that he received it. Thus Ruben would have to declare the whole amount מזומנים

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 חוב), and 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:

מהוצאה נובע ממנו, והחוב חלק או חוב לו נמחל ניתופל מס שבשנת םדא(1)ב() הכנסתומ קלחכ בהחו תא אורת, יבהחיי הכנסתו בבירור הותר יהכוניש

שנה; הבאות

Class 1520/12/11

Capital gains tax - רווחי הוןמיסוי

The question that needs to be asked is whether capitals gains הון) (רווחי should be taxed

differently than the way רווחים על פירות are taxed. In Israel of 2011 הכנסה פירותית is taxed at

about 45%, whereas capital gains are taxed at 20%! With regards to why this so, there is much

dispute96, in fact capitals gains tax is the apex of the political debate both in Israel and in the

US97. Some of the arguments for why capital assets (נכסי הון) shouldn’t be taxed, or at least we

should apply a reduced tax rate, are;

(1) Capital (הון) is 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

95 I think he said that this only applies to business loans. Double check!96 He mentioned that its usually the upper classes that tend to posses capital assets (נכסי הון). 97 In the US the Republicans want נכסי הון to be taxed at a reduced rate whereas the Democrats say that הון should be taxed just like פירות. Netanyahu’s government position is along the lines of the aforementioned Republican policy.

82



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 (נכסי הון)). (4) Capital 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 המיצוע) this 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 (

and peyrot (in a previous lecture we gave several examples)98. He also mentioned that at the (הון

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 מס) in Israel – before 2003 and after

After 2003 there was a significant change in the tax rates, he explained as follows100: Until 2003

capitals gains were tax progressively. The law in Israel stated that if you sold capital assets the

capital gain (רווח הוני) is attached to your הכנסה פירותית and you pay tax according to your מס

.e.g) השולי 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).

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 and the way it does this is [seemingly] arbitrary. Meaning that any transaction could be פירותית considered הון or פירותית. 99 The Trachtenberg Report wants to raise the tax rates for נכסי הון (double check!). 100 In 2010 there was another change but we don’t have to know it.

83


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 רכוש) that accrued inflation profits (הפרשי הצמדה) from 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) מוניטין. Until 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 and by מוניטין

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 מס). They lowered the tax rates on

capital gains (רווחי הון) to 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 שולי from there it was reduced to 25%

and from that it was reduced to 20%!)101. So if you sell property (נכס) in 2011 that you bought in

2004 than you would apply the reduced rate of 20%. But if you bought the property in 1970 and

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 שולי (in the highest bracket it ends up at almost 60%), with regards to נכס הון it is only 20%!

84


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 102מס שולי.

Time line of taxes in Israel

1948 - 1961 Capital gains exempt from taxes

1961 - 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

1960 would be taxed 24%)

1970s-1980s Inflation profits (linkage differentials were taxed at a fixed rate of 10%

1994 Inflation tax is repealed (with regards to profits incurred after January 1st 1994)

2003 Prior to 2003 there was also a fixed tax on reputation (מוניטין) at 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) (Section 89(b) TO).

2005 In 2005 the capital gains tax was reduced yet again to 20%

Currently the tax on reputation is 25%

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 פרסונאלית. According 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

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.

85


have to pay (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

in Israel and (נכס הון .i.e) He mentioned that if an American buys a business .((שיטת פרסונאלי)

than sells it for a profit; it would be subject to taxes in Israel103. We looked at section 89(b):

Section 89(b) TO:

חייבת, הכנסה כדין הון ריווח ודין2 סעיף לפי כנסהה כדין תמורה דיןא( ).89 אחר מפורש או משתמע מהוראות חלקשפירו ובאין הענין פיל םיביימחוה םייבשינו והכל

.1הזה או חלק

או בישראל שהופק או שנצמח ןהו וחרו על סמב חייב לאריש שבות(1)()בלענין מחוץ "תושב לישראל; ישראלי רחאז לרבות– ישראל" זה,

)1) בפסקאות כמשמעותו ו-)3(, אלי" בסעיףישר אזרח" ( להגדרה4( האמור; בסעיף הגדרתוכ אזור בושת או, שהא3

ישרין זכות, במ בעיקרו והוא לישראל מחוץ נמצא ר כ מ הנ כס נ ה(ב) במקרקעין לזכות בעקיפין זכות א הו ש או י לא למ ו ס, א כ בעקיפין, לנ או ש(,והרכ- הז )בסעיף בישראל הנמצא מקרקעין באיגוד לנכס או

בישראל; מצאנה מהרכוש הנובע התמורה קחל ןלעני

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 במקור): With הכנסה פירותית an employee (עובד שכיר) pays

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?

86

רווח דיןו תמורה יןדהון( 6מס' תיקון )

1965תשכ"ה-( 132' מס תיקון )

2002תשס"ב-( 147מס' תיקון )

2005תשס"ה-( 132' מס תיקון )

2002תשס"ב-


it’s the opposite, with capital gains there is an obligation on the receiver to pay in (הכנסה הונית)

advance104.

Deduction of expenses (ניכוי הוצאות): We will learn that there is a distinction between

capital expenditure (הוצאות הוניות) and הוצאות פירותיות. We will also discuss capital gains (רווח

When discussing .(הפסד הוני) and capital losses (הוני there is a [limited] possibility to רווח הון

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:

פי לע המתחייב סהמ תימחצ הוא סנכ בהפקעת הון וחורי על שיחול המסז())ו(. א( עד) טניםק יםפיסע

Section 97 lists several exemptions for capital gains tax (מס רווחי הון). One 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:

מאלה:מאחד עבנו אוה םא ממס פטור היהי הון ריווחא().97

כי השומה דיפק עשוכנ אם אחר ליחיד תנהמ וכן לקרוב מתנה(5)חוץ; תושב אינו המתנה שמקבל בדבלו לב םתוב ניתנה המתנה

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 (מוניטין) tax 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 מקדמה. In some situations the חיוב will 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.

87

סממ טורפ( 6מס' תיקון )

1965תשכ"ה-( 22מס' תיקון )

1975של"ה-ת

( 13מס' תיקון )1968שכ"ח-ת



Class 161/1/12

What is considered a capital asset (Section 88) – הגדרת נכסי הון

Last lecture we discussed capital gains (רווחי הון): We now went over the normative status of

capital gains: we looked at section 88:

Clause 88 TO:

טובת או זכות כל , וכןיןמיטלטל ןובי קעיןרמק רכוש, בין - כלס" נכ" שראל,יל ץומח םהש ובין בישראל םהש יןב כלהת, ווחזקומ או ראויות הנאה– טלמע

או האישי ושומלשי דיוי על המוחזקים דיחי של מיטלטלין(1)בו; תלוייםה י-אדםבנ לש וא שפחתומ בני של יהאיש לשימושם

עסקי; מלאי(2)בין יןעבמקרק חזקה זכות(3) - המשמשים שביושר ובין שבדין -

ווח;רי וא ותהשתכר לשם ולא גוריםמ לצרכי חבש סמ קבחו כמשמעותם גודאיב ויותזכו במקרקעין זכויות(4) היהש או שבח מס למוט מכירתם , שעל1963ג-תשכ"ן, יעקרקמ

ור;מאה החוק לפי ורטהפ ולאילא וטלמ להיות עשוי

The section states that an asset (with regards to this section) includes property (real or movable),

as well as any vested right or benefit (זכות) whether they are in Israel or abroad entitlement (זכו

However it excludes (1) movable property held by an .(נכס הון) is considered a capital asset 106(ת

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

106 E.g. a זכות תביעה would be considered a capital asset

88

( 13מס' תיקון ) 1968תשכ"ח-


evaluate if it was indeed used for personal use. He gave another example of a collectors car

(missing an engine) 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 אישי.

And once we categorize an item as שימוש אישי than selling that item would not be taxable107.

We looked at the term מכירה in section 88:

Section 88 TO:

לרבות–" כירהמ" וכןרהעבהה, בור, הסויתחליפין, ל כ , הענקה, מתנה, פדיון, , והכל אדם של מרשותו היא ש ל כ רך בד נכס א יצ שבעקבותם חרים א וע ר י א ו א ה ל ו ע פ

ורשה;ה למעט ךבעקיפין, א ובין במישרין בין

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 תמורה with regards to מס רווח הון:

המחיר–תמורה" " מרצון נהולק מרצון מוכר ידי על סנכ תכירממ ול תלצפו שיש הבאה אחרת ותזכ וא, המשכנת, בוח להבטיח הבא שעבוד מכל נקי כשהנכס בתום נקבע הנכס ד בע ר המחי שוכנע, כי השומה ד פקי ם א ם ל ו א; םולשת להבטיח

– לקונה המוכר בין וחדיםמי יחסים מקיום בעקיפין או במישרין שהושפע ובלי לב ; שנקבע ר י המח התמורה תהא – בכתב עשתהנ כירהמשה ינאבת גם ובמקרקעין

או חוב איגרת בפדיוןמכירה; באותה וםישהנ אישהוצ הריהמכ הוצאות כויבני והכל;מהתמורה כחלק ההצמדה הפרשי את מסחרי, יראו ערך נייר

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 אישי, but on the other hand you are holding a sale?

89

( 13מס' תיקון ), 1968תשכ"ח-


( 13מס' תיקון ) 1968תשכ"ח-



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

burden of proof on Moshe to prove that he sold at this (low) price in good faith.

