by Adv. Shemer Sendak and Rivka Evron
The Israeli Supreme Court finally adopts the Business Judgment Rule Doctrine (“BJR”)– in Verdnikov v. Alovich(given December 28, 2016), the shareholders of Bezeq, the Israeli telecommunication monopoly, requested to approve derivative actions against Bezeq in connection with a capital reduction and dividend distribution, both of which were approved by a shareholder majority vote. The shareholders contested that Shaul Alovich, the controlling shareholder of Bezeq, had a personal interest in the above actions. Justice Amit wrote the leading verdict, and for the first time officially determined that the BJR has been adopted in Israel and is now part of Israeli Corporate Law. Although reference to BJR has been common practice lately, there was a “shadow” looming over the BJR, which has now been finally removed. The BJR determines that when analyzing decisions made by the board of directors of a company, the court will not review the business decisions of the directors, to the extent such business decisions were made utilizing adequate decision making procedures.Justice Solberg noted, however, that the BJR is not fully adopted in its American format, rather, adjustments may be necessary in order to maintain the established balances within the Israeli Corporate Law corpus.
Reduction of Corporation Tax.– Corporation Tax will be reduced by 2% from 25% to 23% in two phases, as part of the continued efforts to encourage foreign enterprises to establish businesses in Israel and to promote the continued growth of Israeli markets. The initial 1% reduction shall come into effect on January 1, 2017 and the second on January 1, 2018.
New Tax Treatment for Wallet Companies– The Israeli Law of Arrangements for 2017-2018 (“Hok HaHesderim“) was recently approved. One of the issues the law deals with is “Wallet Companies” (“Havarot Arnak“). Wallet companies are usually incorporated by individuals (or up to 5 people) for the sake of providing consultancy services to a different company which such person would otherwise be considered an employee of. Up until the adoption of the latest instalment of the law, this practice allowed an individual to defer payments on certain due taxes, assuming he does not withdraw the entire payment as salary – and to pay a reduced tax on funds left in his company. The law now determines that in cases where it is evident that the sole purpose of such wallet company was to enable lower tax payments, the tax assessor may see “through” the company and treat its income as the individual’s regular work income. In addition, the tax assessor may treat the funds left in the company as distributed dividends (to the extent that, in the framework of a special hearing to be carried out on such matter the individual fails to convince the assessor that such distribution shall not harm the company). For example, if a company’s income is derived from the services of one essential shareholder and such income is due to services which are typically performed by an employee – the individual shall have to pay regular income tax on such income.In certain situations the change may also be relevant to service providers who work via a separate company, if 70% or more of such company’s income is derived from one source.In order to soften the blow, the law incorporated a short term reduction in dividend tax from 30% to 25% for controlling shareholders (over 10%) with respect to dividends distributed no later than September, 2017.
Labor Law Updates– Commencing January 1, 2017, the minimum wage under Israeli Labor Law is increased to 5,000 NIS, following two previous increases as part of a comprehensive process to protect disadvantaged employees. In addition, the number of paid vacation days is increased to 12 per year, and pension contributions are increased to a total of 18.5%, of which 6.5 shall be allocated to a provident fund (including disability insurance and life/survivors insurance), 6% shall be contributed towards a severance pay component, and 6% shall be deducted from employee salary.