Income from gambling on the internet

The law includes 4 exceptions that allow, under certain circumstances, forbidden game, lottery or gambling:

Gambling in sports, regulated by the Sports Gambling Arrangement Act.

Gambling carried out by the Israel State Lottery.

Lotteries approved by the Minister of Finance or his proxy.

A game, lottery or gamble within a private circle, intended for specific people, within a framework of fun or entertainment.

1. Reference to the legal situation:

The legal aspects are an independent & comprehensive subject, relating to complex questions on the practical level, as well as the philosophical legal level.

The source for the prohibition on gambling is found in the Penal Code 1977. According to the law, it is prohibited to arrange or make any forbidden game, lottery or gambling. Also, participation in such activities and its advertisement is forbidden in Israel. This law applies also on an offense partially done within the territory of Israel.

The law includes 4 exceptions that allow, under certain circumstances, forbidden game, lottery or gambling:

Gambling in sports, regulated by the Sports Gambling Arrangement Act.

Gambling carried out by the Israel State Lottery.

Lotteries approved by the Minister of Finance or his proxy.

A game, lottery or gamble within a private circle, intended for specific people, within a framework of fun or entertainment.

Therefore, according to the letter of the law, an Israeli gambler, gambling via his computer in Israel through a website backed up by a server located abroad, is committing a criminal offense, even when the law abroad, at the country where the server is located, allows such gambling. Also, a person advertising gambling, organizing or making a lottery or gambling, is committing a criminal offense.

However, the purpose of this opinion is not a legal opinion, but rather taxation; therefore, we recommend consulting an attorney specializing in such matters.

On principle, in order to examine in a nutshell the legal problems, one should pay attention to the following questions:

·Who is in charge of operating the website: The players? The website operators? The servers?

·Is there any country that can subordinate the website to its regulations?

·Can it be deemed an area of jurisdiction?

·When the gambler surfs the gambling website, is he “gambling” within the domain of his country, or is he in a kind of an extra-territorial location (“the net”)? Or, alternately, should he be seen as acting and gambling in the same country where the gambling website is established and managed?

·Etc., etc.

It should be noted that even unlawful activity is liable for tax in Israel, like any other income, whether by an individual or by a company.

2. The instructions of the law regarding lottery, gambling and prize taxation

Income Tax Circular #17/2004 – Legal, Professional, Deductions

Re: lottery, gambling and prize taxation

1.General:

Prior to the legislation of the Economic Plan for the Recovery of the Israeli Economy

Act (Legalization for achieving budgetary goals and economic policy for the fiscal years of 2003 & 2004), 2003 (“the economic plan act”), the fructification income taxation method in Israel used to be according to the origin theory. According to this method, income should be taxed only if it has a source. A tax-payer who earned an income from lottery, gambling and prize-winning activity profits, usually was tax exempt, since such an income was considered heaven-sent, without any real potential of repeating itself, and without any possibility of classifying it as income, as defined in Section 1 of the Income Tax Order (new version) 1961 (“the order”) and therefore considered source-less.

This approach by the legislator received criticism, since no real justification was found why, since he increased his income as a result of winning the lottery, gambling or from a prize-winning activity, he should not bear the tax burden according to his increased financial abilities, due to the winning.

Following the abovementioned criticism, and as part of the economic plan aim of extending the tax basis, a Section 2a was added to the order, imposing tax on earnings or profit originating in gambling, lotteries or prize-winning activities (“gambling profits”). In the primary and secondary legislation, by force of the economic plan act, a tax was levied on gambling profits, tax liability limits were molded, and tax exemptions and instructions regarding its collection were determined.

The tax to be levied on gambling profits is of a final rate of 25% without deduction of expenses and no off-setting of losses, crediting or exemptions.

2.Determining profit as income and determining the personal and territorial basis for tax liability:

The first action of Section 2a of the order was in the mere determination that gambling profits constitute an income.

Section 2a of the order further states the incidence of personal and territorial taxation regulations, identical to those set at the beginning of Section 2 of the order, namely: An Israeli resident will be obliged to pay tax on earnings or profits made from gambling, no matter in what country these profits were produced, while a foreign resident will be obliged to pay tax on earnings or profits made from gambling profits, only if they were produced or grown in Israel.

Section 4a (a) (11) of the order states that the location of the gambling profit production will be determined according to the residency of the payer. Accordingly, if a foreign resident earned gambling profits that were paid him by an Israeli resident, then these profits will be taxable according to Section 2a of the order, since the foreign resident produced profits originating in Israel.

3.Profits where Section 2a will not apply.