Lastly with regards to the term קרוב (relative) (in section 88) it says as follows:

מאלה: אחד – כלקרוב" "

זוג, ובן בן של וצאצא הורה, צאצא זוג, אח, אחות, הורה, הורה בן(1)מאלה; אחד כל של זוגו

הורה; של אחות או אחות, ואח של או אח של צאצא(2)

אדם או אדם שבהחזקת אדם-בני-חבר(3) בו המחזיק קרובו, זו, "החזקה" הגדרה בו; לענין המחזיק אדם בידי המוחזק אדם-בני-וחבר

או באחד לפחות25%-אחר, ב עם יחד או בעקיפין, לבד או – במישריןהשליטה; אמצעי של כלשהו מסוג יותר

או ישראל תושבי בנאמנות היוצר ג, לגבי75 בסעיף כהגדרתו נאמן(4) או חוץ תושב נהנה בנאמנות נהנה לגבי נאמן וכן הדירה בנאמנותצוואה; לפי בנאמנות

יראו97 סעיף לפי ממס פטור לענין ואולם המנויים את רק כקרוב (;2)-( ו1) בפסקאות

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 – With regards to how we would classify indemnity we mentioned the :פיצויים

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).

90



The barge received two heads of damages. With regards to taxation the court ruled that one must

distinguish between damages to damages to hon and damages to peyrot.

Severance pay – פיצויי פיטורים

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

On the other hand, you could say that from the very beginning of Ruben’s .עובדן מקום העבודה

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 הוני because you are

loosing a safety in your income-producing-mechanism. He mentioned several examples from the

case law:

)171/67 (גורדון : Gordon 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 .(הוני) (As a side point he mentioned that technically we could have

categorized it either as capital (הוני) or peyruti, the court decided to categorize it as capital (הוני).

(סולר 24/72( : This 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 יד) (i.e. if the lawyer’s license wouldn’t have

91


been suspended he would have been earning the money, thus this money is simply עובדן משלח

.(יד On the other hand it could easily have be viewed as capital assets (נכסי הון). The court

“arbitrarily” decides to categorize the event as הוני (that his work/money making mechanism was

lost – and taxes him accordingly. Lastly we mentioned the (עובדן מקור הכנסה 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 הונית. The House

of Lords ruled that it was to be treated as He pointed out that once again in this case it .הונית

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 הון). Until 2003 reputation

was taxed at a fixed reduced rate of 10% (thus anyone who sold capital (הון) wanted 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.

108 What if there was more than one café on campus?

92


Horowitz. Shalom Horowitz has been dead for fifty years, but many high profile clients will

procure the firms services based on its 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 (שפרירי This 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 פירותית and הכנסה 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 בריילובסקי) with 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 1703/01/12

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).

93


Transferring assets – שינוי ייעוד

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 ייעוד of the watch was changed from נכס הוני to נכס

and הכנסה 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 עסקי); if 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 הון. If 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 אישי) would not be taxable. If the same owner brought the

painting to the store to sell it there, than it would be considered and it would be מלאי עסקי

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 עסקי and it is taxable: But if he

sells his private home than it wouldn’t be considered מלאי עסקי. Likewise if he decides to take

one of the apartments (that he is selling) for himself to live in, than it would be considered שינוי

and there would be tax ramifications114. The seeming discrepancy represented in these cases ייעוד

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

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 Say Ruben wants one of the watches in his store for .(Section 2(1) ) הכנסה מעסק 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 הון is everything other than מיטלטלין בשימוש אישי.

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eighty years. If a neighbor walks in the house and buys the painting for 100,000$ than being that

it is מיטלטלין בשימוש אישי it 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 עסקי and 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 סופית"), than if Ruben had

a painting (for sale) in gallery for ten years, and than brings it home and sells it, than according

to the doctrine, the sale would be exempt from taxes! Clearly, such a doctrine תחנה הסופית

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,

קונה מעצמו .(אדם To sum up what we said, in order to resolve the aforementioned unjust

outcome, we would have to recognize the concept of שינוי ייעוד and 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 ייעוד. The House of Lords recognized the שינויי ייעוד doctrine and the ability

of a person to sell something to himself for tax purposes. In Israel the case law dealt with this

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 ייעוד doctrine 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 and thus it would be taxable (because when the painting came to the מלאי עסקי gallery it was worth one million and two years later it appreciated in value to one million two hundred thousand).

95


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

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

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

Chaim Ben-Tzvi became a contractor (during the time period that he had bought the ((כהן) 217/65

property), and thus the tax authorities wanted to tax him on the transaction as if he sold מלאי

Chaim Ben-Tzvi .שינויי ייעוד In other words the tax authorities weren’t willing to recognize .עסקי

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

that in fact they should only be taxed on the value accrued later on, but in order to (כהן) 217/65

do so the court would have to recognize the doctrine of in the beginning the court ,שינוי ייעוד

didn’t want to accept this doctrine, but ultimately in 217/65 כהן it did.

(Sections 85 & 100 ) שינוי הייעוד בחוק

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:

מלאי ראו, יזו ודהקפ יןנלע מעסק חיםהרוו או תיורוכתההש שוביבחא( ).85השווי: בסכום רככנמ להלן האמורים םירקבמ סקע ולאות שייך שהיה עסקי

116 He changed some of the details for the sake of abstraction. 117 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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סקיע אילמ ערכתהסויימיםמ במקרים

( 13מס' תיקון )1968-"חשכת


שהועבר; או שהופסק בעת קעסל יךישה עסקי ימלא(1)

שלא או בתמורה לאש מהעסק שהועבר או שהוצא עסקי מלאי(2)עסק. ותובא בועק סכנל והפכוהש בעסק עסקי מלאי מלאה, וכן בתמורה

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:

או 119עסקי כמלאי לעסקו שבבעלותו נכס העביר םאדש שומהה פקיד וכנעש.100 אותרהו - העברה(, יחולו זה עיףס)ב ושבעסק עסקי אימלל בעסקו ועבק סכנ ךפשה

:אלה

ההעברה, יום עד הנכס את הנישום שרכש יוםמ שנים ארבע חלפו(1) עליה סמה וםבתשל יחוייב לא שוםניה לםאוה, כמכיר ההעברה את יראו שאם מקצתו; ובלבד או האמור, כולו העסקי איהמל רתכימ בעת אלא שקיבל ורהמהת על הלהעו בסכום מס שלוםבת חייב יהא , לאוקצתמ מכר

מכירה; באותה

ויראו את ם י שנ ע ב אר פו ל ח לא(2) כאמור, לא יראו את ההעברה כמכירה לנישום.יתרת המחיר המקורי כמחיר שעלה הנכס

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 ייעוד the 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 and thus the שינוי ייעוד

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 ייעוד and 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

119 Alternatives 3 and 5

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ילאלמ נכס עברתהקיעס

( 13מס' תיקון )1968-כ"חשת



valued at 5 million. The first sale is and thus exempt from taxes, the second sale is שינויי ייעוד

considered revach peyruti and would be taxable. The section provides (Ruben) with two benefits;

firstly it recognizes Secondly, it .שינויי ייעוד postpones the tax until a buyer comes along. If

however four years didn’t pass than all 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 הלכת בן צבי/כהן (שינוי ייעוד( applies to alternatives 4 and 6 its unclear,

there is no case law on the matter.

takes placed120 שינוי ייעוד he explained that usually it’s not clear when the :עיתוי של השינוי ייעוד

(examples of this were in, 2/91 (קול), and 105/86 (דנקנר)).

Class 1808/01/12

פרשנות דיני המס; עסקה מלאכותית

Artificial transaction ( Section 86) – עסקה מלאכותית

He mentioned the distinction between הימנעות ממס and השתמטות ממס, the 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

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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Regarding interpretation of the tax code there are two basic approaches. One approach, the גישה

says that when the tax authorities ask for money from the tax payer, the burden of proof is ,הישנה

on them and thus if there is a doubt (ספק), than it works in favor of the tax payer (המוציא מחבריו

This is also based on the idea that there could no taxation without legislation. On .(עליו הראייה

the other hand there is the newer approach, the גישה חדשה, which is based on Barak’s approach

of purposeful interpretation (פרשנות תכליתית). This 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 (חצור , Barak 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:

העלולה ה, אויתהמפח תניפלו עסקה יכ, בורס ומההש פקיד היהא( ).86 ואבדויה, וא מלאכותית היא יונלפ םאד ייד לע םלהמשת המס סכום תלהפחית, א

עסקה של העיקריות ממטרותיה תחא כי וא למעשה, מופעלת אינה יתונפל שהסבה ןמ להתעלם הוא נאותות, רשאי בלתי מס הפחתת או ממס הימנעות איה תיפלונ

או ממס זה. הימנעות פיל םושינ האי בדבר עוגהנ ההסבה, והאדם מן או העסקהוק.הח את תונוגד ינןא אפילו נאותות ילתבכ ןתראול תןינ סמ הפחתת

פעולה. - לרבות" זה, "עסקה עניןל

-153 עיפיםסל םאתהב, רוערעב מהשיג נעומ ונאי זה עיףסב האמור דבר שוםב()על158 יף קטןסעב לו ןיתשנ דעתו בשיקול השתמשוב השומה ידקפ של החלטתו )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 מיסוי מקרקעין) ,חוק etc). 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)121.121 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 רכוש. This lawyer listed the house as a בית משותף (and not a villa) and thus he didn’t have to pay מס רכוש. He than went to the tax authorities and said that he doesn’t have to pay מס רכוש. He explained that at this time there was no section like section 86 in חוק מס רכוש (now there is). So in this case שפאר did a מהלך and being that there was no legislation regarding עסקה מלכותית and 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 מהות overrides the formality המהות גובר על הפורמליסטקה). Likewise in England where there is no legislation like section 86, the courts have had no problem from ruling that עסקות מלאכותיות could be ignored.

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[28]( 13' מס תיקון )

1968שכ"ח-ת


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

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 מלאכותית. As

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

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 מכר (it’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 מלאכותית all he has to do is apply his basic knowledge of civil law, and calls the transaction what logic says that it is.

100


legitimate transaction. The court said that the assessor has two options when checking a

transaction. One if the 123 מסלול הדין הכללי(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.

