This is a dramatic week on the Israeli judicial front. Two massive amendments to the Judgement basic law passed their first reading in the Knesset. First, it is proposed to prohibit judicial review of the reasonableness of government decisions. Second, it is proposed to abolish the Israeli Bar Association (i.e. the Law Society). Many people are out demonstrating. But how will this impact the Israeli business scene? We briefly review these proposals.
A bill which passed its first reading in the Knesset on July 11, 2023, proposes to ban the Israeli High Court of Justice (“Bagatz”) from discussing or giving injunctions concerning the reasonableness of decisions of the government, the prime minister or any other minister. This would also apply to decisions of others “chosen by the public” as determined in any law. (Proposed Basic Law: Judgment (Amendment 5)(Reasonableness Standard)).
Why? The Commentary to the bill explains that the reasonableness standard currently enables the High Court to disqualify a governmental decision that does not give sufficient weight to different interests that ought to be considered…amounting to material or extreme unreasonableness. The Commentary says elected representatives of the public should consider this, not a Court. The Commentary also says the proposal would not stop the Court considering and issuing injunctions on other grounds, such as proportionality (presumably against a disproportionate decision).
Another bill which passed its first reading in the Knesset on July 5, 2023, proposes to wind up the Israel Bar Association and replace it with a quite different Israeli Lawyers Council (Draft Law Israeli Lawyers’ Council, 2022).
Currently the Israeli Bar Association is an autonomous body whose leaders are democratically elected by lawyers in Israel. It admits new lawyers, administers disciplinary matters and promotes other professional matters. This is all legal, pursuant to the Bar Association Law, 1961.
According to the latest Bill, the Israeli Lawyers Council would be an appointed body with the following members: a Chairman (District Court judge) appointed by the Justice Minister; 4 private lawyers appointed by the Knesset Constitution and Law Committee; a District Court judge appointed by the Supreme Court President; 3 public sector lawyers appointed by the Justice Minister; 2 representatives of the Finance Minister; 1 academic appointed by the Knesset Constitution and Law Committee.
The Lawyers’ Council would largely take over the Bar Association’s functions according to detailed provisions in the proposed bill. Note that the Justice Minister would issue ethical rules for lawyers. This would be after consulting the Lawyers’ Council and the Knesset Constitution and Law Committee.
According to the latest Bill (Section 67), the Lawyers’ Council would not take over the Bar Association’s function of appointing two representatives to the Judges’ Appointment Committee….
Currently, Israeli judges are appointed by the President based on the selection of the Judges’ Appointment Committee which has 9 members: the Supreme Court president; 2 other Supreme Court judges appointed by the Supreme Court; the Justice Minister; another Minister; 2 Knesset Members; and 2 members of the Bar Association. According to the proposed Bill, the last 2 would drop out leaving 7 members on the Judges’ Appointment Committee.
Why? The Commentary to this Bill says the interests of all citizens should be promoted, not just the welfare of the legal profession.
These are controversial proposals which the government may or may not refine before they are finally enacted. Regrettably, no written constitution is yet proposed to lay down separation of powers or checks and balances, not even a second Knesset chamber. A simple majority of the Knesset would be sufficient. All this is different from the situation in many other Western democratic countries.
Start-ups in Israel often now set up US parent companies which own intellectual property (IP) and Israeli limited scope subsidiary companies. This benefits the US treasury and puts the Israeli hitech economy and tax revenues on borrowed time.
Whenever an exit deal occurs, the US IRS would collect capital gains tax.
On the legal side, Israeli attorney Gidon Cohen, based in Ramat Gan, commented to us that judges must be seen to be impartial, professional and free from political influence. Otherwise, commercial disputes won’t be heard in Israel and Israel won’t be the forum for litigation. A left-wing liberal businessman will not want a biased right-wing judge, and vice versa. Impartiality is absolutely vital. Loss of faith in the Israeli legal system to enforce rights would reinforce the need to register IP abroad among other things.
Also, businesses don’t like surprises – the proposed Israeli judicial reform was scarcely mentioned in the last Israeli general election, it was mainly about personalities. The Shekel is fluctuating and international credit rating agencies have expressed reservations.
