The Israel Tax Authority ("ITA") is promoting
legislation that will require foreign companies not subject to the
Israeli tax regime today to report and even pay tax in Israel.
A draft amendment to the Income Tax Ordinance (no. 238) was
promulgated recently, which proposes, inter alia, changing the
definition of the term "resident of Israel" or
"resident" as it pertains to companies.
According to the Draft Bill, a company will be deemed a
"resident of Israel" if a resident of Israel directly or
indirectly holds more than 50% of the company, due to the
legislature's presumption that, under these circumstances, it
is reasonable to assume that that company is controlled and managed
Nevertheless, the Draft Bill prescribes that a foreign company
will not be defined as a "resident of Israel" if it
fulfills both of the following conditions:
x The tax rate imposed on the foreign
company in its country of domicile is more than 15%; and
x The foreign company's country
of domicile has not signed a double tax treaty with the State of
Israel, or the foreign company is not taxed on income generated
outside of its country of domicile.
We must stress that, even if a particular company does fall
under the proposed definition in the Draft Bill, at issue is a
rebuttable presumption, either by the company itself or by the tax
A company that falls under the definition of "resident of
Israel" as proposed in the Draft Bill, but wants to rebut this
presumption, can do so by providing factual details and supporting
documents in conjunction with its annual financial reports.
Although the proposed amendment is not introducing any material
innovation, since the Income Tax Ordinance already prescribes that
any company managed and controlled from Israel is deemed a
"resident of Israel," this procedural change –
which shifts the burden of proof of residence and imposes it on the
taxpayers – will increase the friction between taxpayers and
the ITA. Furthermore, taxpayers failing to pass the statutory
management and control tests will now be required to incur
additional expenses, such as legal opinions, in order to prove what
they had not been required to prove up until now.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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