We again looked at section 86:

העלולה ה, אויתהמפח תניפלו עסקה יכ, בורס ומההש פקיד היהא( ).86 וא, בדויה וא מלאכותית היא יונלפ םאד ייד לע םלהמשת המס סכום תלהפחית, א

של העיקריות ממטרותיה תחא כי וא , למעשה מופעלת אינה ית ונ פל שהסבה להתעלם הוא נאותות, רשאי בלתי מס הפחתת או ממס הימנעות איה תיפלונ עסקה

או ממס זה. הימנעות פיל םושינ האי בדבר עוגהנ ההסבה, והאדם מן או העסקה ןמוק.הח את תונוגד ינןא אפילו נאותות ילתבכ ןתראול תןינ סמ הפחתת

פעולה. - לרבות" זה, "עסקה עניןל

-153 עיפיםסל םאתהב, רוערעב מהשיג נעומ ונאי זה עיףסב האמור דבר שוםב()על158 יף קטןסעב לו ןיתשנ דעתו בשיקול השתמשוב השומה ידקפ של החלטתו )א(.

The section lists three scenarios where the assessor can categorize the transaction as something

other than the parties classified it as: artificial (מלאכותית); fictitious (בדויה); or 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

123 What we said above – civil law. 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.

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[28]( 13' מס תיקון )

1968שכ"ח-ת


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).

102/59 :(איסמר) With this in mind we went on to try and understand what is an artificial

transaction according to the case law? In 102/59 (איסמר( the 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 כלשהו test

(265/67 :(מפי According 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 משכנע test

(761/77 According to this test the tax payer needs to provide :(אבנעל a compelling commercial

reason (טעם מסחרי) for 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

Ruben tells the contractor that he wants to be sold the property in two separate (תעש מור 390/80)

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 רכישה) on 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 מסחרי) for his transaction. In this case the

defendant said that the reason for the transaction was because of tax purposes in South Africa (he

125 Because there are transactions which although their purpose is to avoid taxes, the transaction is nonetheless legit! 126 Could a ‘compelling reason’ be tax evasion? 127 Usually you buy both the property and the structure in the same contract.

102


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 מלאכותית עסקה , he 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 רכישה needs מס to be on the whole

transaction.

By way of background he explained that there were certain laws :128(ת.מ.ב תחזוקת מפעלים) 83/81

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 companies129 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 or "מיד" not. Or to put it differently is Ruben obligated to pay tax on the

transaction?

Section 95 TO:

לחברה נכס רתיממכ הון ריווח בני-אדם רספלמ או לאדם הגיע(א ).95 לאחר מיד אם במס ההון ריווח בחוייי לאברה, ח הבאות בלבד מניות תמורת

אחוז90רים, וכהמ או המוכר בידי היה המכירה של ההצבעה מכוח פחותל .הרבחה האות

128 He changed the details of the case for the sake of simplification. 129 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 right מיד away after the transaction you hold at least 90% of the shares than the transaction is exempt from the tax.

103

רהכיממ ןהו חיוור מניות מורתת

חברהב( 6מס' תיקון )

1965תשכ"ה-


רתיבמכ ןוכא(, ) קטן בסעיף כאמור חברה ידי על שכשנר הנכס במכירתב() המקורי כמחיר האמור, ייחשב הנכס ורתמת רכהמו ידי על קבלותשנ ותיהמנ )א(; קטן בסעיף רכאמו וכרהמ יביד הנכס של ריוקמה רוימח - יתרת םשלהלחברה. שמכרו מי אותו כשר ובש םויב סהנכ של הרכישה וםי את ויראו

סמנכ דםא בני פרלמס או לאדם שהגיע הון ריווח על יחול זה סעיףג()(.1994 ארובינ 1) נ"דשת בטבת י"ח ליום עד כרמשנ

Class 1910/01/12

Regarding artificial transactions, last class we mentioned the approaches of the various judges

,(תעש מור) 390/80) ת.מ.ב 83/81 )), and .(רובינשטיין) 3415/97 390/80 (which 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

104

( 95מס' תיקון ) 1993תשנ"ג-


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).

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 כלכלית)” and 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 – איסמר (סטייה מדפוסים מקובלים(

(2) “Some reason” – מפי (טעם כלשהו(

(3) “A compelling business reason – אבנעל (טעם מסכרי משכנע(

(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)

132 Is this an element of piercing the veil? 133 It’s a partial offense

105


(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

Deduction of expenses (Section 17) – ניקוי הוצאות:

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:

הותר לא או להוגב הניכוי אם ינוכו, זולת אדם של החייבת ותהכנס בירור שםל.17 ךכ שםלו המס בשנת הכנסתו בייצור כולן שיצאו והוצאות אותיצ, י31 סעיף יפ על

– בלבד, לרבות

שלווה, כסף על דהמהצ הפרשי או ריבית בתור המשתלמים סכומים)א((1)הכנסה; תגבהש שמששי הון על םשתלמימ שהם מהשוה פקיד נוכח אם

(א) נהמש תקספ פי על הצמדה הפרשי או ריבית יוניכ התובע נישוםב())9 יףעס פי על ממס פטורים הצמדה הפרשי או ריבית קיבל שבה בשנה

דהההצמ והפרשי הריבית וםלסכ שווהה סכום ניכויל לו יותר (, לא24לה:א נישמ הובגה אמור, למעטכ יםפטורה

דרש שומהה שפקיד משום ילםשש יתר סמ לבש ליבשק סכום(1)במקור; ממנו שנוכה וא לשלמו ממנו

15% על עולה שאינו היתר ממס חלק ותוא בשל שקיבל סכום(2)העצמית;ו על פי שומתו נממ עימגה מהמס

השגת לשם בידו תפוסים שהיו ניןב או רקעק כרשו םששיל שכירות דמי(2)ההכנסה;

בהשגת ת, ששימשומכונו או חצרים, מוצבה של יקוניםתל ואהוצש םסכומי(3) או תשר יכלמלאכה, יכל של םלשינויי או לחידושם, לתיקונם ההכנסה, וכן

אמור;כ ימשושש םיחפצ

ידקפ לש תועד תלהנח והוכח במשלח-יד או בעסק וושנתה רעים חובות(4)שהחובות וכן בשנת רעים נעשו השומה, במידה קיםפסומ חובות המס,

אם המס, אף בשנת רעים נעשוש כחובותהפקיד, של דעתו להנחתמדו, שנא שנת לש התחילת ניפל חל המסופקים או הרעים ובותחה לש םנוערפ ןמז פניל כושנו או שנמחקו סכומים לחשבון המס בשנת גבונש שכספים מס; אלאה לש יותקבולב מוכ וז פקודה לענין בהם מסופקים, ינהגו או רעים חובות שלב כן

ה;שנ התואל משלח-היד או סקהע

סעיף לענין בתקנות שנקבעו םיובשיעור - בתנאים ידבמע ששילם סכומים(5)

106

המותרים ניכוייםה)(יי)(י) (ח)-(א)(1)11][(כ( 17מס' תיקון )

1972תשל"ב-

והפרשי יביתרהדצמה

( 22' מס תיקון )1975של"ה-ת


( 32מס' תיקון )1978של"ח-ת


שכירות מיד

יקוניםת

רעים ובותח

מעביד שלומיתגמל קופתל

( 13ס' מ תיקון )1968שכ"ח-ת





האמור בסעיף כמשמעותה גמל לקופת ירהדס תיתנש תותתפשה רובת 47 כאמור ובתנאים בשיעורים סכומים וכן, זו פסקה לענין המנהל ידי על שאושרה

או יתמקומ שותלמדינה, לר מעביד ששילם הענין פי על םיבייחוהמ בשינויים אך וכן עובדו לש נסיההפ זכות תשמיר זה, לשם לענין האוצר שר שקבע אחר לגוף

רכאמו גמל - לקופת המנהל - באישור דיבמע ששילם ממנו לקח או כוםס כל;סדירה שנתית ותפתתשה רובת שלא אמורכ לגוף או למוסד או

לאחר השתלמות לקרן דחיי םלששי סכומיםא(5) חתשהופ לעצמאים, על יעלו אל כאמור הקובעת; סכומים מהכנסתו2.5%ל- השווה כוםס מהם

– זה ןענילעת; בהקו תו מהכנס4.5%

פניל, יד ממשלח או מעסק היחיד לש החייבת קובעת" - הכנסתו הכנסה"נה;שב חדשים שקלים156,000 של לסכום ו, ועדז קהפס ילפ יויכהנ

קרן–אים" מלעצ השתלמות קרן" המיועדת ליחיד שיש לו הכנסה מותהשתל יד;מעסק או ממשלח

עבט עיגופ שטפונות דגונ עף-קרקסח מניעתל צעיםמא בנקיטת הוצאות(6)קבעו;ישי אחרים

האוויר; ןמ תפותקה פנימ תוריהז יעאמצ בנקיטת הוצאות(7)

ב'; בסימן מוראכ פחת בעד ניכוי(8)

יחס שנתית, לפי הטבה בתור לחבריה חזירהה תופיתשי שאגודה סכומים(9)– , ובלבדברח כל עם עסקאותיה

לפני החייבת מהכנסתה חלק ותאו על העולה כוםבס ניכוי יותר אלש(א)שי החזרת סכום כיחס הוא החייבת סתהנכה לכלל וחסההטבה,

ה;יתקאוסע לסך-כל חבריה עם עסקאותיה

החשבון שנת מתום חדשים עהתש תוך ריםבלח ניתנה שההטבהב();המנהל וקבעש יותר מאוחר במועד או מתייחסת היא שאליה

החשבון שנת תום וםיב םירבחה ייד לע נתקבלו ילוכא ייחשבו שהטבותג()ות;סחיימת הן השאלי

)נמחקה(;(10)

כייהל כלב למס שרבק והטיפול הדו"חות תנלהכ בקשר הוצאות)א((11) פנקסים לקבילות ועדה או משפטה בית קבעו אם לםוור, אעוער ומהש

