A new Israeli Supreme Court tax case, Rachel Niago and Yitzhak Niago vs Kfar Saba Assessing Officer, was published recently. This case deals with the "Control and Management" test.
For the case in the Israeli District Court, see: New Israeli Case on Control and Management.
See also: Control and Management: The Israeli Tax Authority Position
Two Israeli residents set up an Israeli company to buy Israeli textile products and sell them to oversee customers. A few years later, the same people transferred the business activity to a Bahamas company. Later on, the Bahamas cooperation sold the business back to the Israeli company and paid it as a dividend to the individuals. The anticipated result was a tax free dividend from a foreign company for the Israeli residents under Israel’s tax system before 2003.
The Arguments Presented
The Israel Tax Authority considered the above as artificial transaction and therefore taxable under the Section 86 anti-avoidance rule. In addition, the Israel Tax Authority maintained that the payment by the Bahamas cooperation was a taxable dividend because the Bahamas cooperation was controlled and managed in Israel, and therefore an Israeli resident.
The taxpayer claimed the Bahamas cooperation should be considered as a foreign resident since the control and management were not exercised in Israel. The taxpayer explained that the central office of the Bahamas cooperation was in Geneva and managed by the Swiss director, and also that the company had an office in Amsterdam managed by the Dutch director.
The Israel Supreme Court in fact supported an earlier judgment by the District Court rejecting the taxpayers’ arguments. The court found that directors of the Bahamas company, although foreign, played no substantive position in the company, and their influence in the business activity was negligible.
In addition, the court ruled that since the daily operations were conducted in Hebrew, none of the directors had any practical way of conducting business activity as they didn't speak the language. Accordingly, the court ruled that the control and management of the foreign company was exercise in Israel. The result was that the company and the dividend payments are taxable in Israel.
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