The next Israeli election is 3 years away. Market forces are here now.
It remains to be seen how things develop. One possibility is that compromise talks might perhaps resume at the residence of President Herzog, a lawyer, before the Knesset passes the proposals…..
If you would like more information about this issue or Israeli tax matters in general then please get in touch. The content of this article is provided for educational and information purposes only.
It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
A recent court judgment has held that non resident hedge funds should be treated like residents in Spain if they meet certain requirements.
Under the Non-resident Income Tax Law, hedge funds resident in Spain are taxed at a lower rate of 1%, while those resident in other countries are taxed at a higher rate of 19%, unless there is a relevant double tax treaty.
The Supreme Court ruled that this different treatment is discriminatory and goes against the free movement of capital regulated in article 63 of the Treaty on the Functioning of the European Union.
The court held that non-resident hedge funds should be treated like residents if they can prove that they are open-ended entities, that they have relevant authorization, and that they are managed by an authorized management company pursuant to the terms of Directive 2011/61/EU.
The nonresident hedge fund has the burden to prove these requirements, but a certain flexibility should be allowed due to the lack of specific regulations in Spain in this regard. If the Spanish authorities have reservations about the documentation provided by the fund, they must initiate an exchange of information procedure with its State of residence.
The Court also concluded that the restriction on the free movement of capital could only be considered neutralized by the provisions of a double tax treaty if the treaty permits the hedge fund (not its members) to deduct the total amount of Spanish tax withheld in excess. However, given the way hedge funds operate and are taxed, that neutralization is impossible in practice.
This judgment is significant as it removes discrimination against nonresident hedge funds and brings Spain in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union.
The decision clarifies the requirements that nonresident hedge funds must meet to be treated like residents and offers some flexibility in terms of providing documentation. It also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.
In conclusion, the recent Supreme Court judgment in Spain has removed discrimination against nonresident hedge funds and clarified the requirements for them to be treated like residents.
This decision is in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union and offers some flexibility in terms of providing documentation.
However, the decision also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.
If you have any queries about issues around Spain non-resident hedge funds, or Spanish tax matters in general, then please do get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Over a year ago, we wrote an article called “She sells corporate shells” about the EU Commission’s proposal for a directive imposing new rules to prevent the misuse of shell entities for tax purposes.
In January 2023, the European Parliament approved the European Commission’s draft directive known as ATAD 3 to prevent the misuse of shell entities for tax purposes.
The directive includes several indicators of minimum substance to assess if an entity has no or minimal economic activity, which could result in the denial of certain tax benefits based on treaties or EU directives.
Unlike Pillar 2, ATAD 3 is not limited to international or domestic groups with global revenues exceeding EUR 750 million, meaning it will impact many small and medium-sized enterprises with an EU presence, increasing the administrative burden.
The European Council is not bound by the amended text and may still amend or decide not to issue the directive.
The Council will have the final vote, and ATAD 3 will be on the agenda of the European Council Ecofin meeting of 16 May 2023.
Member States are meant to transpose ATAD 3 into domestic law by 30 June 2023, and the directive would apply as of 1 January 2024, although the European Commission may relax the timeframe in light of the short timeframe for final adoption and implementation.
ATAD 3 targets passive undertakings that are tax resident in an EU Member State and deemed not to have minimum substance.
The directive aims to bring more entities into scope by lowering some gateway thresholds but clarifies that the intra-group outsourcing of the administration of day-to-day operations and decision-making on significant functions is not considered a gateway.
Certain entities, including UCITS, AIFs, AIFMs, and certain domestic holding companies, will benefit from a carve-out and be exempt from reporting obligations. However, entities owned by regulated financial undertakings that have as their object the holding of assets or the investment of funds did not retain the proposed amendment to introduce a carve-out.
If an entity passes all three gateways, it will have to report certain information regarding indicators of minimum substance through its annual tax return.
Failure to comply with the reporting obligation triggers a penalty of at least 2% of the entity’s revenue, and for false declarations, an additional penalty of at least 4% of the entity’s revenue would be due.