לא להגשתם סביר צידוק היה ולא הטרדה םשומ ררעב וא בערעור שהיה טובתל משפטיות הוצאות ם; נפסקוהב תוכוכרה יותטשפמ הוצאות יותרו

שתבע; צאותההו מסכום שנפסק ההוצאות סכום שום, יופחתהני

משלח או מעסק להכנסות שרקב תרווי אל זו הקפסב כאמור הוצאותב() ח לא בוסס על פנקסי"והד אם וא תחשבונו פנקסי נוהלו לא שלגביהם יד

חשבונות;

ורלג עבר ושאליה בישראל ששכר הריד דעב ידיח לםששי שכירות דמי(12) ורה;אמה בדירה לגור שעבר מיום שנים חמש עיסוקו, במשך או עבודתו לרגל

דירת השכרת בשל מקבל ואהש השכירות מדמי ילניכו תרווי האל תושכיר ידמ;פהתקו באותה שלו הקבע

עבקשנ רזובא דירה שכירת או הלינ בעד וםשני לםישש כומיםסא()(13) גר אינו אך קבע דרך ישוםהנ עובד בו , אשר11 סעיף פי על פיתוח כשטח

;שם עבד אאילול גר היה שעמה משפחתו עם בו

107

רןלק שלומיםת תומשתלה

םיאמצעל( 108מס' תיקון )


עטב זקינ

מהאויר קפותהת

חתפ

באגודה טבותהיתופיתש


( 53מס' תיקון ) 1982תשמ"ב-

הכרוכות וצאותההמס תשלוםב


משלםש רותשכי מיד זמנית עברש יחיד

( 43מס' תיקון ) 1981תשמ"א-

תוכירש או לינה מידיתוחפ זוראב

( 25מס' תיקון )1977של"ז-ת


פסקת פי על לניכוי ותריש וםכהס תקרת את בועקל רשאי האוצר שרב()ניכוי;ה תקופת )א( ואת משנה

זו;יקבעו בתקנות לפי פקודה יש אחרים ניכויים(14)

שחב מי ידי , על2011נפט, התשע"א- רווחי מיסוי חוק לפי ששולם ( היטל15).חוק אותו לפי בו

The case law understands the words והוצאות שיצאו כולן בייצור הכנסתו to mean that only business

expenses can be deducted, but personal expenses can’t be deduced. We will obviously have to

understand what is considered personal expenditure. The words בשנת המס mean that if you have

an expense that is הונית than it too can’t be treated as a הוצאה פירותית. So you first need to check

if the expense is a business expense (עסקית) and that it is not הונית. The 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 deductable135. 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

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!

108

אחרים יכוייםנ( 22מס' תיקון )

1975של"ה-ת



4243/08 פרי) the :(ורד 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 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 אמת in this case, than we don’t have to say that

the expense is a הוצאה כרוכה (תנאי לעסק( rather it is sufficient that there is a זיקה ממשית וישירה

between the job and the expense. With regards to how to separate between the לייצור ההכנסה

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:

– בשל ניכויים יותרו לא אדם של יבתיהח הכנסתו בירורב.32

ההכנסה, לרבות הפקת בתהליך ושלובות הכרוכות הוצאות שאינן הוצאות(1)הוצאות וצאותההבית, הוצאות הוצאות137אש"ל פרטיות, לשם שהוצאו ,

טיפול לשם שהוצאו והוצאותממנו, חזרה ולשם ההשתכרות למקום הגעהזו,; בפסקה עליו השגחה או אחר באדם טיפול לשם או עליו השגחה או בילד

המשתלבות–ההכנסה" הפקת בתהליך ושלובות כרוכות "הוצאות הוצאות בתהליך הטבעי של הפקת ההכנסה ובמבנהו הטבעי של מקור ההכנסה, והמהוות חלק

מהם;בלתי נפרד

במקום–אש"ל" "הוצאות בין שהוצאו ארוחותיו, בשל יחיד שהוציא הוצאות ההשתכרות ובין מחוצה לו, ולמעט הוצאות בשל ארוחת בוקר הכלולה במחיר לינה

בניכוי;המותרת

כך ולשם ההכנסה לייצור כולו שהוצא כסף ת, שאינםוהוצא או תשלומים(2)ד;לבב

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?)

109

רםילהת שאין יכוייםנ[12]

( 170' סמ תיקון ) 2009תשס"ט-



Thus the legislature nullified the test offered by the courts and brought back the זיקה ממשית

test. Thus only expenses directly connected to work could be deducted. He pointed הוצאה כרוכה

out that actually this section expanded the rule because it says או לשם טיפול באדם אחר meaning

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

e.g. say you are a carpenter, and you buy a new saw. Though this is an expense for this) (הוניות

business, this saw will last and thus it is considered מעבר לשנות המס .and not deductable הוני

Likewise if you build a factory for your business, being that it last beyond the tax year, it will be

considered a capital expense (הונית) and 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 הונית and 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 (הונית) expenses that can’t

be deduced but you will be able to consider them when you sell the property (נכס). There are

other wherein you could do a partial הוצאות הוניות deduction via amortization (פחת) (i.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 פירותית to include expenses whose goal is maintaining what is

already in existence .(שמירה על הקיים) Expenditure 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 העסקית) than even if its capital expenditure (הונית) it will

be treated as peyrutit. With regards to the first expansion (שמירה על הקיים) he 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 הון it will still be considered as peyrutit and

138 What if you put the playgroup in the office building? 139 Why didn’t we say that in light of this rising children is considered הונית (being that their education will last them a lifetime?)

110


thus deductable; lobbyists – expenses spent on lobbying, this to the court has considered שמירה

.(141לשמור על הקיים legal expenses; expenses spent on protexia ;140על הקיים

Class 2015/01/12

השתלמויות

(141/54 וולף We :(לילי continued the discussion of deduction of expenses הוצאות) (ניכוי

specifically with regards to השתלמויות: He 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 הון), and 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 הקיים), he needs to

constantly update his knowledge. So in short the question is whether taking advanced study

courses (השתלמויות) is 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 וולף) that we need to understand

in a wide fashion. However studies towards an official degree (BA, MA, PhD) לשמור על הקיים

would not be considered לשמור על הקיים. So 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 הקיים

getting 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):


לרבות הוצאות(15) או אקדמית השכלה לרכישת הוצאות לימודים, ולמעט לרכישת שאינה השתלמות הוצאות מקצוע, לרכישת מקצועית, ;הקיים על שמירה כאמור, לצורך מקצוע או השכלה

140 He mentioned the case (35/67 שתדלן) where 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.

111

רםילהת שאין יכוייםנ[12]( 151מס' תיקון )

2006תשס"ו-


We moved on to last lecture we mentioned the case :הוצאות כרוכות The.142(ורד פרי) 4243/08

question is, what is meant by הוצאות כרוכות? We 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 בעסק and thus it is מותרת בניכוי

The case law has ruled that with a גוף עסקי (e.g. a bank) its donations are not considered הוצאה

.כרוכה However as we learned in the beginning of the year, they would be entitled to זיכוי

according to section 46.

Section 46 TO:

שקלים310 על העולה סכום פלונית סמ בשנת םרשת םאדא( ).46 לענין ( שקבע2)9 ףעיבס וכמשמעות ריוביצ וסדלמ לאומית, או לקרן חדשים

בו חייב שהוא מהמס יזוכההכנסת, של הכספים ועדת שורבאי האוצר שר זהמסכום35% של בשיעור שנה באותה ובשיעור הוא אם – התרומה יחיד, דבלבו, אדם-בני-חבר הוא אם – התרומה )א( מסכום126 בסעיף הקבוע

30% על העולה תתרומו לש ללכו כוםס בשל פלונית מס בשנת זיכוי יינתן אלשאו באותה הנישום של ייבתחה הסהכנהמ שקלים7,636,000 על שנה,

לפי סכוםלזיכוי( התקרה – )להלן מביניהם הנמוך חדשים, על ולהעה ; ףעיס ותאלהור םתאבה מהמס מס, יזוכה שנת באותה שנתרם לזיכוי ההתקר

אחת כלב יכויז תןיני אשל דזו, ובלב אחר בזו ותהבא המס שנות שושלב הז ההתקר על הלועה תרומות של כולל סכום מור, בשלאכ המס ותנש משלוש

זיכוי.ל

As a side point he mentioned that if a public institution (מוסד ציבורי) wants to donate to a specific

organization and it wants to deduct (ניכוי) the expense (as supposed to a which as we) (זיכוי

already mentioned is not possible according to the law being that a donation can’t be deducted

(there is no a donation only entitled the donor to ניכוי The way to do so would be via .(זיכוי

advertisement (because advertising is an expense that is considered כרוכה)143.

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 כרוכות and reversed the ruling of the court).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.

112

למוסד רומהתיבוריצ

( 65מס' תיקון )1984שמ"ד-ת

( 96מס' תיקון נתש (1994-"ד

( 124ס' מ תיקון ) 2000תשס"א-



( שעה הוראת ) 2009תש"ע-

תשע"א- הודעה


He gave another example of הוצאות כרוכות, as 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 in the business (it’s a built in expense). He כרוכה

explained that stealing could also be from the employers of the business. The case law has ruled

that these expenses144 are considered הוצאה כרוכה and thus מותרת בניכוי. However, if the CEO of

a bank would steal a large sum from the bank, than according to the case law this would not be

considered a הוצאה כרוכה – because this is not considered, within the reasonable risks/expenses

that a business should have to expect. The test is the reasonability test. He reminded us of section

85 which states that if you have מלאי עסקי and it disappeared (e.g. it was stolen) than it will be

viewed as if you sold it at the market price however it will be viewed as ,סכום השווי145 הוצאה

.146שמותרת בניכוי

Section 85 TO:

מלאי ראו, יזו ודהקפ יןנלע מעסק חיםהרוו או תיורוכתההש שוביבחא( ).85השווי: בסכום רככנמ להלן האמורים םירקבמ סקע ולאות שייך שהיה עסקי

שהועבר; או שהופסק בעת קעסל יךישה עסקי ימלא(1)

שלא או בתמורה לאש מהעסק שהועבר או שהוצא עסקי מלאי(2)עסק. ותובא בועק סכנל והפכוהש בעסק עסקי מלאי מלאה, וכן בתמורה

כנמכר ונראה עוקב כסנל פכוהוהש יקסע מלאי גביל, 88 ו-21 סעיפים לעניןב()קורי.המ רחימה השווי םסכו )א(, יהיה קטן סעיףב ורמכא

– זה בסעיףג()

העסק, או על הרגיל במהלכו נמכרה יןקרקעמ או ןמיטלטלי נכס עסקי" - כל מלאי" המשמש חומר לנייתו, וכב וא ורו, הכנתויצ גמרל עהגי או לישהב ואיל כך נמכר שהיהנכס; אותו לש ובנייתב וא תונכהב, ורבייצו

;מעסק לקח ותסק" - לרב"ע

רצוןמ כרממו עסקיה המלאי תמורת לקבל ההי שאפשר השווי" - הסכום סכום"

144 He stressed that we are talking about minor theft145 Sat Ruben bought 100 shirts and he paid 100 for them. The 100 shirts were stolen. According to section 85 it is as if he sold them for 150, thus it will be viewed as if he sold 100 x 150. with regards to the הוצאה it too will be viewed as 100 x 150. Thus Ruben doesn’t loose anything. 146 If you come to your business in the morning and you see that your inventory was stolen. The logic behind of this section is in light of שינוי ייעוד.

113

סקיע אילמ ערכתהסויימיםמ במקרים

( 13מס' תיקון )1968-"חשכת


אחרת זכות אוכנתה, , משבחו חבטיהל הבא שעבוד מכל נקי כשהוא מרצון לקונה נקבע המלאי דעב המחיר יכשוכנע, השומה פקיד אם ם; אולםלותש טיחהבל האהב

- לקונה המוכר בין מיוחדים יחסים םיומק ןיעקיפב וא במישרין שהושפע בלי בל וםתבשנקבע. המחיר יהשוו סכום - יהא בתכב נעשתה שהמכירה נאיתב גם ובמקרקעין

יראו2)א() ןקט ףיעסב רוהאמ אף לע(1)ד() להלן, רטפוכמ קיעס מלאי (, העלות: בסכום כנמכר

לחוק א53 בסעיף משמעותוכ רהכלהש יןנלב שהפכוהו בנין()א - חוק זה קטן בסעיף הלן)ל 1959ון, תשי"ט-ה ותקעשה לעידוד

העידוד(;

בניית למטרת ידודהע קוח יפ לע תרשומא תיבתכנ שנכלל מגרשב() כרההשל בנין וליע האמור, שנבנה וקבח ותועשממכ רהכלהש בנין

ר;ומאה לחוק א53 בסעיף כמשמעותו

או משנה פסקאותב כאמור מגרש או ניןבג() שהועבר, )ב( )א( להם המקנה באופן העסק בעלי כל בה שחברים חברה של תהלולבע

בהתאם היתה רהבחל רהבעהה םא, קסבע כזכויותיהם לנכס זכויות.ודעידה בחוק כמשמעותה השקעותה זכרמ תלינהמ רישתלד

את לגביהם חילוהש לאחר רשאבנין, עליו קםושה מגרש או בנין(2) בנסיבות אותם שקיבל מי ייד ב,םחלק או ם( נמכרו, כול1) פסקה ותאהור

,1963מקרקעין, תשכ"ג- שבח מס חוק חלים המכירה בה, ועל האמורות ותיקוני שעה אתרות( )הוירד כרתשלה ודדיע) ההכנס סמ לחוק4 עיףס או

הרכישה םוי יהיו, דוהעיד וקח ל1 שביעי פרק , או1981שמ"א-(, תחוקהיםרוהאמ קיםוהח לענין המוכר בידי שהיהרכ ושווי שהיו והשווי םיו,

- גםזה, "בנין" יןנעל; רכומל םריבעהש מי בידי הנכס נמכר אילו נקבעיםבנייתו.מה ינסתי רםט אם

In summary: tests whether deduction will be allowed – הוצאות מותרות בניכוי

(1) if the asset provides benefit beyond the tax year it will be considered) מבחן היתרון התמשך

honit) (לילי וולף)

)ורד פרדי (זיקה ממשית (2) (no longer relevant)

)לילי וולף; שתדלן (לשמור על הקיים (3)

)147שחר זרעים (הוצאות כרוכות בעסק (4)

Mixed expenses – מעורבותהוצאות

A straightforward reading of the statute reads that it is permissible to deduct (לנכות) expenses in

which all of the expense (כולן) took place in the given tax year. It would seem that mixed

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

114

( 50מס' תיקון ) 1981-"אשמת

( 87מס' תיקון תשנ (1992ב-"


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 כרוכה, on the other hand he spent a week

for pleasure purposes. If you read the statute literally being that this wasn’t a business "כולה"

expense, Ruben shouldn’t be allowed to deduct (לנכות) the expenses of the trip! To resolve such

issues the case law has ruled that in such a case – of a mixed expense (הוצאה מעורבת) – where

you can distinguish between the business expense (הוצאה עסקי) and the personal expense (הוצאה

we would allow the business expenses (the plane ticket and the hotel for the first week) – (פרטי

to be deducted, (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 כרוכה),

thus 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 מעורבת) than 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.

!We pointed out that donations will not be considered a built-in expense .(ערביה 54/84)

Timing and deduction – כללי העיתוי של ההוצאה

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.

115


With regards to timing (עיתוי) and at what point expenses can be deducted (ניכוי), the same two

approaches that we mentioned above concerning taxation – בסיס מסחרי and בסיס מצטבר, apply

(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 בניכוי). The question with all of

these expenses is with regards to, at what point (עיתוי) can they be deducted – in 2011 or 2012?

According to the בסיס מסחרי we 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 לתשלום (e.g. with regards to the insurance policy,

we would look at the 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 כלכלי takes place.

חוב מותנה - תלוי

חובות מותנה/חוב תלוי

refers to expenses which are ambiguous (e.g. Severance pay – according to the law חובות מותנה

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 (כרוכה) and

it could be deducted. This is considered a חוב תלוי because the employer isn’t going to pay the

116


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 תלוי. For a חוב תלוי to be recognized as a

deductable expense it needs to be a חוב לצד שלישי it can’t be money that one owes to oneself

(e.g.

A solution for a company that wishes to deduct a .((פס"ד ארקיע) is simply to set up a חוב תלוי

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

deducted (e.g. a certain percentage on each car based on the logic of based on the) חוב תלוי

possibility that Ruben – the customer – may end up returning the car, and he will have to fix it150)

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 (כרוכה) and we will allow for it to be deducted at the time of

sale151.

Business entities that have cases pending against them - כנגדם שיש עסקיים גופים פתוחות משפטיות תביעות

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

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 to yourself. Thus a simply solution to bypass the ruling is to set up a חוב the court ruled that you cant have a (תלויsubsidiary. 150 Thus when there is a guarantee its not clear cut profit, because there is a slight chance that there will be a liability. 151 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.

117


claims are settled (this is not feasible because that would mean waiting many years!). Thus the

case law has ruled that similar to תלוי say חוב 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 2122/01/12

Deduction of expenses (cont’d) and relevant legislation (Section 17) – ניכוי הוצאות 17ותתי סעיפים חשובים תחת ס'

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:

לא או להוגב הניכוי אם ינוכו, זולת אדם של החייבת ותהכנס בירור שםל.17 המס בשנת הכנסתו בייצור כולן שיצאו והוצאות אותיצ, י31 סעיף יפ על הותר

– בלבד, לרבות ךכ שםלו כסף על דהמהצ הפרשי או ריבית בתור המשתלמים סכומים)א((1)

אם שמששי הון על םשתלמימ שהם מהשוה פקיד נוכח שלווה, הכנסה; תגבהש

נהמש תקספ פי על הצמדה הפרשי או ריבית יוניכ התובע נישוםב() פי על ממס פטורים הצמדה הפרשי או ריבית קיבל שבה ( בשנהא) והפרשי הריבית וםלסכ שווהה סכום ניכויל לו יותר (, לא24)9 יףעס

לה:א נישמ הובגה אמור, למעטכ יםפטורה דהההצמ שומהה שפקיד משום ילםשש יתר סמ לבש ליבשק סכום(1)

במקור; ממנו שנוכה וא לשלמו ממנו דרש על עולה שאינו היתר ממס חלק ותוא בשל שקיבל סכום(2)

118

המותרים ניכוייםה)(יי)(י) (ח)-(א)(1)11][(כ( 17מס' תיקון )

1972תשל"ב-

והפרשי יביתרהדצמה

( 22' מס תיקון )1975של"ה-ת





העצמית; ו על פי שומתו נממ עימגה מהמס15%

The section states that interest expense (הוצאות ריבית) on a loan taken out for the purpose of

creating income is deductable. We stressed the importance of the term הון in 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 הון) it deductable (מותר בניכוי). He 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

regards to configuring amortization (פחת) and capital gains tax (מס רווח הון) if 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

What was unique about .מלאי עסקי In this case Ruben took out a loan to purchase .(חלף) 3196/93

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 הכנסה whereas 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

119


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:

לשם בידו תפוסים שהיו ניןב או רקעק כרשו םששיל שכירות דמי(2)ההכנסה; השגת

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:

ת, ששימשומכונו או חצרים, מוצבה של יקוניםתל ואהוצש םסכומי(3) מלאכה, יכל של םלשינויי או לחידושם, לתיקונם ההכנסה, וכן בהשגת

אמור; כ ימשושש םיחפצ או תשר יכל

This sub section is also redundant, because as we learned elsewhere money spent for the

generation of income or towards maintenance (לשמור על הקיים) is deductable.

