Shai Dover, CPA (Isr.)
Under the Gift Law 1968 (the “Gift Law”) a gift is defined as the granting of an asset, either real or personal property, by a donor to a donee for no consideration. An undertaking by the donor to grant a gift in the future requires a written document. The Gift Law further provides that the ownership of an asset comprising the gift passes to the donee upon the actual transfer of the gift or upon providing the donee with a written document evidencing the undertaking by the donor to grant the gift to said donee.
The Israeli Tax Ordinance (“ITO”) and the Land Taxation Law (“LTL”) include comprehensive rules governing the issue of gifts. As a general rule, the transfer of an asset as a gift is a taxable event in Israel as any other sale of an asset. Nonetheless, under certain circumstances, the donor may be entitled to receive an exemption from the payment of taxes.
2. What is a gift
Neither the ITO nor the LTL define the term “gift”. Therefore, various other laws and court precedents are reviewed in order to find said definition. The issue came before the courts a number of times over the years. The courts determined that the meaning of gift for tax purposes is no different from its meaning in the Gift Law, as discussed above. A gift may be of land, property or rights. A gift is complete upon the transfer of the asset form the donor to the donee with the understanding that it is a gift.
3. The Israeli Tax Authority’s position
The Israeli Tax Authority published an interpretation of the ITO in which it provided that the donor may not receive anything from the donee in return or as consideration for the gift. Any return, no matter how small in value, may result in the exclusion of the transfer as a gift and as a result may deprive any exemption resulting from the transfer thereof..
4. Main ruling regarding the definition of gift
As mentioned above, it is of great importance that the Tax Authority accepts the granting of an asset from one person to another as a gift in order to be eligible for the exemptions permitted by law. The definition of which granting constitutes a gift is an integral part of the Tax Authority’s stance on the matter. In the case of Nimrod Graiber vs. Haifa Tax Assessment Officer the Supreme Court ruled that the mere fact that a sister transferred shares to her two brothers without a direct return is not merely sufficient in order to define the transfer as a gift. The Supreme Court based its ruling on a number of facts including the bad relationship between the sister and her brothers as well as the transfer of a large amount of money from the mother to the sister (her daughter) following the transfer of the shares from the sister to her brothers. This Decision may allow a conclusion that transfers between family members are not automatically viewed as gifts. A gift should be given with a good will and bona fide motives.
5. The Taxation of A Gift and Exemptions for Gifts – ITO
Section 88 of the ITO provides that any transfer of an asset from one’s possession is considered a taxable event . The section specifically mentions the transfer of a gift as a taxable event. The tax calculation is made as if the asset was sold on the free market in an arm’s length transaction at fair market value. However, Sections 97(a)(4) and (5) provide an exemption for certain gifts.
Exemption for gifts made to a public institution
Sec. 97(a)(4) provides an exemption for gifts made to the State of Israel and to a few other national institutions. Also exempt are gifts for Public Institutions fulfilling the terms of Section 9(2), which requires the institution to be a non-profit organization for the purpose of religion, culture, science, education, health, welfare or sports. The term “Public Institution” can also include a charitable trust.
Exemption for gift to an individual
Sec. 97(a)(5) provides an exemption for any gift transferred by an individual to one of his family members. The Section further exempts any transfer made by an individual to another individual. There are two main conditions for both transfers. First, the gift must be transferred Bona Fide. This condition overlaps in someway the meaning of the term “gift”, that is, if it not made bona fide, the transfer is not a gift. .
The second condition was added in the tax reform of January 2003. It stated that the exemption would be given only if the donee is an Israeli resident. In simple terms, any gift to a non-Israeli resident is taxable. For example, an Australian resident transfers a gift, an asset in Israel, to his son who is an Australian resident as well. Said gift is subject to capital gains tax in Israel. If the same transfer mentioned above is made to his Israeli resident son, he may receive an exemption from that tax. Furthermore, this rule applies to an Israeli resident as well. An Israeli resident who wishes to transfer a gift to a non-Israeli resident is liable for capital gains tax. The location of the transferred asset, i.e., whether the asset transferred is located in Israel or elsewhere is irrelevant.
6. Taxation of gift and Exemptions for gifts – LTL
Real estate transactions in Israel are governed by the Land Taxation Law. The term “Real Estate” also includes shares and other rights in corporations with assets composed only of real estate. Any transfer of real estate even as a gift is automatically subject to capital gains tax. The calculation of the tax is made in a method similar (but not identical to) the one in accordance with the ITO. However, as in the Income Tax Ordinance, the Land Taxation Law has several exemptions for the transfer of gifts.
