Dr. Avi Nov, Adv.
The Israel Tax Authority published recently a new tax ruling on "the Allocation of Income to new immigrants who are partners and investment managers in a hedge fund" (Ruling 4589/12).
The Israeli Tax Authority ruling deals with the following questions: what happens when a manager of a foreign investment fund or hedge fund immigrate to Israel and becomes an Israeli resident? What will be the Israeli tax implications for the fund and its investors?
This problem has arisen regularly and the Israel Tax Authority has published a few tax rulings basically defending investors of foreign funds from Israeli tax. However, there were various uncertainties in this area. It is not clear how much fund income needs to be allocable to Israel? Are foreign managers and investors in such fund protected from Israeli taxation?
Another uncertainty with this issue was the Israeli tax implications for new immigrants who are partners and investment managers in a hedge fund. Can such investors and managers qualify for the 10-year tax breaks to new Israeli residents and senior returning residents? The Israel Tax Authority new ruling deals with this uncertainty.
In this ruling, a group of foreign resident partners in a hedge-fund wanted to immigrate to Israel. These hedge fund managers are going to work for an Israeli company, which pays Israeli tax on its activities of research and development and managing and executing investments.
The hedge fund managers hold shares in a foreign company, the subject of the tax ruling, which derives a share of management fees and success fees from other entities and partnerships in the hedge-fund group around the world. The foreign company does not market or seek clients in Israel, nor provide services to clients in Israel.
The ruling decided that a portion of the foreign company’s profits should be assessed to Israeli company tax (25%). This portion, to be determined by reference to Israel Tax Authority Circular number 1/2011, is multiplied by the share of profits actually distributed by the foreign company to the immigrants.