Section 17(4) TO: deals with bad debts:

לש תועד תלהנח והוכח במשלח-יד או בעסק וושנתה רעים חובות(4) קיםפסומ חובות המס, וכן בשנת רעים נעשו השומה, שהחובות ידקפ

בשנת רעים נעשוש כחובותהפקיד, של דעתו להנחתמדו, שנא במידה ניפל חל המסופקים או הרעים ובותחה לש םנוערפ ןמז אם המס, אף

אלאה שנת לש התחילת לחשבון המס בשנת גבונש שכספים מס; מסופקים, ינהגו או רעים חובות שלב כן פניל כושנו או שנמחקו סכומים

התואל משלח-היד או סקהע לש יותקבולב מוכ וז פקודה לענין בהםה;שנ

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 רע) (e.g. loan or credit that is not

honored by the debtor) which could be written off and a כושלתהשקעה (a bad investment, which

120

שכירות מיד

יקוניםת

רעים ובותח


is considered a E.g. Say I invest in a restaurant that goes bust) which can’t be .הוצאה הונית

written off.

Section 17(7) TO: deals with expenditure on air-raid precautions:

האוויר; ןמ תפותקה פנימ תוריהז יעאמצ בנקיטת הוצאות(7)

This section refers to the building of a shelter (מקלט). He 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

ב'; בסימן מוראכ פחת בעד ניכוי(8)

1941תקנות מס הכנסה פחת - deals with depreciation expenses (הוצאות פחת). In the תקנות מס

and the (נכסים) it lists the depreciation rates as well as different types of property הכנסה (פחת)

relevant depreciation that applies. He gave an example, El Al buys a Bowing 747 this is

considered as and thus can’t be written off. However according to the הוצאות הונית the תקנות

amortization of aircraft could be written of at 30%. He explained that when El Al decides to sell

its plane, it will be valued according to the established depreciation rate, meaning לצורכי מס

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 תקנה

says that such a machine has 10% depreciation (פחת). This 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 מס

the machine is worth 700,000. If Ruben than decides to sell the machine, for 750,000 than there

is capital gain (רווח הון) of 50,000, if he sells it for 650,000 than there is a capital loss (הפסד הון)

121

מהאויר קפותהת

חתפ


of 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:

כלב למס שרבק והטיפול הדו"חות תנלהכ בקשר הוצאות)א((11) לקבילות ועדה או משפטה בית קבעו אם לםוור, אעוער ומהש כייהל

סביר צידוק היה ולא הטרדה םשומ ררעב וא בערעור שהיה פנקסים הוצאות ם; נפסקוהב תוכוכרה יותטשפמ הוצאות יותרו לא להגשתםיופחתהני טובתל משפטיות מסכום שנפסק ההוצאות סכום שום,

שתבע; צאותההו או מעסק להכנסות שרקב תרווי אל זו הקפסב כאמור הוצאותב()

ח לא בוסס"והד אם וא תחשבונו פנקסי נוהלו לא שלגביהם יד משלחחשבונות; על פנקסי

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.

Section 30 TO: Restrictions on reductions:

על העולה , בסכום17-27 סעיפים לפי הוצאות בשל יכוינ כל ותרי אל.30 יכריע זה סעיף ןלעני אלהש הנישום; ובכל של ההכנסה ייצור כיצר ילפ הדרוש

ובלבד אדם כל ונעכמ יתפרש אל זה בסעיף האמור דבר ששום המנהל; אמורל אםתהב יהעל רעלערמ המנהל החלטת ידי על מקופח עצמו הרואה

.153-158 םיפיבסע

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 שומה) can decide whether or not to recognize the deduction

could decide whether מנהל רשות המס However section 30 specifically states that only the .(ניכוי)

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.

122

הכרוכות וצאותההמס תשלוםב


ייםולניכ ייגס[11(2)]( 142מס' תיקון )

2004תשס"ה-


The section states “extravagant expenses מופרזות) :”(הוצאות He 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 מופרז is situations such as where a mother pays her son 20,000 to be an intern in her

firm (e.g. He mentioned the ליבנה case: 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)

- תנותק ןיקתה, לתסנהכ של םיהכספ ועדת שורירשאי, בא האוצר רש.31 ניכוי של אי-התרתו או הגבלתו - בדבר יםישומנ של לסוגים ןיוב כלל דרך בין

– בדבר וחדמי, וב27 עד17 יםסעיפ לפי מסויימות הוצאותת;ווצאהה של אומדה או החישוב שיטת(1)שיעוריהן; בניכוי, או ותרויש הוצאותה מיוסכ(2);תצאווהה להתרת התנאים(3)ת.ווצאהה תחכהו דרכי(4)

This section authorizes the Minister of Finance to enact regulations (תקנות) with regards to

deductions of expenses (ניכוי הוצאות). We mentioned some of the regulations listed in תקנות מס

refreshments [i.e. for a work) כיבוד section 2 deals with (TMNHM) הכנסה (ניכוי הוצאות מסויימות)

function]):

Section 2 TMNHM:

בהתאם רק לניכוי (, יותרו6) ( עד1) בפסקאות המפורטות ההוצאות.2להלן: לאמור

מההוצאות80%(1) של העיסוק במקום קל לכיבוד שהוצאו וכיוצא חמה, עוגיות או קרה שתיה-קל" זה, "כיבוד הנישום; לענין

באלה;

123

יכוינ בדבר קנותתהוצאות( 6מס' תיקון )

1965תשכ"ה-( 17' סמ תיקון )

1972של"ב-ת

לניכויים יםאנתגבלתםוה

(3תק' )מס' 1975תשל"ה-

1997' תשנ"ז-תקבודכי2000' תש"ס-תק2000' תש"ס-תק


Section 2(1) states that 80% of a כיבוד קל (cookies, soft drinks) could be written off. section 2(2)

deals with נסיעות לחו"ל:

הנסיעה אם לחוץ-לארץ לנסיעה בקשר שהוצאו הוצאות(2) ההכנסה, לייצור הכרחיים היו שם והשהייה לחוץ-לארץ

היו הכרחיים- )ז( לפקודה3 סעיף עליו שחל ובחבר-בני-אדם אם להלן:לפעילותו, כמפורט

We already mentioned that it needs to be demonstrates that the trip was for business purposes

We also mentioned that the case law has recognized trips that were mixed with .(לילי וולף 141/54)

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:

באזור, ובלבד או בישראל נישום שהוציא לינה הוצאות)א(א(2) בפסקה הנקובים הסכומים על עולה אינו בניכוי המותר שהסכום

היציג השער לפי חדשים בשקלים מחושב ()ב( כשהוא1()ב()2)ואולם מועד לפני לאחרונה שפורסם כפי הדולר של הלינה,

100מ- פחות המרוחק במקום ללינה נישום שהוציא הוצאות יותרו העיקרי, לא עיסוקו ממקום או מגוריו ממקום קילומטרים

זולת הכרחית היתה שהלינה השומה פקיד שוכנע אם בניכוי, ;הנישום של ההכנסה לייצור

שהוציא הוצאות בניכוי (, יותרו3) בפסקה האמור אף לע()ב בניכוי, המותרת לינה במחיר הכלולה בוקר ארוחת בשל נישום

)א( לעיל; משנה תבפסק כאמור הנישום שהוציא לינה הוצאות על יחולו לא זו פסקה וראותה(ג)

עיסוקו; בתחום בכנס השתתפות במסגרת

Section 2(3) TMNHM: deals with הוצאות אש"ל. This section was nullified, thus such expenses

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:

2,300מתנות שנתן נישום, ובלבד שסכום הניכוי לא יעלה על סכום של )4(דולר של15שקלים לשנה לאדם אחד אם ניתנו בישראל, ועל סכום של

124

לחוץ-לארץ יעהנס(2מס' תק' )

1984מ"ד-תש1993' תשנ"ג-תק

לינה צאותהובוקר חתרווא

2000' תש"ס-תק

נותמת(3' )מס' תק

1975ל"ה-תש(4' )מס' תק

1979ל"ט-תש(2' )מס' תק

1984מ"ד-תש


ארצות הברית לשנה לאדם אחד אם ניתנו מחוץ לישראל ובלבד שנרשמוההוצאה;פרטי זיהוי המקבל, מקום נתינת המתנה וקבלות לאימות

As we learned an employer can give up to 200 shekels and it could be written off as an expense.

Section 2(6) TMNHM: deals with: ביגודהוצאות

בעבור או בעבורו ביגוד לרכישת נישום שהוציא מההוצאות80%(6) - עבודה לצורכי שלא בביגוד להשתמש ניתן לא אם עובדו, ואולם

בגדים, לרבות-זו, "ביגוד" במלואן; בפסקה כאמור ההוצאות יותרו נעליים, שנועדו לשמש לצורכי עבודה ומתקיים בהם אחד מאלה:

הנישום;ניתן לזהות בהם, באופן בולט, השתייכות לעסקו של )1(;הביגוד את ללבוש חובה קיימת דין פי על(2)

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:

לא יותרו בניכוי הוצאות בשל החזקת טלפון שאינו נייד במקום מגוריו של(א)ב.2 הנישום או של בעל שליטה בנישום, זולת אם הוכיח הנישום או בעל השליטה בנישום, להנחת דעתו של פקיד השומה, כי בית המגורים משמש את עיקר עסקו או משלח ידו

אלה:של הנישום; הוכיח כאמור, יחולו הוראות

Section 3 TMNHM: deals with הוצאות אירוח:

לא יותר ניכוי הוצאה בשל אירוח בארץ, למעט ניכוי הוצאה סבירה לאירוח אדם.3מחוץ-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 as a deductible expense). The section states הוצאה סבירה, this will depends on each

individual case.