In Section 2a (b) of the order, three exceptions were determined, where the tax liability set in Section a (a) would not apply. Following is a review of these exceptions, with a demonstration of their application:

3.1. Earnings or profits being an income from another source according to the Order.

As already mentioned, the aim of the new tax arrangement was to extend the tax basis to include gambling profits previously not taxable, but its purpose is not to alter the classification of income that had a binding tax source in the order, prior to the legislation of the economic plan act. Accordingly, Section 2a of the order states that preference should be given to other source sections in the order namely Sections 2 & 3. A profit that can be classified as one of these source sections will be taxable according to them and not according to the tax arrangement stated in Section 2a of the order.

Let us demonstrate: In a verdict on the case of Meshulam, where a taxpayer who was working in architecture and won a prize due to his work. The court decided that although prizes that are a godsend were tax exempt, since the prize that Meshulam won constituted part of his earnings, with its legal source being in Section 2(1) of the Order, therefore he should be obliged to pay tax on this earning. Similarly, in the Income Tax Circular 21/90 legal/deductions, dealing with “grants, stipends and prizes as an income”, the Wing’s position regarding taxation of grants, stipends and prizes was clarified, and also in the Execution Instruction 19/90, dealing with “prizes for agents and merchants as an income and the obligation of deduction at source” it is stated that prizes received for business activity and as a remuneration for it, are taxable according to the source section on business activity that the prize was given within its context.

In view of the above, even after the legislation of Section 2a of the Order, a taxpayer who wins a prize that can be classified as income from his work or business will be taxed according to the appropriate source section, and not according to Section 2a of the Order.

It should be noted that among the source sections in Section 2 of the Order, there is also Section 2(10) taxing income “from any other source”. This section could constitute a source of profit not resulting from mere luck, and in this manner can constitute a source for certain income from gambling profits. Even where it is determined that the income source in Section 2(10) of the Order, Section 2a of the Order will not apply.

3.2Earnings or profits from prizes given within a personal framework:

A prize given within personal relationships, e.g., family relations, Section 2a of the Order will not apply to it, and it will continue benefiting from tax non-liability. In determining the tax on gambling profits, the legislator did not wish to enlarge the tax basis so that it would include also monies or gifts given on a personal level; therefore, therefore, the qualification was set, whereby in such cases Section 2a would not apply.

3.3Earnings or profit determined by the Minister:

The Finance Minister has authorized to determine earnings or profit from lotteries or prizes that are not liable according to Section 2a of the Order.

The Finance Minister has determined, within the framework of the Income Tax Order (determining the amount pertaining to earnings or profit from lotteries, gambling or prize-bearing activity), a temporary provision for the tax years 2003 & 2004) 2003 (“the exemption order” or “the order”) a tax exemption on gambling profits that do not exceed the ceilings mentioned in the Order. Below, we shall examine the content of the Order, enacted by force of the constant authorization in Section 9 (28) or the Order.

4. Tax exempt gambling profits

Section 9 (28) of the Order states that the following would be tax exempt:

“An earning or profit, as mentioned in Section 2a, with its value less than the amount set by the Finance Minister, approved by the Knesset [Israeli Parliament] Finance Committee, with everything under the conditions and coordination’s that he determined.”

By force of Section 9 (18) of the Order, the Income Tax Order was enacted (determining the amount pertaining to earnings or profit from lotteries, gambling or prize-bearing activity) (temporary instruction for the tax years 2003 & 2004 – 2003) (“the exemption order” or “the order”), determining a tax exemption on profits from gambling not exceeding the ceilings mentioned in the Order. The exemptions are given for earnings or profit originating in gambling, lotteries or prize-bearing activity, carried out between 1.7.2003 and 30.6.2004.

The exemption determined in the Order will apply only on profits from gambling that was done legally. Namely: Profits from gambling done illegally – would not benefit from the exemption determined in the Order. (Emphasis added)

4.1 Exemption ceilings determined in the Order:

Full exemption: According to Section 2 of the Order, profits from gambling that are less than the exemption ceiling determined in the Order will be tax exempt. The current exemption ceiling stands at 70,000 NIS, and this amount will be updated from time to time, according to the updating mechanism determined in Section 120b of the Order.

Partial exemption: Profits from gambling not exceeding double the full exemption will benefit from partial exemption. The partial exemption level was set at the exemption ceilings, with a deduction of the difference between the gambling profits and the exemption ceiling.

