Tax Advantages in Managing Multinational Operations From Israel

Israel decided to encourage foreign investors and from the beginning of the year a number of changes were made in the Income Tax Ordinance for the benefit of foreign residents. Amongst the main benefits one can find: a tax exemption on dividends that a company receives from foreign companies in which it invested and an exemption from capital gains tax from the sale of shares in those companies. In this way, the company may move revenues from abroad to Israel without any tax liability. A foreign resident shareholder would pay on dividends that he receives from the Israeli holding company a reduced tax of only 5%. Regarding capital gains from the sale of the company’s shares, he will be entitled to a full tax exemption.

An international investment company (holding company) will be tax exempt from dividends that it receives from investee companies. As mentioned, the benefits are not intended for Israeli residents and the main aim of the arrangement is to attract foreign residents to invest in Israel. Nevertheless, the new arrangement will not prevent Israeli residents from establishing holding companies. Israeli residents will be liable for tax, on their proportional share in the profits of the holding company (including exemptions), as if they received an imputed dividend (the tax rate on the imputed dividend will be determined according to the specific characteristics of the shareholder: if he is an individual controlling shareholder – 25%; and if he is an individual who is not a controlling shareholder – 20%). Israeli residents do not have any advantage to establish such a company because the Tax Authority will carry out a comprehensive examination to ensure that Israeli residents are not behind the founders of the company who are foreign residents (either an individual or a company).

What are the conditions that an Israeli holding company will be required to meet?

The company was incorporated and managed from Israel. For a period of at least 300 days during the tax year (from the year after the year of incorporation), the following conditions existed:

1. An investment of a minimum amount of NIS 50 million in shares and loans in foreign investee companies whose main income is business income produced abroad. The cost of the shares and the balance of the loans in investee companies comprise at least 75% of its total assets.

2. The israeli holding company will have a minimum holding (10%) during a period of at least 12 months.

3. The company will not have income from business, excluding income from services or the management of investee companies.

4. An important technical detail – the company must submit an application to the assessing officer, to be considered “an Israeli holding company”, within 90 days from the date of its establishment.

Which investments abroad will entitle Israeli investment companies to benefit?

1. 75% and more of the income whose source is from business operations.

2. The investee company is a resident of the country with which there is a tax treaty with Israel; alternatively, that the tax rate on business profits by the company in that country is 15% or more. The object of this qualification is to prevent a tax regime which encourages tax haven activities. For example, Cyprus has a company tax rate of 10% up to a taxable amount equal in value to $1,200,000, and over this amount an additional 5% is paid. An investee company must submit tax returns in the country where it operates.

3. The cost of foreign company assets in Israel does not exceed 20% of all its assets in every tax year. In addition, the investee company’s income in Israel does not exceed 20% of its total income in the tax year.

A new immigrant will be entitled to tax benefits, which are given to each new immigrant, due on income from dividends or capital gains that the holding companies had and which will be considered as an imputed dividend. In addition, on the dividend that he actually receives from a holding company during the first five years after his immigration, he will be liable to tax at a rate of 5% as if he was a foreign resident.

Proposal for the structure of offshore-type of company

A foreign resident or even a Cypriot company establishes in Israel a holding company which purchases shares of companies operating in countries of the former Soviet Union and is engaged in managing an active business. The company pays the local company tax (e.g.: in Russia 24%).

An Israeli holding company receives its dividends less tax paid in Russia – a maximum of 10% (compared to an Israeli resident company which complements the tax on the dividend received from abroad to 25%).

Globes – Financial Consumer Supplement, April 3, 2006. ___________________

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Alex Sutovsky
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