125

ביגוד תצאוהו2000' תש"ס-תק

טלפון ותחיש(3' )מס' תק

1975ל"ה-תש2000' תש"ס-תק

ירוחא בשל כויני


Section 32 TO: Deductions that are not to be allowed – ניכויים שאין להתירם


ההכנסה, הפקת בתהליך ושלובות הכרוכות הוצאות שאינן הוצאות(1) וצאות פרטיות, הוצאות אש"ל, הוצאות שהוצאו לשםההבית, הוצאות לרבות

הגעה למקום ההשתכרות ולשם חזרה ממנו, והוצאות שהוצאו לשם טיפול בילדזו,או השגחה עליו או לשם טיפול באדם אחר או השגחה עליו; בפסקה

הוצאות–ההכנסה" הפקת בתהליך ושלובות כרוכות "הוצאות מקור הטבעי של ובמבנהו ההכנסה הפקת הטבעי של בתהליך המשתלבות

מהם;ההכנסה, והמהוות חלק בלתי נפרד הוצאות שהוציא יחיד בשל ארוחותיו, שהוצאו בין במקום–אש"ל" "הוצאות

ההשתכרות ובין מחוצה לו, ולמעט הוצאות בשל ארוחת בוקר הכלולה במחירבניכוי;לינה המותרת

ולשם ההכנסה לייצור כולו שהוצא כסף ת, שאינםוהוצא או תשלומים(2)ד;לבב כך

לשמש, הון; נועד ואהמשמש, כסף םוסכ או ניטלש וןה(3);ההשבחה עלות(4)שיפויים; חוזה או ביטוח פי על להיפרע הניתן ההוצא או הפסד כל(5) מהם, ששולמו חלק של או יםחצר תיקונים, של תועלו תירוכש דמי(6)

ה;סנכהה ורציי םשל אלש ומרגשנ אוהכנסה; לשלמם, כמס שיש וולמו, אשש םמיסכו(7))בוטל(;(8) םהפטורי תמוו עקב או פרישה עקב קמענ סכומי תשלום(1))א((9)

אל של בשליטתם שהיא חברה א( ששילמה7)9 סעיף לפי ממס שליטה ללבע, 76 יףסעב אדם, כמשמעותה בני הישחממ תרוי

תשנ דע עבודה תונש , בשלומובמק לאחר או בה חבר שהוא1975;

תבפסק כאמור חברה הלמישש גמל תפוקל תשלומים(2) או צוייםפיל גמל לקופת תשלומים חבר, למעט ( בשל1) משנה

,47 סעיף לענין בתקנות שנקבעו ובתנאים בשיעורים לקצבה לקרן תשלומים טמעלו לשנה תורלי 25,000-מ ותרי לא ךא

ובלבד 4.5% לע העולה סכום יובניכ רתוי שלא השתלמות, ר;בחה לש הקובעת שכורתוממ

חלפו שטרם מי לגבי גם ולו( יח2( ו-)1) השנמ אותקספ תוראוה רשאי זו בפסקה האמור אף חבר. על תיולה חדלש מיום שנתיים יןענהנסיבות; ל לפי ןכ שותלע הרא םא תאחר תורלהו המנהל

– הז דיחב או לבדו, ןיבעקיפ וא יןרשמחזיק, במיש שליטה" - מי בעל"

126

רםילהת שאין יכוייםנ[12]

( 22' סמ תיקון תש (1975"ה-ל

( 13ס' מ תיקון תש (1968-חכ"

( 21' מס תיקון שת (1975-"הל


( 34מס' תיקון ) 1979תשל"ט-

( 35' סמ תיקון ) 1979תש"ם-

( 108מס' תיקון ) 1995תשנ"ו-



( 170' סמ תיקון ) 2009תשס"ט-



מאלה: באחת קרובו עם לפחות10%ב- או שהוצא יותנהמ הוןמ לפחות10%ב-א()

מכוח-ההצבעה; או שהוצא המניות מהון תפחול 10%ב- קלהחזי בזכותב()

לרכשם; כותזב או המכוח-ההצבע לפחות10%ב-רווחים;המ תוחלפ 10% לקבל בזכותג();למנה למנות בזכותד()

(;ד)76 יףבסע בו" - כמשמעותוור"ק שיש או זוגו,ן-ב עם דחי וא לבדו ול שיש שליטה חבר" - בעל"

צאוהש המניות מהון 5% בעקיפין, לפחות או לבן-זוגו, במישרין מאלה אחד כל לרכוש או זיקלהח כותהזמ או ההצבעה וחכמ או זה לענין בחשבון יובאו שלא רווחים; ובלבד לקבל מהזכות וא

בירושה; שנתקבלו וא ןיאושהני לפני שנרכשו וגבן-ז לש זכויותיו(;ה)3 בסעיף ה- כהגדרת" בעתוק תרמשכו"

תומו קבע קמענ סכום על ליחו )א( לא המשנ בפסקת האמור()ב שאינו מוות עקב מענק סכום על )א( או9 יףסע ילפ ממס הפטור

הקטן; לירות לכל שנת עבודה, הכל לפי הסכום 25,000לה על עו

עלב של חייו לביטוח עצמה לטובת רהבח ששילמה פרמיות)א((10) ששולמו כאמור תומירפ עטמ(, ל9) בפסקה תווכמשמע הב טהליש

מל;ג לקופת שותף של חייו טוחלבי עצמה תובלט פותתוש ששילמה פרמיותב()

כשיש, פותוש לש ויחי לביטוח ועצמ לטובת שותף ששילם בה, אוה;חיוולר כותזמה או מהונה חות לפ10% למבוטח

ניתן לא רואש לעובדיו מעביד נתןש הנאה בתטו למתן הוצאות(11) מיועדות ינןא בןטי ילפ כי שהוכח תאווצה לוני, למעטפ דלעוב הסחליי

ועבנקש יםומסכ תלעובד; הוצאות, בגבולו אישית הנאה ובתט להעניק והמשמש מעביד של שבהחזקתו רכב , להחזקת31 סעיף פי על ותקנבת ני;ולפ דבולע בו מושימהש הנאהה טובת את לייחס ןנית אולו, דיבעו תא יביד עבודה כהכנסת אוירי לא כאמור יוכילנ ותנתינ שאינן צאותוה

העובדים; ב5ו- א5 םיפיעס יפל הרוסהא פעולה דעב ששולמו סכומים(12)

;1972חדש[, התשל"ב- [נוסח טיהאלחו רףהטלג לפקודת הביטוח לחוק 179 ףעיס פיל תוספכת ששולמו תשלומים(13)

;1968משולב[, תשכ"ח- ]נוסח הלאומיעבודה;(א) הוצאה לרכישת ביטוח מפני אבדן כושר )14(

נרכש שבשלה ההכנסה )א(, היתה משנה פסקת הוראות אף על)ב( (,2) ( או1)2 סעיף לפי עבודה, הכנסה כושר אבדן מפני ביטוח

יותרו ביטוח הוא והביטוח לרכישת הוצאה בשל ניכויים מועדף,

127


( 108מס' תיקון ) 1995שנ"ו-ת




( 35מס' תיקון ) 1979תש"ם-






( 51מס' תיקון שת (1981מ"ב-

( 59מס' תיקון ) 1984תשמ"ד-

( 138מס' תיקון ) 2004תשס"ד-

( 138מס' תיקון ) (2004תשס"ד- (תיקון( 153מס' תיקון )

2007תשס"ז-( 163מס' תיקון )

2008תשס"ח-


סעיף לפי מההכנסה3.5% עד של בסכום שהיא המועדף הביטוח ,חייבת הכנסה הענין, שהיא העובד, לפי של ממשכורתו ( או1)2

כאמור, הכנסה בשל יותרו זו, לא משנה פסקה לפי שניכויים ובלבד המס בשנת במשק הממוצע השכר כל לסך השווה סכום על העולה לקופת עובדו בעבור המעביד שילם אם ; ואולם3ב- מחולק כשהוא

על העולה בשיעור המעביד, סכום תגמולי מרכיב חשבון גמל, עלממשכורתו4% יופחת של לגביברישה, הנקוב מהשיעור העובד,

ההפרש שבין השיעור ששילם המעביד כאמור,(,2)2 סעיף לפי הכנסה;4%לבין

– זו פסקה לענין ביטוח מפני אבדן כושר עבודה, ואם נרכש הביטוח–מועדף" "ביטוח

שנים, התקיימו לגבי הביטוח גם שני אלה:60בטרם מלאו למבוטח

תקופת הביטוח, למעט ביטוח קבוצתי, נמשכת עד שימלאו)1( שנים לפחות;60למבוטח

למבוטח )2( ימלאו בטרם הביטוח יקרה מקרה שנים,60אם ישתלמו הכספים על פי הביטוח ממועד קרות מקרה הביטוח ועד

שנים60תום תקופת אבדן כושר עבודתו או עד שימלאו למבוטח המוקדם;לפחות, לפי

)א(;3 כהגדרתו בסעיף –עבודה" כושר אבדן מפני "ביטוח םכהגדרת –המעביד" תגמולי במשק" ו"מרכיב הממוצע "השכר בסעיף

;(2()3)ה3 ברכב שימוש של שוויו למעט עבודה הכנסת –"משכורת"

;העובד של לרשותו שהועמד )נמחקה(;–גמל" "קופת

או אקדמית השכלה לרכישת הוצאות לימודים, לרבות הוצאות(15) לרכישת מקצועית, שאינה השתלמות הוצאות מקצוע, ולמעט לרכישת;הקיים על שמירה כאמור, לצורך מקצוע או השכלה

תשלומים, בין שניתנו בכסף ובין בשווה כסף, שיש יסוד סביר להניח(16)דין.שנתינתם מהווה עבירה לפי כל

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 (ורד פרי)152. It states:

Section 32(1) TO:

ההכנסה, הפקת בתהליך ושלובות הכרוכות הוצאות שאינן הוצאות(1) וצאות פרטיות, הוצאות אש"ל, הוצאות שהוצאו לשםההבית, הוצאות לרבות

הגעה למקום ההשתכרות ולשם חזרה ממנו, והוצאות שהוצאו לשם טיפול בילד

152 Supra at 105

128




( 151מס' תיקון ) 2006תשס"ו-

( 172מס' תיקון ) 2009תש"ע-

( 170' סמ תיקון ) 2009תשס"ט-



זו,או השגחה עליו או לשם טיפול באדם אחר או השגחה עליו; בפסקה

The sub-section states clearly that expenses on playgroup, etc won’t be recognized as a

deductable expense.

