Contributed by Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions Ltd., Israel
As is well known, a foreign company will be deemed to be a company that is resident in Israel, if the control of its business and the management thereof are operated in Israel even though it was incorporated outside of Israel. In the past, an amendment was made to the definition of "resident of Israel" in respect of a company. Within the framework of the amendment, a relief was determined, pursuant to which in a case in which the control and the management are operated in Israel, by a new immigrant or a returning veteran resident ("The beneficiary individual"), the foreign company will not be deemed to be resident in Israel.
Recently, many of the new immigrants have been coming to the end of the benefits period (ten years) and are required to make preparations for a new regime that applies to them. Insofar as the beneficiary individual does indeed conduct control and management from Israel, they have to make preparations in due time, before the end of the benefits period, and to ensure to transfer the control and the management to outside of Israel. In particular, they must ensure that they execute their authority and execute the significant activity for the Company when they are outside of Israel, they must ensure that the key employees and management are outside of Israel, in appropriate cases they should consider the "emigration" of the foreign companies back to the countries in which in any case the management set up operates and etcetera.
The following are abbreviated details of the possible tax implications, if the beneficiary individual who holds a foreign company did not think or is unable to maintain control and management outside of Israel at the end of the benefits period:
First and foremost, insofar as the foreign company is resident in Israel, its income is chargeable to taxation in Israel, without connection to the place in which it is produced.
Further, when the beneficiary individual sells the company, there may be a claim that the exemption will not apply, because the asset that has been sold is an asset in Israel and in light of the rationale that it is determined in the regulations that capital gains from its sale will be deemed to be a gain that has been produced in Israel. We would mention that the law provides an exemption to a beneficiary individual, even after the benefits period, which is linear, such that only part of the capital gain arising after the end of the benefits period relative to the entire period in which the shares are held will be chargeable with taxation.
In our opinion, the language of the law supports specifically the application of the exemption, since the exemption is granted on a capital gain from the sale of an asset that the beneficiary individual had outside of Israel. There is no doubt that this asset was outside of Israel until the end of the benefits period; moreover, even if the company is now resident in Israel for tax purposes, it is still a company that was incorporated outside of Israel and as such it is deemed to be an asset outside of Israel.
Insofar as the exemption may be negated despite the language of the section, in accordance with the practical interpretation of the Law, at the least a proportionate exemption should be granted for the period in which there is no doubt regarding the company being a foreign company. In addition, insofar as the foreign company has been acquired or founded by a beneficiary individual before they came to Israel, it will be possible to support a position according to which they will be exempt from tax at the time of its sale (in a linear manner) even though it is deemed to be resident in Israel because of the control and management at the time of its sale. This is because of the provisions of the Ordinance, which grant a tax exemption for a beneficiary individual on the sale of a security in a company that is resident in Israel, and solely that they were a foreign resident at the time of the purchase of the security, and capital gains will apply to this matter, as of the security was an asset that he had outside of Israel before he became a resident of Israel.
In a case in which the issue is not with a sale-back of shares in a company but rather the sale-back of activity/ assets by the Company, "the problem" is even more certain and significant, since the more that the issue is with a company that is resident in Israel under the force of "control and management" at the time of the sale, then two levels of tax will apply to the sale – corporate income tax on the sale of operations/ the assets and dividend tax when the profits are distributed to the beneficiary individual. Insofar as a (full or partial) tax exemption may be granted on the sale of the shares, it will be possible to sweeten the pill by liquidating the company after the sale of the activity/ the assets and thus benefit from a liniary exemption on the capital gain on liquidation instead of the full tax that would apply to a dividend.
In light of all of the aforesaid, an individual beneficiary, who is reaching the end of the benefits period should place an emphasis on the issue of control and management. In the appropriate cases, consideration should be given to making a structural change immediately before the end of the benefits period in order to retain the tax exemption that is due to them, on the increase in the value of a company up to that time and also to consider an approach to the Taxes Authority to arrange the tax regime that will apply from that time onwards.Dated: [bxcode.pagedata.date]