Artificial Transaction in Israel tax law

Section 86|Tax Ordinance

Israel tax law contains anti-avoidance provisions which allow for the reclassification of a transaction which may be deemed to be conducted for the purpose of the improper avoidance or reduction of Israeli tax.

The Israeli income tax assessing officer is authorized to disregard or reclassify a transaction, for tax purposes, pursuant to its actual economic substance by virtue of authority delegated by Section 86 of the Israeli Tax Ordinance.

Pursuant to section 86 of the Israeli Tax Ordinance, any transaction deemed a fictitious transaction, aimed at the avoidance of tax may be disregarded and taxed accordingly.

Section 86 of the Israeli Tax Ordinance provides:

“(a) If the Assessing Officer is of the opinion that a specific transaction - which reduces or is liable to reduce the amount of tax payable by any person - is artificial or fictitious; or that a certain disposition is not in fact carried out; or that one of the principal objectives of a particular transaction is an improper avoidance or improper reduction of tax, then he may disregard that transaction or disposition and the person concerned shall be assessed accordingly. Avoidance or reduction of tax may be deemed improper even if it is not contrary to the law. For this purpose, “transaction” includes any act.” 

Israeli case law has indicated that, within the confines of the law, tax planning aimed at minimizing the taxpayer’s tax liability is legitimate. In the event that one is faced with two possible options for achieving a specific goal, and the path chosen may have certain tax effects, it would generally be at the taxpayers discretion to choose the option which would result in the lowest tax liability.

In fact, one Israeli court decision held that it is the right and, indeed, the obligation of tax experts to plan legal transactions in a manner which would not trigger excess tax.

In sum, Section 86 of the Israeli Tax Ordinance is aimed at artificial transactions which have no business substance behind them.

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