Draft Circular on Taxation of Activities Using Virtual Currencies

The Israel Tax Authority (ITA) published a draft circular today about a sale of rights in a corporation when a portion of the consideration is paid to the seller at a future date.

In a considerable number of share sale transactions, the consideration mechanism is comprised of an immediate partial payment, while additional payments are contingent upon the fulfillment of particular parameters, for which there is no way of knowing if, when, and to what extent they will be fulfilled. For some of these transactions, the consideration derives from the achievement of particular milestones, such as sales, profits, or the stock-exchange price of the shares. For others, however, the consideration is a function of the development of a particular technology or a particular product, etc.

Up until now, the ITA’s position was to tax the sale in respect of the entire consideration on the signing date of the sale agreement—even though there is no certainty about when such milestones will be achieved, if they will be achieved at all. Thus, if this draft circular is finalized, the situation will change for the better.

Pursuant to the draft circular, under particular circumstances, a seller of shares shall be able to split its reporting of the sale and the tax payment into two parts: a regular report of the consideration received and an additional report about the future consideration. A portion of the future consideration shall not constitute a portion of the consideration and, therefore, will not be taxed at the initial stage, rather only when these sums are actually received by the seller, or only when the sums become certain and the data can be quantified (whichever occurs earlier).

Furthermore, when calculating the original price of the shares being sold in the corporation, the entire original cost of the shares shall be taken into account, and not only their relative share of the transaction.

Notwithstanding the above, and as a slightly discordant final note, the draft circular subjects the entire mechanism to the prior approval of the tax assessor—which could put a damper on the otherwise good news proposed by it. So, while not all is rosy in the draft circular, it undoubtedly provides a refreshing breeze in the region of taxation of shareholders during a sale of their holdings in a corporation.