Pre-Ruling Tax Decisions: An Effective Way to Minimize Tax Conflicts with the Israeli Tax Authority

Dealing with the Israeli Tax authority can be mind-boggling at times. The Israeli tax system is based on law originating from the British Mandate which was subject to continuous changes and additions. Present day tax law is very complicated, built in a patch-like manner, with many sub-sections and sub-sub-sub-sections, etc. To make things even more complicated, there is the main law, dealing with taxation on ordinary income, international taxation and capital gains (the Income Tax Law) and a secondary law dealing with real estate transactions in Israel (Land Taxation Law). Additionally, there are the Customs Tax and its Exemptions, VAT Law, Purchase Tax Ordinance and its amendments, and many internal instructions which are sometimes difficult to keep track of.

The resulting unpredictability and inconsistency can put most people off. However, dealing with tax issues can be quite easy and relaxing if you have a lawyer who is familiar with the system and has good hands-on experience and connections.

The pre-ruling procedure
The pre-ruling procedure, which was recently introduced in Israel, gives predictability to Israeli citizens and prospective Olim in dealing with tax issues. In this process, a lawyer approaches the Israel Tax Authority with an anonymous case. The case should only reveal data which is crucial to understanding the case and to formulate a decision based on its facts (identifiable details such as names, id/passport numbers, company names, etc., are not given). The relevant tax authority official receives the inquiry and a dialogue is initiated (this can take up to four months and require constant involvement from your lawyer). When both sides are in agreement with regard to the tax consequences of the case, the details are revealed and a pre-ruling decision is given.
The pre-ruling decision enables one to anticipate the tax consequences of a case before it takes place. The decision will be binding for both parties. It should be noted that, in cases where an agreement is not reached, identifiable details will not be disclosed.

Examples
In a recent case that I handled, a senior executive in the US wanted to make Aliyah, and was facing the risk of double taxation of his income from the deferred compensation program that was used by his company. This program included a voluntary bonus deferral plan which is a type of executive compensation that is not covered by current Israeli legislation and was previously unheard of in Israel. After an extensive and thorough dialogue with the international tax commissioner, a pre-ruling was given, stating that these earnings would be exempt from taxation in Israel, under specified conditions.
In another case, a client's actual date of return to Israel had tax implications on the sale of his shares in a UK-based corporation. Negotiations with the tax authorities with respect to his and his family's date of return led to an exemption from tax on the sale of the shares (the documentations which were needed in the process were entry logs, passport stamps, a list of assets in Israel and abroad, etc.).
Some of the pre-ruling decisions are published anonymously in the Israel Tax Authority website and can be used as reference for future decisions (http://www.mof.gov.il/taxes/hahlatot_misui.htm, the decisions are in Hebrew).  
To conclude, obtaining a pre-ruling decision is a very effective way of dealing with tax issues without surprises.

The author of this article is a managing partner at Ron, Drihem & Co., a boutique law firm specializing in international tax issues, real estate contracts, corporate and high tech law.


Tal Ron, Adv.,
Ron, Drihem & Co.
Museum Tower
4 Berkowitz St., Tel Aviv
Tel: 03-6935300, 052-2437484
email: tal@rd-law.co.il