Business for the Management and Funding of Companies
The classification of management and/or financing income from related companies as business income entails significant tax advantages, such as:
Examination of whether management and/or financing income constitutes a business can be executed according to the list of tests set forth in the extensive caselaw, including in the Maggid precedent, such as: the type of asset, the frequency of transactions, the monetary scope, the manner of finance, the taxpayer’s knowledgeability, the existence of a permanent and continued mechanism or activity, and above all, the “overall umbrella” test. Alternately, the classification of income can be examined according to the “personal exertion” test, recently adopted by the Honorable Justice Grosskopf in the Sheratzky precedent, which examines whether the profit stems from the taxpayer’s personal exertion or rather from “external factors”.
According to the above tests, determining whether management and/or financing income constitutes a business differs from case to case, according to the circumstances of each taxpayer, and there are cases in which the income can be classified as business income even when the taxpayer company does not have employees, or when the company recorded management or financing income only, and in other additional cases.
In light of the numerous tax advantages inherent in the classification of income from related companies as business income, both for the purpose of offsetting losses against current income and for the purpose of classifying future share sales as a business’ capital gains, we recommend companies conduct an in-depth examination of this topic, both according to the tests set forth in the Maggid precedent and the “personal exertion” test in the Sheratzky precedent.
Without derogating from the above, where the frequency test is met for share sales, losses from share sales can be classified as business losses. In this case, keep in mind that when shares are sold at a profit, taxpayers are not eligible for an exempt inflationary amount under the Capital Part of the Income Tax Ordinance.
For additional information, contact Adv. (CPA) Shahar Strauss from our firm.