Section 32(2) TO: deals with payments or expenses which are not wholly exclusively expended

for the production of income:

ולשם ההכנסה לייצור כולו שהוצא כסף ת, שאינםוהוצא או תשלומים(2)ד;לבב כך

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:

הכנסה; לשלמם, כמס שיש וולמו, אשש םמיסכו(7)

Section 32(15) TO: deals with educational expenses:

או אקדמית השכלה לרכישת הוצאות לימודים, לרבות הוצאות(15) לרכישת מקצועית, שאינה השתלמות הוצאות מקצוע, ולמעט לרכישת;הקיים על שמירה כאמור, לצורך מקצוע או השכלה

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:

תשלומים, בין שניתנו בכסף ובין בשווה כסף, שיש יסוד סביר להניח(16)דין.שנתינתם מהווה עבירה לפי כל

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 השוק). In 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

129

( 151מס' תיקון ) 2006תשס"ו-

( 172מס' תיקון ) 2009תש"ע-


build a project in Jerusalem and you need to bribe the mayor you wont be able to deduct the

expense).

Class 2224/01/12

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 פירותי) and offsetting

capital (קיזוז הוני). We 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 (קיזוז) the 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$. He also has a law firm which saw profits of 700,000$. In this case too he could setoff

his losses and the net result will be 0 in taxes). This is mentioned in section 28(a) TO:

Section 28(a) TO:

היה שאילוו המס נתבש במשלח-יד או עסקב לאדם שהיה הפסדא( ).28 של החייבת הכנסתו כל סך כנגד לקיזוז תן, ניוז הפקוד לפי םוניש היה חוריומס. שנת באותה אחרים רותקוממ אדם וותא

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

130

(1)13] הפסד יזוזק(2])



Forward looking taxation refers to a situation where there is no possibility of offsetting the loss

in the given tax year, so the law allows you to push off your losses to the subsequent tax year

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

1,000,000$. The net result is 0 taxes. This is stated in section 28(b):

Section 28(b) TO:

סכום כאמור, יועבר מס בשנת סדפהה לכ תא זזקל ניתן לאש מקוםב() בתהחיי הכנסתו כל סך כנגד ויקוזז זו אחר בזו הבאות לשנים זקוז שלא ההפסד

או סקעב הון ריווח בותריד, ל לחשמ וא סקעמ םשניה באותן אדם אותו שלבאותן אותו של החייבת הכנסתו כל סך כנגד שיקוזז אויד, משלח אדם,

ובלבד להלן, והכל המפורטים התנאים כל ( בהתקיים2)2 סעיף השנים, לפישלאחריה: בשנה לקזזו יותר ם, לאניהש אחתב פסדהה תא זזקל ןתינ שאם

בשנת יד ממשלח או מעסק הכנסה היתה לא אדם לאותו(1)הקיזוז;

ההפסד שאת היד במשלח או בעסק לעסוק חדל אדם אותו(2)לקזז; מבקש הוא בו לו שהיה

בית מחברת אינו אדם לאותו שהיה ההפסד של מקורו(3)מחברה64 בסעיף כמשמעותה בסעיף כמשמעותה משפחתית ,

.)א(1א64 בסעיף כהגדרתה שקופה מחברה או א64 לא םהנישו זאת ביקש )א( ו-)ב(, אם קטנים םפיעיבס האמור אף על()ג

נגד רווח הוןכ או ייונצלפניא םוסכ שהוא הון ריווח כנגד זה סעיף לפי הפסד זזיקו.20%ריבית או דיבידנד אם שיעור המס החל עליהם אינו עולה על

החמישית יםנשבכב, רמו שניטע םהדרי עטבמ אדםל יההש הפסדד() בלבד מטע מאותו הכנסתו דגנכ קוזזו, ניטע שבה המס שנת מתחילת והשישית

.יתוהשביע השישית בשנה השישית מורכב, בשנים לא שניטע הדרים מטעב לאדם שהיה הפסדה()

מטע מאותו הכנסתו כנגד זזוניטע, יק שבה המס שנת מתחילת והשביעיתמינית.השו יתיעבהש הנבש בלבד

עליו ולה( יחו-)ו)ד( טניםק בסעיפים כאמור זזוקל ניתן שלא הפסדו())ב(. קטן סעיף תוארוה

לאחר שניטע הדרים מטע )ד( ו-)ה( יראו םניטקה יםיפהסע לעניןז().הירחאלש המס שנת של ןהראשו בחודש ניטע כאילו שנה כל של בנובמבר30

מאותו הכנסתו כנגד לקזזו ניתן בנין השכרתמ לאדם שהיה הפסדח()הבאות. בשנים בנין

)בוטל(.ט()

131






( 54מס' תיקון ) 1982-בשמ"ת

( 132' סמ יקוןת ת (2002שס"ב-

( וןקתי תשס"ג- (2002( 147מס' תיקון )

2005תשס"ה-( 22מס' תיקון )

1975של"ה-ת


( 71מס' תיקון ) 1986שמ"ז-ת




( 54מס' תיקון ) 1982תשמ"ב-


ותועכמשמ שבח בותרן" - לוה ו"ריווח בת"ייח הכנסהזה, " בסעיףי()מקרקעין(. (להלן - שבח 1963ג-"כשעין, תקרמק שבח מס לחוק6 סעיף לפי

Regarding section 28(b) TO, until 2008 section 28b said that you offset losses from a persons

business (עסק), vocation (משלח יד), or capitals gains (רווח הון)154. The 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.

Offsetting capital – קיזוז הוני

The section the deals with offsetting a capital loss is section 92 TO: Section 92 TO:

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

132





ההי ולואי תינופל מס בשנת לאדם יההש הון הפסד סכום(1)א( ).92יקוזז עליו מתחייב היה הון ריווח ןההו יווחר כנגד תחילה במס,

שקלים וחצי שלושה כנגד קוזזי היתרה של שחד לשק וכל הריאלילחייב אינפלציוני סכום של חדשים דוהפס שבח רואים הז ענין;

חריוו היו , כאילו1963ן, תשכ"ג-יקרקעמ ויסמי חוקב םכמשמעות;הענין הון, לפי הפסד או הון

)נמחקה(;(2) היה ילואלישראל, וש מחוץ נכס במכירת הון פסדה םלאד היה(3)

(,1) פסקה הוראות עליו יחולו, בישראל במס עליו מתחייב היה רווחלישראל;כאמור יקוזז תחילה כנגד רווח הון מחוץ נכסמ הון הפסד ואולם

עליו המס, יחולו בשנת ערך נייר במכירת הון הפסד לאדם היה(4) גם יקוזז ההון הפסד הענין, ואולם (, לפי3) ( או1) פסקאות הוראות

אלה: כנגדערך; נייר אותו בשל ששולמו מדיבידנד או מריבית הכנסה)א( אחרים, ובלבד ערך ניירות בשל מדיבידנד או מריבית הכנסה)ב(

אדם אותו שקיבל הדיבידנד או הריבית על החל המס ששיעור;25% על עולה לא

ועדת באישור האוצר שר שקבע ערך, כפי ניירות בשל הוצאות(5) זה סעיף לענין המס, ייחשבו בשנת נוכו הכנסת, שלא של הכספיםערך. מניירות הון כהפסד

(,א) טןק בסעיף , כאמורתומקצ או וזזו, כולקל ניתן אלש סכוםב() א( בשנות) קטן בסעיף כאמור לבדב הון יווחר כנגד קוזזיויימת, מס סמ נתשב

לפקיד שוגשה לבדוב ההפסד היה שבה השנה אחרל וז ראח ובז ותאבה המס היה .132 ו-131 בסעיפים ההפסד, כאמור היה שבה המס נתשל חוד השומהיקוזז מחוץ נכס ממכירת הפסד לקזזו ניתן שלא הסכום ההפסד לישראל, .לישראל מחוץ נכס ממכירת הון רווח כנגד תחילה תאוורה לקבוע ת, רשאינסהכ של יםהכספ ועדת אישורב, רהאוצ רשג() וכן רוכאמ הפסדים של הוכחה ודרכי דוחות לענין והוראות זה סעיף לביצוע או ערך, כולם ניירות ממכירת הפסדים קיזוז הגבלת לענין הוראות לקבוע

הרווחים וייחוס ההפסדים קיזוז סדר כאמור, קביעת קיזוז על איסור חלקם, או.זה סעיף לביצוע והוראות הוכחה דרכי וכן

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 that as a general rule capital losses (הפסד הוני) can be offset by capital gains (רווח הוני).

Just like 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

133

הון הפסד יזוזק( 6מס' תיקון )

1965תשכ"ה-( 22מס' תיקון )


1982שמ"ב-ת( 90מס' תיקון )

1992שנ"ב-ת( 132' מס תיקון )

2002תשס"ב-

( 132ס' מ יקוןת ) 2002תשס"ב-

( 132ס' מ יקוןת ) 2002תשס"ב-


( 132ס' מ יקוןת ) 2002תשס"ב-


( 132ס' מ יקוןת ת (2002"ב-שס


( 147ס' מ יקוןת ) 2005תשס"ה-

( 147ס' מ יקוןת ) 2005תשס"ה-


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).

134

tax law prof. yishai beer

Documents

social security bl

forty story building

real estate lawyers

mega property owners

tax structure influencing

real estate deals

financing government expenditure

finance government expenditure