New Israeli Case on Control and Management

February 2012

A new Israeli tax case law has certain implications on the Control and Management test for corporate residence.
On this issue, see: Control and Management: The Israeli Tax Authority Position
See also: New Case Law on Control and Management

In the case of Niago vs Kfar Saba Assessing Officer (Income Tax Appeal 1029/8, Tel Aviv District Court, January 12, 2012, a Bahamas company controlled by Israeli residents was found to be managed and controlled from Israel, and consequently resident and taxable in Israel.

In this tax case, Israeli residents used an Israeli company to buy textile products and sell them in the United States. A few years later, they transferred business activity to a Bahamas company. See also: Israeli tax implications resulting from changes in business model.

The Israel Tax Authority claimed that the Bahamas Company was controlled and managed in Israel, making it Israeli resident. The Israel Tax Authority asserted also that it was an artificial transaction under Israeli Tax Law, and therefore taxable under Section 86 of the Israeli Tax Ordinance (Israel’s general anti-avoidance rule).

The taxpayer maintained that the Bahamas Company was a foreign resident for the reason that control and management were not exercised from Israel. The taxpayer asserted, inter alia, that: the directors were foreign residents, the board met abroad and passed its resolutions autonomously without shareholder intervention, and the daily management was conducted abroad.

The court concluded that that the directors and employees of the company had no real interest in the company’s business and that the directors served as a platform lacking any business substance. Accordingly, the court ruled that the control and management of the Bahamas Company was exercised in Israel.

It is highly recommended that taxpayers with foreign companies and especially offshore companies check the rationality of their tax structure. In this context, it is important to make sure that the company's prospectuses and other documents are executed correctly.

Dr. Avi Nov Law Offices, Israeli & international tax law 
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion