Dr. Avi Nov, Adv.
Section 1 of the Israeli Tax Ordinance provides that a corporate entity is considered an Israeli resident, if it fulfills one of the following:
“(1) was incorporated in Israel; or
(2) the control and management of its business is performed from Israel”.
Thus, a company incorporated outside Israel may be deemed Israeli resident. As such, it may be subject to taxation in Israel on any capital gains or income derived from its worldwide business.The notion of “control and management” is not yet defined in Israeli law, and there is limited Israeli case law regarding this issue. The Israeli Tax Authority position regarding the “control and management” test can be found in a special Circular (hereinafter: the Circular).
According to the Circular, the expression “control and management” contains two terms - “control” and management” - but the two terms are incorporated and combined into one integrated concept (not all practitioners share this view). The Circular states that the formal legal ownership of a business does not on its own prove the existence of control and management, nor is the place of shareholders meetings generally conclusive. What matters is the ability to effectively decide, influence the conduct of a business and give binding instructions of decisive effect.
It is necessary to review:
· Who in practice is empowered to exercise control and management of the company or business;
· Where is business policy determined; and
· Where are major strategic decisions taken.
· Where in practice are decisions taken that enable the business to be conducted
For these purposes, such decisions are material core decisions taken at the level of senior management. Each case should be reviewed on the basis of its facts.
In general the decision making process should be reviewed:
· From where does the need for a particular decision originate
· Where are all the alternatives checked and preparatory work done
· Where are professional personnel consulted
· Where is the final decision formulated
The place where the board of directors convenes may not be conclusive given modern means of communications.
A number of factors may indicate actions requiring decisions at the strategic management level. It is necessary to review, among others, where the following are decided:
· Major transactions that may impact the company’s future (e.g. a merger)
· Finance of operations and specific transactions, especially those requiring a guarantee
· Major investments
The person or body authorized to exercise control and management in practice may be:
· The board of directors, or
· Specific people if they are delegated broad authority and discretion to decide and responsibility for failure. In this regard, the Israeli tax authorities may review board resolutions and any management agreements or powers of attorney.
The Circular sets forth a number of additional supporting indicators of where control and management are exercised, including:
· Where day-to-day operational decisions are taken - but precedence should be given to where material strategic decisions are taken, if different,
· Where the books are maintained
· Where most major business contacts are located
· Where new contracts are entered into
· Where telephone calls are made
· Postal address