Israeli Tax of a Foreign Professional Company

Dr. Avi Nov, Adv.

April 2009

For Israeli tax purposes, a Foreign Professional Company will be considered to be controlled and managed in Israel and thus will be taxable in Israel (25% in 2010) on income from specified services even where the control and management of the company is, in fact, exercised outside of Israel.

A Foreign Professional Company must fulfill all of the following conditions:

· The company has 5 or less shareholders

· 75% of the controlling interest of the company must be held directly or indirectly by Israeli individuals whose occupation is a “special profession”, such as an architect, practical engineer, technician, tax consultant, economist, engineer, bookkeeper, translator, lawyer, patent attorney, public accountant, evaluator, doctor, agent, lecturer, teacher, journalist, photographer etc (the list has been published in a special order).

· Most of the shareholders or their relatives work for the company directly or through a company, in an occupation listed in the “special profession” regulation, and hold directly or indirectly controlling interest of at least 50%.

· Most of the company’s profits arise from services provided by occupation listed in the “special profession” order.

A foreign company will be classified as a Foreign Professional Company only where the company is at least 75% controlled either directly or indirectly by an Israeli resident individual. For this purpose, “means of control” is defined as any of the following
 
(a) Right to participate in profits;

(b) Right to appoint a director;

(c) Voting right;

(d) Right to a portion of the assets of the body of persons after the repayment of all its debt upon liquidation;

(e) Right to instruct the holder of any of the rights in subsections (a) through (d) as to how to exercise that right;

Any of these [rights] either by way of shares or any other means, including through a trust.
 
A Foreign Professional Company will be deemed to be controlled and managed in Israel, and hence resident and taxable in Israel, to the extent of its special profession income (subject to any treaty).

Consequently, a Foreign Professional Company will pay Israeli corporate tax of 25% (in 2010) and withhold tax at a rate of 25% from dividends, subject to any tax treaty. The combined resulting Israeli tax burden may therefore be about 44% (plus national insurance on the dividend where applicable).

In order to avoid being deemed a Foreign Professional Company, the company should avoid conducting a listed “special profession”. Alternatively, the company may be held by at least 6 shareholders. Another way to avoid being deemed a Foreign Professional Company, the company may be held by at least 26% non-Israeli residents, or new immigrants and senior returning residents.

Caveats and Limitations

This article is not a tax opinion and may not be relied upon by any person as such. Please note also that there is no certainty that the view raised above will be accepted by the Israeli tax authorities, and that if challenged by the the Israeli tax authorities it would not be sustained by the Israeli courts.

Dr. Avi Nov, Adv., is an expert in Israeli & international tax law.

For more details, see the Israeli website on international tax planning at http://www.israeltaxlaw.com
 
Dr. Avi Nov can be reached at avinov@bezeqint.net

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