Dr. Avi Nov, Adv.
The Israeli government is planning to change certain tax rules in order to close loopholes and make tax planning more difficult. Following are the new rules that are proposed in the 2013 Economic Arrangements Bill. See also: Israeli new Tax Rules Proposed – Part I
A. Controlled foreign company
Israeli residents may be taxed on "deemed dividends" received from a controlled foreign company (CFC) if they hold 10% or more of the CFC shares. According to the Israeli CFC rules, a foreign company is considered to be a CFC if a series of conditions are met.
The Economic Arrangements Bill proposes to constrict many of these conditions. Specifically, the minimum passive proportion of income would decrease from 50% to 33.3%. In addition, the deemed tax credit on deemed CFC dividends would no longer be permitted.
Beside these constrictions, there is also one good proposal - the maximum tax rate on the CFC’s passive income would decline according to the Economic Arrangements Bill, from the current 20% to 15%.
B. Foreign professional company
A foreign professional company is considered to have its control and management in Israel and, accordingly, taxable in Israel. A company is considered to be a foreign professional companyif it meets all of the following conditions: (1) it has five or fewer individual shareholders; (2) it is owned 75% or more by Israeli residents; (3) most of its 10%-or more shareholders conduct a special profession for the company; and (4) most of its income or profits are derived from a special profession, such as management, technical advice, financial advice, agency, law and many others.
The rules on foreign professional companygenerally contradict Israel’s tax treaties. Therefore, the Economic Arrangements Bill proposes to tax the shareholders on deemed dividends instead of taxing the foreign professional companyitself.
The Economic Arrangements Bill proposes that transactions in Israel involving moving assets into entities so they can be securitized will now be allowed under tax-free reorganization rules. Beside these constrictions, there is also one good proposal; the tax-free reorganization rules will be applicable, not only for companies, but also to partnerships.
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