Capital Market Taxation

In the calculation of capital gains, commission fees for purchase, sale, custody, and management of the portfolio that were incurred will be allowed as a deduction. The purchase commission will be added to the cost price and the sale commission will be deducted from the sale price. A pro rata portion of the custody and management fees will be deducted from the sale price, without adjustment.

Real interest expenses and other direct expenses incurred will be allowed as a deduction subject to the following conditions:

• The securities being sold were held in a separate bank account for a period of more than 12 months.
• The expenses relate to the period during which the securities were held in a separate account as mentioned.
• The loan is identifiable and attributable at the discretion of the tax authority in accordance with conditions and rules to be determined.

Starting in 2007, it will be possible to offset losses using the credit method. This will apply to all types of securities traded on the stock exchange against profits from the sale of all types of securities traded, and against interest and dividends from traded securities, both in the stock exchange in Israel and in the stock exchange abroad (including a regulated market in Israel or abroad). Such profits and losses will be considered a separate basket for the purpose of offsetting losses.

Section 91(b) of the Income Tax Ordinance states that an individual will be liable to tax on real capital gains at a rate not to exceed 25% and if he is a substantial shareholder, 30%. Real capital gain is defined as the difference between the sale price of an asset and its purchase price, after taking into account inflation.

The formula for calculating real capital gain is as follows: Real capital gain = proceeds - (adjusted original purchase price - original purchase price)

• Proceeds is the amount the seller received in exchange for the sale of the asset.
• Original purchase price is the amount the seller paid for the asset at the time of purchase.
• Adjusted original purchase price is the amount of the original purchase price, adjusted for inflation.

The formula calculates the difference between the sale price of the asset and the purchase price, after adjusting for inflation. This difference is the real gain accrued to the individual.

In July 2006, the Israeli Tax Authority published guidelines for semi-annual reporting on capital gains from the sale of traded securities from which no withholding tax was deducted. These guidelines have not yet been replaced by new guidelines. The semi-annual report is made by submitting a notification to the collection department in the office of the relevant tax inspector. The notification will include the following details: Date of sale; Number of shares or bonds sold; Sale price of each share or bond; Total capital gain. 

The semi-annual report must be submitted by November 30 of the tax year.

The tax on capital gains from the sale of securities will be withheld at source by the broker who manages the securities account. The broker will transfer the amount of tax withheld at source from all of his clients to the tax authorities on a monthly basis. It is important to note that if the taxpayer is overcharged in the withholding at source phase, the excess will be refunded to them upon filing their tax return or short tax return. If losses were not taken into account in the withholding at source phase, they can be offset in the tax return phase.