51 the taxation of partnerships. This amendment would ensure that income from securities or financial assets, including capital gains, received by a passive limited partner from investments in specified securities, will not be considered ordinary business income. This applies equally to both foreign and Israeli investors. These changes are also positive for Israeli resident investors, since the specific tax rulings issued to date for investment funds have only addressed income classification for foreign investors. Taxation of Carried Interest Currently, the position of the ITA is that income from carried interest in an eligible investment fund is considered ordinary business income. However, within the framework of the specific tax ruling, the ITA is willing to provide reduced tax rates on carried interest as follows: (i) for foreign managing partners, a flat tax rate of 15% (concerning carried interest derived from the disposition of Israeli companies); and (ii) for Israeli managing partners, the tax rate is calculated based on a formula that weighs the rates of foreign resident investors out of the total investors in the fund (“IVA Arrangement”). The Memorandum proposes amending the ITO to stipulate that carried interest income related to investments specified in the regulations, when attributed to Israeli managing partners, will be subject to a fixed tax rate of 32% (instead of the IVA Arrangement). This proposal serves as a compromise between the full ordinary income tax rate (up to 50%) and the capital gains tax rate (25% before surtax). The goal is to create certainty and uniformity, eliminating the need for special tax rulings or reliance on formulas that depend on the specific circumstances of each investment fund. Regarding carried interest paid to a foreign resident managing partners, the tax relief is expected to be provided as part of the amendment to the ITO within the new regulations. VAT on Management Fees and Carried Interest The Memorandum also proposes resolving the long-standing dispute between the ITA and the fund industry in Israel, regarding the applicability of VAT on management fees and carried interest in investment funds. It is proposed that carried interest (which qualifies for benefits under the provisions of the ITO) will be exempt from value-added tax (rather than being subject to a 0% VAT rate). This implies that, under the VAT Law provisions,
RkJQdWJsaXNoZXIy MjgzNzA=