The Obligation to Withhold Tax at Source from Income, the Payment Date of Which Precedes the Date of the Tax Event
Sections 164 and 173 of the Income Tax Ordinance set forth a series of provisions regarding the obligation to withhold tax at source. According to these provisions, a “payer” of income must withhold tax at source from payments made to the income’s “recipient” and must transfer the amount withheld directly to the Tax Authority, provided the recipient does not have an exemption from withholding tax at source with respect to that income. The withholding tax obligation is founded upon two pillars: first – the presence of actual payment (in cash or cash equivalent), and second – the presence of a provision that sets forth the manner and rate at which tax must be withheld at source.
Under various provisions in the Ordinance, there are cases in which, at the date of payment no income is accrued for the recipient, and the tax event is not generated until later, when certain conditions are met. Examples of this type of case are: income from debt forgiveness, income from an imputed dividend from loans granted to a material shareholder (Section 3 (i1) of the Ordinance), income from imputed interest on a loan for the benefit of a controlling shareholder in a company (Section 3(i) of the Ordinance), and more. In our opinion, in some cases of this type, the conditions required for withholding tax at source are not met:
In light of the above, we believe there is no obligation to withhold tax at source with respect to some of the types of imputed income described above. Due to the issue’s complexity, each case must be considered individually, and legal counsel should be sought before making decisions on the matter.