If an entity lacks substance in one of the indicators or fails to provide adequate supporting documentation, that entity is presumed to be a shell entity. However, an entity has the right to rebut this presumption.
If the entity cannot rebut the presumption, it will not receive a certificate of tax residence from its EU Member State of residence, resulting in the disallowance of any tax advantage gained through bilateral tax treaties of the entity’s resident jurisdiction or through EU Directives.
Regardless of whether the entity is classified as a shell, the reported information will be exchanged automatically.
Additionally, the European Commission is working on a new taxation package, including the Securing the Activity Framework of Enablers initiative and the FASTER proposal, aiming to introduce a new EU-wide system for withholding tax to prevent tax abuse in the field of withholding taxes.
The implementation of ATAD 3 and other initiatives to restrain the use of shell entities and aggressive tax planning may have an important impact on existing structures, and entities should be carefully checked on a case-by-case basis before the relevant date of entry into force.
If you have any queries about this article, or the matters discussed more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Norway has seen a rise in the number of its billionaires leaving the country, in response to increased taxes.
The Norwegian government has implemented stricter rules for taxing its citizens, including the abolition of the five-year period for exit taxation of unrealized gains on shares and other assets.
This means that any gains on assets such as shares will be taxed immediately upon transfer or sale, rather than being taxed over a five-year period.
Additionally, the rules will be extended to include transfers of shares to close family members living abroad.
As a result, many of Norway’s wealthiest individuals, whose net worth exceeds 1 billion Norwegian kroner (approximately 100 million euros), have reportedly relocated to countries such as Switzerland.
One of the main reasons for this trend is the significant difference in tax rates between Norway and other countries.
According to an analysis by the Heritage Foundation, the top tax rate in Norway is 47.8%, while the country’s total tax burden is 39.9% of total domestic income.
In comparison, Switzerland has a top income tax rate of only between approx. 25% to 40%, and its total tax burden is 28.8% of total domestic income.
Moreover, corporate profits are taxed at 28% in Norway, and dividends are taxed again at 28% income tax rate, leading to a de facto tax of 48.16% on company profits.
In contrast, Switzerland has lower profit taxes (between approx. 12% and 20%), lower income taxes (dividend privilege; between approx. 13% and 30%), lower wealth tax (0.1% to just under 1%), and certain cantons have regulations defining the maximum tax burden to prevent confiscatory taxation in special cases (especially in the case of large non-income-producing assets).
The Swiss tax system is generally considered advantageous for high-net-worth individuals compared to other countries for several reasons.
First, Switzerland’s federal, cantonal, and municipal tax system allows for relatively low tax rates, especially for high-income earners.
In addition, Switzerland has favorable tax treatment for certain types of income, such as dividends and capital gains.
Dividends from significant shareholdings (10% or more) held as part of an individual’s private assets are subject to preferential taxation.
Capital gains from the sale of private assets are generally tax-free, with an exception on capital gains on Swiss real estate, which are taxed under a special regime.
The Swiss tax system is also decentralized, with each canton having the power to set its own tax rates, leading to a high degree of tax competition between the cantons. This can result in lower overall tax rates for individuals and companies.
Additionally, Switzerland has strict banking secrecy laws that provide wealthy individuals with a high degree of privacy and discretion in their financial affairs, and an extensive network of double taxation treaties that help avoid or significantly reduce double taxation and foreign withholding taxes on dividends.
Switzerland is also known for its high standard of living, excellent infrastructure, and high-quality health and education systems, making it an attractive location for wealthy individuals seeking a stable and prosperous environment.
In conclusion, the increase in taxes in Norway has led to a rise in the number of billionaires leaving the country.
Switzerland has become a popular destination due to its advantageous tax system, which allows for relatively low tax rates, tax competition between cantons, strict banking secrecy laws, an extensive network of double taxation treaties, and a stable and prosperous environment.
If you have any queries about this article on Norway’s Wealth Tax Exodus, or Norwegian tax matters in general, then please get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.