Would Israel’s ICO Tax Plan Retain Startups or Scare Them Off?

There’s a handful of initial coin offering (ICO) issuers working out of Tel Aviv, Israel, but they typically domicile elsewhere.

That’s not particularly helpful for the government since it loses out, not only on tax revenue, but also opportunities to market Israel as a place to do business.

And according to some, the Israel Tax Authority’s (ITA) draft circular, published last week, detailing how domestic companies’ ICO revenue could be taxed, is an effort by the Israeli government to entice token issuers to stay on the Middle Eastern soil.

“Up until now all Israeli ICOs ran the ICO from either Switzerland or Gibraltar,” said Uriel Peled, a co-founder of two Israeli crypto startups. Both countries are known as business-friendly tax havens.

In Peled’s eyes, the ITA is taking steps to legitimize the business of companies financed by ICOs, in an effort to make the country just as attractive. (The ITA did not respond to request for comment from CoinDesk delivered through a third party.)

CoinDash, Matchpool and Kik, all of whose teams fully or partly work in Israel, have moved their bases outside the country. Plus, Sirin Labs, which raised $157 million in an ICOrecently, is largely based in Tel Aviv, but its website shows a company address in Switzerland.

One of the main reasons the ITA’s circular might be appealing to token issuers is that it describes deferrals on when ICO income would become taxable, plus it mentions the potential for crypto companies to earn special tax treatment.

As such, according to Peled, the industry will see more companies officially operating from Israel this year, although he declined to give any specific names. One of his startups, a consultancy called CoinTree, is encouraging clients to consider an Israeli address.

Pointing to what he sees as an advantage to working in a country that is trying to move cryptocurrency out of a gray area, Peled told CoinDesk:

“The goal of the blockchain industry in Israel is not to stay under the radar. It’s always been clear to us that there will be regulations and we want to work with government to help create regulations that are good for both sides.”

Realizing the magnitude

Global consulting giant Deloitte helped the ITA craft the circular, providing extensive feedback by invitation, according to Yitzchak Chikorel of Deloitte’s international taxation team.

Chikorel and others were able to convince the authority that drawing distinctions between different crypto tokens – whether it be the original currency tokens, such as bitcoin; crypto tokens created to fund the building of a platform that the coins will be used to access in the future; or crypto tokens that act as equity – would be key to writing successful regulation.

“The main focus is the utility coins which are also in the heart of the tax circular,” Chikorel told CoinDesk. “Our main focus was to tie a direct and clear line between the technology to the tokens, arguing they are connected one to each other in an inseparable tie.”

Plus, the circular makes it clear that income will not automatically be taxed when it is first received.

Chikorel likened this to a gift card purchase – in many places around the world, income from a gift card purchase doesn’t become taxable until someone spends the amount on the gift card, and the company can actually determine how much profit it realized…

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