Tax laws allow the Israel Tax Authority to collect tax due by seizing assets of the taxpayer, even if they have been transferred to a third party.
We live in fast-moving times. What we own today we can quickly dispose of tomorrow. Can the Israel Tax Authority (ITA) collect taxes you owe from someone else you transferred some of your assets to?
Enforcing tax debts
The tax laws allow the ITA to collect tax due by seizing assets of the taxpayer, even if they have been transferred to a third party, subject to the following conditions: (1) an entity or individual has a tax debt or a final (nonappealable) tax debt; and (2) there was a liquidation or asset transfer without consideration or with only partial consideration, or the taxpayer transferred his activity without leaving enough means in Israel to pay the tax due (Income Tax Ordinance, Section 119A; VAT Law, Section 106).
The tax laws do not say which of the above two conditions comes first – tax debt or asset transfer. If you transfer assets to another person and only later owe tax, can the ITA move in and grab those assets from the other person? The ITA certainly thought so, leading to acrimonious disputes all round on occasion.
Recently, the Israeli Supreme Court ruled on the subject and put an end to the uncertainty (Dalia Pelach & Bros. vs Tel Aviv 3 Assessing Officer, Civil Appeal 2755/08).
The facts of the case
A couple married in 1984 and had three children. On July 23, 2003, they reached a divorce settlement with legal validity, in which the ex-wife received the family home in Holon. On March 11, 2004, the ex-wife registered her ownership of the home in the Land Registry. The ex-husband happened to owe income tax of about NIS 1.8 million for the tax years 1994-1998. His appeal against the tax assessments was rejected in a court decision dated October 2, 2005.
On January 22, 2006, the ITA registered a caveat in the Land Registry laying claim to the home. The ex-wife appealed to the courts. The question was whether the ITA could indeed claim the home from the ex-wife.
The Supreme Court ruling
The Supreme Court turned down the ex-wife‘s appeal. Why? The purpose of the law is to facilitate the collection of taxes. The wording and intent of the law are aimed at preventing the transfer of assets by a taxpayer if that will affect the collection of taxes. However, applying these provisions to assets transferred before a tax debt is generated would be undesirable.
Therefore, the court ruled that the ITA could begin collecting tax from the point of time the taxpayer should have foreseen the possibility that he would owe tax in light of the proceedings conducted between him and the ITA. The ITA accepted that this point in time would be ‘‘from the time that assessment proceedings begin and the taxpayer is invited to discuss them.‘‘
To sum up
We can conclude that an Israeli tax collector can exercise his authority to seize assets transferred to someone else only if assessment proceedings existed that the taxpayer knew about, at the time the asset was so transferred. What is interesting is that this is subject to the taxpayer‘s knowledge and foresight.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.