Exchange of information between countries, voluntary disclosure and taxation issues in dual citizenship

Israeli company owners, partners and private individuals with dual citizenship face issues of taxation, disclosure of will and exchange of financial information about them between countries.

Attorney Paz Weinberger-Yitzhaky explains how to act in front of international taxation conventions

Hila Tzur-Shinzi, in collaboration with legal zap

07/08/2022

Sunday, 07 August 2022, 07:50

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How to act in front of international taxation treaties and when is it recommended to consult a legal entity? (Photo: ShutterStock)

Eduardo Severin, co-founder of the social network Facebook, renounced his American citizenship in 2012 and became a Singaporean citizen in order to reduce his tax payments by hundreds of millions of shekels.

Just like Sabrin, many Israelis, whether they are company owners, partners or even private individuals with dual citizenship, are faced with tax issues, declaration of will and exchange of financial information about them between different countries.

The lawyer and entrepreneur Paz Yitzhaki-Weinberger explains how to act in front of international taxation treaties and when it is recommended to consult a legal entity that is familiar with international tax tests.

"In the last decade, there has been a fundamental change in international legislation that allows the countries of the world to transfer between them financial information about a private person or about a corporation. These are international treaties that are enshrined in law and make, among other things, the banks and financial institutions the gatekeepers. The banks are obliged to transfer information about the balances and income of the customers to different countries According to tax tests such as place of residence, residency, etc. The information comes to the banks from the citizenship and residency statement that each one of us filled out when opening the account, or after an initiative by the bank (American FATCA or CRS - OECD)."

"The information passes automatically by virtue of the regulations, the bilateral treaties or the multilateral treaties that the country is a signatory to, so that if an American citizen opens a bank account in Israel, the financial information about him will be transferred to the American Tax Authority even without anyone asking for his permission."

Attorney Weinberger-Yitzhak adds that "These treaties, which are shared by about 135 countries, allow for tax audits, and therefore people should know that the financial information about them is exposed and passes between many countries, sometimes without consideration and even if no investigation is held against them and no request or received information regarding them".

"There is reason for concern. First, it is important to report and pay the taxes and to avoid committing tax offenses in the first place - it is neither profitable nor moral, because someone else carries the burden and the needs of the state. Tax offenses are a completely black case. It is important and desirable to avoid them and always act correctly and with full transparency. It is possible Even benefiting from tax benefits due to laws such as the Law on Encouraging Capital Investments, because when the corporation contributes to society, the state relieves it of the tax burden."

Attorney Weinberger-Yitzhak emphasizes: "In terms of reporting, my recommendation is to report income in full, send the bank forms and maintain transparency, since the information passes anyway.

If, nevertheless, the person is caught up in a tax investigation, even if he has no direct connection to the tax offense - if, for example, he inherited a bank account abroad and the testator, who has since passed away, did not act correctly, or because he himself made some mistake in the past, cases that recur again and again - it is important that he will report the funds, perform due diligence and receive criminal immunity. In such cases it is important to consult with experts in the field and it is better to deal with the issue as early as possible, especially if the funds or property were inherited."

Does voluntary disclosure protect the person against all the countries of the world?

"No, voluntary disclosure protects the person through criminal immunity only vis-a-vis the country to which the person disclosed the information and proceeded with the appropriate procedure. Thus, if an Israeli citizen with American citizenship disclosed the information only to Israel but not to the US, he will be criminally immune from authorities The tax in Israel only.

This situation is prevalent among people with dual citizenship who are exposed to double taxation and even higher tax payments, so even in these cases it is recommended to seek legal advice."

"There are countries that tax income anywhere in the world, regardless of the residency test or the test of the place of production of the income. For that matter, Israel also taxes its residents on all their income anywhere in the world, but does not tax citizens who are not residents of Israel. In a situation of dual citizenship there is a risk of doubling taxes And even for triple taxation, so the Israeli may, God forbid, pay tax both in Israel and in another country of which he is a citizen, unless there is a double tax treaty between the countries. This is true for both individuals and companies."

According to Attorney Weinberger-Yitzhaki, "In a situation of double taxation it is important to examine whether there is any point in maintaining the economic activity at all, in particular when the profit margin is low and the payment of an additional tax may lead to an activity that has a financial loss.

In any case," he says, it's important not to be clever in front of the various authorities, act legally, declare residency and consult an expert when there are doubts."

What tests determine if a person becomes a resident of another country?

"The tests are many and vary from country to country. In the past, I have come across stories of people who would spend time on a yacht in the middle of the sea, or spend most of the year in international waters so that they could claim that they are not residents of any country and therefore not pay tax. At the level of principle, if a person stays for more than 180 days in one country , the presumption will be that he will become its resident, but this is not an absolute test. If a person travels abroad for work and stays there most of the year, but the center of his life - for example, his wife and children - is in Israel, he will be required to examine the issue."

Even in these cases, according to him, it is important to know the different tests in each country and to know that sometimes there is competition between different tax authorities, when each of them claims that the person or the company is obligated to pay them tax.

"In these cases, it is recommended to consult a legal entity, in particular regarding aspects of daily conduct: activity in a certain country, where the employees live, where the management is located, where the decision-making process is carried out and from where the business activity is controlled. Sometimes such conduct may turn a completely foreign company into an Israeli company for tax purposes ", advocate Weinberger-Yitzchaki emphasizes. In

"Before establishing a new activity, but also with any substantial change, for example: if the field of activity has changed or the organization has started working with other countries, if there is an intake or outflow of employees from a certain country, a change in the visibility of the company and in the decision-making processes, where is the decision-maker in the company, if applicable Changes in the shareholders, in particular if a new substantial shareholder is added or if a previous shareholder has reduced his holding".

Any long stay, which is not for the purposes of travel or tourism of different people in another country, in particular when passing the half-year mark, can be very significant, says attorney Weinberger-Yitzchaki, and "therefore, in this context, even a backpacker traveling in Brazil for six months may become a resident of Brazil in terms of tax and he will have to examine how he can maintain his rights.

In this context, it should be emphasized that most countries in the world do not allow visas for tourists for such extended periods, but even re-entering and re-exiting the country, exceeding the 180-day limit, can classify a person as a resident.

attorney Paz Yitzhaki Weinberger by phone

- 077-2303726 or by email - paz@piwlaw.com

The article on the legal website courtesy of Zap Legal

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