Your taxes: Understanding business and the Silicon Valley Bank fallout - opinion

Many businesses park their spare profits in real estate, so, what was this taxpayer doing that was so businesslike?

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)

Israel’s High Court of Justice has ruled that a meat trader who also carried out some real estate transactions was in business, resulting in a hefty extra VAT liability of NIS 825,000. This was a VAT case but it is fair to assume the taxpayer, an individual, may have also paid 50% income tax instead of 28% land appreciation tax on his real estate gains. Many businesses park their spare profits in real estate, so, what was this taxpayer doing that was so businesslike? (Emile Levy vs. Petah Tikva Customs & VAT Office, Civil Appeal 1533/20 of January 2, 2023).

According to the judgment, the taxpayer was engaged in the business of importing and marketing meat and fish products. But he also engaged in real estate transactions. If they were private capital transactions, no VAT was applicable, but if they were business transactions VAT was due, according to the VAT Office.

The Court found that from 1988 to 2013, the taxpayer conducted over 30 transactions. There were 13 purchases, 16 sales, two combination (barter) deals and even two apartments received as gifts. Some transactions were speculative in that purchases were made before re-zoning, and parceling up (splitting) land plots. Large amounts of money were involved. Land development was also involved.

Some signs of a business were absent, for example, there was apparently no business organization on the real estate side. And the taxpayer didn’t claim input VAT on his real estate purchases. But the Court also applied an overriding test of the overall circumstances – the number of transactions, the types and diversity of the properties, the taxpayer’s undisputed knowledge of real estate, the profits made and the taxpayer’s use of a lawyer who specialized in real estate transactions.

The Court said capital gains stem from an increase in market values whereas ordinary business income stems from exploiting skills and resources of the taxpayer. Therefore, the Supreme Court ruled the taxpayer was not only a meat trader but also in the real estate business.

 SVB (Silicon Valley Bank) logo is seen through broken glass in this illustration taken March 10, 2023.  (credit: REUTERS/DADO RUVIC/ILLUSTRATION)
SVB (Silicon Valley Bank) logo is seen through broken glass in this illustration taken March 10, 2023. (credit: REUTERS/DADO RUVIC/ILLUSTRATION)

Comment: Using a real estate lawyer is generally considered prudent. Being a property wheeler dealer is something else.

Silicon Valley Bank Fallout:

Following the recent surprise collapse of Silicon Valley Bank (SVB), a leading bank for the high-tech sector, a number of Israeli companies apparently experienced short-term cash flow difficulties. This was despite the announcement of March 12 from the US Federal Reserve Bank offering full cover for holders of deposits at the bank if they hadn’t yet withdrawn their money.

Consequently, the Israeli CPA (Certified Public Accountants) Institute announced to its members on March 13 that it had been in contact with the Israel Tax Authority (ITA) regarding the following stopgap relief measures:

Withholding taxes: i.e. taxes withheld from salaries. As requested by the CPA Institute, regional assessing officers at the ITA may on a case-by-case basis consider extending the upcoming reporting date (“March reporting”) and allowing payment of such tax by installments if necessary. Such extensions should not trigger fines, liens (bank account freezes) or any criminal reports. Comment: The term “March reporting” in the announcement is unclear – tax for March payable in April, or tax payable in March regarding February, or both? It will be up to each SVB-affected company to request what it needs from its own Assessing Officer,

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Remitting money abroad to pay salaries to foreign employees (especially American employees): The ITA may issue confirmations needed by Israeli banks to move money out of Israel to pay the salaries of foreign employees. This should be possible via the existing “green channel” for transferring money abroad. The idea is to move money quickly without Israeli withholding tax to a foreign-affiliated company if money is blocked at SVB. Currently withholding tax exemption is normally restricted to $250,000 per year for foreign services unless special permission  is obtained for that transaction or in advance


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Comment: SVB caused shock waves in the hi-tech sector. The resulting withdrawal of funds and transfers to Israel may have also contributed apparently to the recent rise in the shekel despite the judicial reform demonstrations.

As always, consult experienced legal and tax advisers in each country at an early stage in specific cases.