‍Decoding Business Income

Determining what constitutes a "business" is critical. A business is a regular realm of genuine economic activity. Consider a continuous, methodical, and consistent operation that reflects a persistent commercial activity. A "random business transaction," on the other hand, is a one-time, infrequent commercial event.

In addition, notable court decisions have attempted to identify the boundaries between business and capital, as well as active and passive business activities, establishing additional criteria to assist in distinguishing these transactions.

Navigating the Fine Line

The line separating capital gain from business income is often razor-thin, confusing even the most seasoned tax professionals. Even after careful consideration of the evidence, divergent conclusions and perspectives can emerge. These complexities require our attention, especially when the tax disparities between capital and business are as large as they are in Israeli law today.

Section 89(c) of the Ordinance - the Sole Referee

Section 89(c) of the ITO plays a vital role in this complex maze. It states that profits from the sale of property, which may be subject to tax under the first chapter of Part B, Part E, or Part E1, should be taxed exclusively under the first chapter of Part B. In simpler terms, if an asset sale aligns with a "transaction or random business of a commercial nature" as defined in Section 2(1) of the ITO, Section 91 (the tax on capital gains) does not apply. Instead, the tax rate is determined following the provisions of Section 121 of the ITO.

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The distinction between capital gain and business income is an important one for taxpayers, as the tax rates for these two types of income can vary significantly. This article has provided an overview of the key concepts in this area, and discussed some of the factors that courts have considered in making this determination. It is important to consult with a tax advisor to determine the proper classification of a particular transaction.

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