4.2The extent of the exemption coming into effect:

A taxpayer gaining gambling profits from two different lotteries during the same tax year, will be able to benefit from the exemption determined in the Order regarding each lottery separately. Thus, for example, a taxpayer who won 70,000 NIS in the Lotto lottery on a certain date, and then he won another 70,000 NIS in another lottery a week later – will benefit from tax exemption regarding both his winnings, each of them in itself.

According to Section 4 of the Order, a taxpayer who bought one lottery ticket that won him two different prizes, in his case the exemption ceiling will be calculated regarding both prizes together. Similarly, two taxpayers who bought together one lottery ticket will benefit from one exemption ceiling only. Namely: The exemption ceiling is calculated in relation to the lottery ticket and not to the number of people who own the ticket.

A subscription ticket enabling a taxpayer to participate in a number of lotteries that take place during the time of the subscription validity, will be considered as a separate lottery ticket for each and every lottery.

5. Final tax rate – without allowance for deductions, set-offs &exemptions:

Section 124b of the Order determines the tax rate on gambling profits by an individual. According to this Section, the tax rate will be 25% “without eligibility for any exemption, discount, deduction, credit or set-off”, except for the exemption determined in the Order and expenses involved in paying the tax (e.g.: expenses incurred for preparing the report and handling the assessment & appeal processes) as determined in Section 17(11) of the Order.

This means that taxable gambling profits (i.e., not exempt according to the Order), will be taxed with a final rate of 25%. This tax will be calculated without deducting any expenses from the income (except for those determined by Section 17(110 of the Order). It is made clear that this includes no allowance for deduction of expenses for buying the lottery ticket that is the object of the winning or other lottery tickets bought by the taxpayer during the tax year. No losses incurred to the taxpayer from any source can be off-set, including losses of a businesslike source.

The conclusion that arises from this collection is that, subject to the exemption ceiling in the Order and to expenses deduction according to Section 17 (11) of the Order, gambling profits will be taxed by a final tax of 25%, without any consideration of the taxpayer’s income results and tax. It should be clarified that Section 121 of the Order does not apply to these profits; therefore gambling profits won by an individual who has reached 60 years of age will be taxed by a tax rate of 25% and not according to the tax brackets set in Section 121 of the Order.

6. The deduction of tax at source obligation:

6.1Section 164 – deduction of tax at source obligation

a.Section 164 of the Order has been amended so that the deduction of tax at source obligation is imposed also on whoever is paying or is responsible for paying gambling profits.

b.The Finance Minister has been authorized to determine that tax deduction would be as determined, even if the deduction is made not at the time of payment, and not according to the rate from the amount being paid.

6.2The regulations

The Income Tax Regulations (deduction from payments due to gambling, lotteries or prize-bearing activity) 2003 (“The regulations”) determine the rate of deduction from payment due to gambling, lotteries or prize-bearing activity, payment of tax deducted to the income tax assessor, reporting to the income tax assessor, and certifications to the payee.

Definitions

“Earning or profit” – as defined in the exemption Order:

“debtor” – a person paying sums that constitute earning or profit in the hands of the payee, whether on his own account or on his behalf or on account of another person, through whom sums are being paid as mentioned, directly or indirectly, except for an individual paying sum as mentioned that is not within his business or occupation;

“payee” – a person receiving a sum due to earning or profit as defined in the exemption Order, wholly or partially;

“payment” – sum paid as earning or profit, not tax exempt according to the exemption Order, whether it is paid to one person or to a few persons; and for this matter they will be seen as one lottery or gambling, as the case might be, even a lottery or gambling that combine a few guesses, as well as a few lotteries or gambling’s using one form.

Tax deduction

The Regulations determine that a debtor making a payment will have tax deducted at the rate of 25%.

If the entire payment or part of it is in money equivalent, the payer will determine the sum of payment according to its worth. If the payment is in money equivalent, its worth will be determined for tax deduction purposes according to the market price and not the cost, whether the money equivalent is an asset or product, or whether it was given as a service. The worth will include also VAT. The regulations authorize the income tax assessor to increase or decrease the mentioned sum.

Tax payment

A debtor will pay the income tax assessor by the 15^th day of each month, the tax deducted during the previous month according to these regulations, and at the same time will submit to him a report according to Form 0102. The report on tax payment will be made under deduction type 067.

The regulations determine instructions about submitting an annual report by the 31^st of March in the year following the year of payment.

The tax deduction from payment does not exempt the payee from including the payment in the report on his income.

7. Incidence:

This circular applies to gambling profits produced after the 1.7.2003.

Conclusions arising from the circular:

1.As part of the aim of the economic plan for enlarging the tax basis, Section 2a was added to the Order, levying tax on earning or profit originating in gambling, lotteries or prize-bearing activity.

