The Israeli parliament enacted on December 23, 2013, a new legislation that makes various changes to the tax regime for offshore companies held by Israeli residents. The new Israeli tax legislation includes modifications to section 75B of the Income Tax Ordinance (Amendment 198), became effective on January 1, 2014.
The New CFC Legislation
A controlled foreign corporation is essentially an investment corporation that pays a very low or zero tax. Israeli law imposes tax on deemed dividends received from a controlled foreign corporation if Israeli residents hold 10 percent or more of the CFC.
A foreign corporation (or any entity) is considered to be a controlled foreign corporation if all of the following conditions exist:
1 - The controlled foreign corporation mainly derives passive income or profits.
2 - The controlled foreign corporation’s income are taxed at a rate of 20% or less abroad (the new legislation changed it to 15%).
3 - The controlled foreign corporation’s shares are not publicly traded, or less than 30% of its shares or other rights have been issued to the public or listed for trading (changed by the new legislation).
4 - Israeli residents own either directly or indirectly more than 50% of the controlled foreign corporation, or an Israeli resident owns over 40% of the controlled foreign corporation and together with a relative owns more than 50% of the company.
The New FPC Legislation
The changes in Amendment 198 regarding foreign professional corporations are dramatic. A foreign professional corporationis essentially a foreign service corporation that pays zero or low tax.
A corporation is considered to be a foreign professional corporationif it meets all of the following conditions: it has five or fewer individual shareholders; it is owned 75% or more by Israeli residents; its shareholders conduct a “special profession” for the foreign professional corporation; most of its income or profits are derived from a special profession. The special professions include engineering, management, technical advice, financial advice, agency, law and medicine, and more.
Until the recent legislation changes, Israel deemed foreign professional corporations to be controlled and managed from Israel. However, it was argued that Israel’s tax treaties don’t allow Israel tax authority to deem foreign professional corporation as to be resident of Israel.
The new legislation makes Israeli residents liable to Israeli corporation tax on deemed dividends from foreign professional corporations if they are major shareholders with a 10% interest or more.
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