The LTL includes three main exemptions. The first two relate to any type of real estate, and the third relates only to an “approved apartment” which is an apartment used mainly for residence purposes (and not for other uses such as a business).
The first exemption may be found in Section 61 which exempts gifts transferred to a public institution which is a nonprofit organization and was approved by the Treasury Minister.
The second exemption may be found in Sec. 62 which exempts gift of real estate transferred to a family member. A family member is the spouse, parent, issue, spouse’s issue and any spouse of each of these. A family member also includes a brother or sister, in respect of a right received from a parent or parents of a parent without payment or inheritance. The main difference between the LTL and the ITO is that an exemption can only be given for the transfer of a gift to a family member. Whether or not the transfer is bone fide, any transfer of a gift to another who is not by definition a family member of the donor (for example, a nephew is not included in the definition of a family member and neither is an uncle) is subject to tax. Another difference between the LTL and the ITO is the absence of the condition as to the residency of the donee. As long as the donee is a family member of the donor, the transfer of the gift may receive an exemption regardless of the donee place of residence.
The third exemption relates to the sale of an “approved apartment”. Sec 49B exempts any sale of such an apartment if several conditions are met. In this case the identity of the donee is irrelevant and the exemption will be given only on the basis of the donor’s personal information, provided that the gift is of an “approved apartment”.
Where the gift is of an “approved apartment”, the donor may choose between an exemption based on Section 62 or an exemption based on Section 49B. Each have their advantages and disadvantages.
7. Gifts of assets From an international Perspective
The transfer of a gift, like any other transaction, has unique aspects when made across jurisdictions. An individual is liable to taxes in accordance with the law in such person’s country of residence. Nevertheless, any transaction made between two individuals residing in separate jurisdictions, should be reviewed from a tax perspective, in light of any tax treaties between the two countries, if any.
The asset transferred as a gift is located in Israel
As a general rule, (with many exceptions) Israel’s Tax Treaties (based mainly on the OECD Model Tax Convention) do not provide the country in which the asset is located any right to tax the transaction. Taxes will be imposed, if at all, only in the country of residency of the donor. Where a gift of an Israeli asset is transferred from an individual residing in a country with which Israel has a treaty, to a non-Israeli resident, in most cases the treaty will not permit Israel to tax the transaction regardless of its domestic rules.
The asset transferred as a gift is not located in Israel
In the event that the donor is not an Israeli resident he is not subject to Israeli laws and thus not liable for the payment of taxes in Israel. Nonetheless, if the donee is an Israeli resident, the transfer of the gift may cause a tax distortion. Under such circumstances, the price of the gift now owned by the Israeli donee is the same as it was while owned by the donor. Once the asset is sole by the Israeli donee, the taxes owned will be calculated in accordance with the original purchase price paid by the donor and not in accordance with the price of the asset at the time it was gifted to the Israeli donee. To deal with this distortion, the Israeli donee can request the Israeli Tax Authority for a step-up. A step-up is usually given under several conditions including restrictions on the use of carryforward loses and tax credits. In some cases, a valuation of a qualified appraiser will be needed.
8. A gift of real estate as defined in Land Taxation Law
Most of Israeli tax treaties distinguish between transactions with respect to assets and transactions relating to real estate. The former are taxable in most cases only in the country of residence of the donor, the latter is taxable in both counties. When real estate located in Israel is transferred as a gift from a non-Israeli resident, the fact that the country of residence of the donor can tax the transfer of the gift reduces the amount of tax saved through the exemption. Most Israeli treaties, as aforesaid, are based on the OECD Model Tax Convention, which states in Section 6:
“Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.” In Short, in many circumstances, the exemption given by Israel to the transfer of the real estate as a gift is only transfer the payment of the taxes overseas. There are of course exceptions, and there are treaties, which allow the complete exemption from the payment of these taxes.
In the absence of a tax treaty, any taxes saved in Israel are likely to be paid in the country of residence of the donor if gift tax is imposed in said country.
Israeli law distinguishes between the transfer of an asset governed by the Income Tax Ordinance, the transfer of real estate governed by the Land Taxation Law and the transfer of personal belongings which is not considered a taxable event. Both the Income Tax Ordinance and the Land Taxation Law consider the transfer of a gift to be a taxable event, yet both have exemptions therefore. The Income Tax Ordinance exempts gifts which are given bone fide to individuals who are residents of Israel. The Land Taxation Law exempts gifts only made to family relatives as defined in the law.
Shai Dover C.P.A (Isr.)
**This article is updated to July 1st 2018**