2.The tax levied on gambling profits is at a final rate of 25% without deduction of expenses and without off-setting of losses, crediting or exemptions. I.e.: without consideration for the outcome of the taxpayer’s income and tax.

3.An Israeli resident will be obliged to pay tax for earning or profit from gambling, no matter in what country these profits were produced.

4.Even after the enactment of Section 2a of the Order, a taxpayer who won a prize that can be classified as income from his work or business, will be taxed according to the appropriate source section and not according to Section 2a of the Order – i.e., tax liability exceeding 25%.

5.The exemption determined by the Order will apply only on gambling profits made within a legal framework. Namely: Gambling profits made within an illegal framework – will not benefit from the exemption determined by the Order.

6.Section 164 of the Order was amended so that the tax deduction at source is levied also on whoever is paying or is responsible for paying gambling profits. The regulations determine that a debtor making a payment will have tax deducted at the rate of 25% by the 15^th day of each month.

7.The tax deduction from payment does not exempt the payee from including the payment in the report on his income.

The Income Tax Order (determining the sum for earning or profits from gambling, lotteries or prize-bearing activity) 2003 (656)

By force of my authority according to Sections 9(28) and 243 of the Income Tax Order (“the order”), and with the approval of the Knesset [Israeli Parliament] Finance Committee, I hereby determine:

[Definitions]

1.in this Order –

“The difference” – the difference between the sum received for gambling, lotteries or prize-bearing activity and the exemption ceiling sum;

“earning or profit” – earning or profit originating in gambling, lotteries or prize-bearing activity as mentioned in Section 2a of the Order, done within a legal framework;

2004 Order (amendment) – 2005 Order“Temporary provision period” – erased;

2005 Order

“Exemption ceiling” – the sum of 51,240 New Shekel.

[Determining sum]

2004 Order – 2005 Order

2. Regarding Section 9 (28) of the Order, earning or profit will be seen as tax exempt, if the sum received from one gambling, one lottery, or one prize, as applicable, is less than the exemption ceiling.

[Partial exemption]

3. Regarding earning or profit from one gambling, one lottery or one prize as mentioned, the sum of which exceeds the exemption ceiling and is less than double the exemption ceiling, a sum that equals the exemption ceiling after deduction of the difference will be seen as tax exempt.

[Scope of lottery, gambling or prize]

4. Regarding these regulations, also a lottery, gambling or prize that have a number of conjectures combined, as well as a few lotteries or gambling’s done on one form, will be seen as one lottery, one gambling or one prize, everything whether they are paid to one person or to a few people.

[Update of sums]

5. The exemption ceiling according to the instructions of Section 120b of the Order, as if the income ceiling were as per its meaning in the same Section.

[Commencement & incidence]

6. This Order commences on the 1^st of Tammuz 5763 (1 July 2003) (“the day of commencement”) and it will apply to earning or profit originating in gambling, lotteries or prize-bearing activity done on the day of commencement or afterwards.

The tax levied on gambling profits is at a final rate of 25% without deduction of costs or off-setting of losses, crediting or exemptions.

The amendment determines further that tax at the rate of 25% will be deducted from earning or profit originating in gambling, or lotteries, or prize-bearing activity, as mentioned in Section 2a of the Income Tax Order (new version) 1961, exceeding 70,000 New Shekels according to the conditions determined in the Order.

The tax debit has been expanded, and it applies also on earning or profit originating in gambling, or lotteries, or prize-bearing activity, originating in illegal activity.

3. How do you gamble/play on the Internet?

Usually, in order to enter a gambling/game website, you can retrieve different key words in search engines. Upon arrival at the gambling site, a warning will appear numerous times, stating that gambling on the site is forbidden, if gambling is forbidden at the surfer’s place of residence.

Taking part in the gambling itself is done by opening an accounting using a credit card, for the surfer; sometimes, prior to opening the account, the surfer needs to download a certain program from the website. In some cases, the surfer is asked as to his residence, and when he resides at a country that prohibits gambling altogether, or gambling through the Internet in particular, the surfer will be blocked from entering the gambling website.

At this point already, we wish to make a short comment, that since gambling is prohibited in Israel, except for specific statutory permissions, e.g.: The Israel State Lottery, “Toto”, etc., it is recommended for website owners as mentioned, being Israeli residents, to abstain from advertising a certain website in Israel. Furthermore, it might even be worthwhile for the above owners to avoid enabling entrance of Israeli residents to the website. However, it is c

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