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Miss Sahara Kaplan, will attend to you
(in English) at Phone No. +972 3 546 88 88
In case of emergency, call Gabriel Hanner
at his
cellular: +972 50 552 33 33
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CHAPTER FOUR "A": CONTROLLED FOREIGN COMPANY
Israeli controlling members in a controlled foreign company
75B. (a) In this section –
(1) "controlled foreign company" – a foreign resident body of
persons, for which all the following hold true:
(a) its shares or the rights in it are not listed for trading on an
Exchange; however, if they are listed in part, then less than
30% of the shares or of the rights of that body of persons
were offered to the public;
(b) most of its income in the tax year is passive income or most
of its profits derive from passive income, and in respect of a
body of persons in a chain of companies, which is directly
held by a business company (in this section: held body), and
also in respect of any body of persons that is directly or
indirectly held by the held body – if most of the business
company's total income or profits stem from passive income;
for this purpose, the amount of income, the amount of profits
and the amount of passive income shall be calculated
according to the applicable tax laws, as defined in section
5(5)(c); 100
(c) the tax rate that applies to its passive income in the foreign
countries does not exceed 20%;
(d) (1) more than 50% of one or more of its means of control
are directly or indirectly held by Israel residents or by
Israel citizen residents of an area, as defined in
section 3A, or more than 40% of one or more of its
means of control are held by Israel residents, who –
together with a relative of one or more of them – hold
more than 50% of one or more of its means of control,
or an Israel resident has the right to prevent the
adoption of substantive management decisions in it,
including decisions on dividend distributions or on
winding up, and all that at one of the following times:
(a) at the end of the tax year;
(b) on any day during the tax year and on any day in
the following tax year;
for this purpose, "relative" – as said in section 76(d),
who is a foreign resident;
(2) the proportion held, as said in subparagraph (1), in
respect of indirect holdings in a certain body of
persons in a chain of companies (in this section: the
certain body) shall be calculated according to the
following provisions:
(a) if the holdings in each of the bodies of persons
in the chain of companies that indirectly hold the
certain body exceed 50%; then the proportion of
the holding in it shall be calculated according to
the rate of direct holdings in it;
(b) if the rate of holdings in one of the bodies of
persons in the chain of companies that hold it
indirectly is less than 50%, then the indirect
holdings in it by means of that chain of
companies shall be taken to be a holding at the
rate of zero;
(2) "means of control" – as defined in section 88;
(3) "controlling member" – an Israel resident who directly or
indirectly, alone or with another, holds at least 10% of one of the
means of control in a body of persons at one of the following
times:
(1) at the end of the tax year;
(2) on any day during the tax year and on any day during the
following tax year;
(4) "together with another" – together with his relative and also
together with a person who is not his relative, if they are Israel
residents and if there is regular direct or indirect cooperation
between them by agreement concerning substantive matters of the
company;
(5) "passive income" –
(a) each of the following kinds of income, other than income
which – had it been produced or accrued in Israel – would
under Israel tax laws have been deemed income from
business or profession:
(1) income from interest or linkage differentials;
(2) income from dividends; 101
(3) income from royalties;
(4) income from rent;
(5) consideration for the sale of an asset, within its
meaning in section 88, which was not an asset used
by the company in a business or in a vocation;
(b) any income that stems from an income or a consideration
said in subparagraph (a), even if it is income from business
or occupation;
(6) "total income and profits" of a business company – its income
and profits and also its proportional part, direct or indirect, of the
income and profits of any body of persons in the chain of
companies which it directly or indirectly holds; for this purpose, the
business company's indirect proportional part of aforesaid profits
shall be calculated by multiplying the proportional right by the
profits of each body of persons in the chain of companies which
the business company holds indirectly;
(7) "business company" – a foreign resident body of persons, most
of the income and profits of which are not passive income;
(8) "controlling member's proportional part of unpaid profits" – a
proportional part of all unpaid profits, in accordance with the
controlling member's direct and indirect right to profits in the
controlled foreign company on the last day of its tax year; for
purposes of this section, a controlling member's indirect part of
unpaid profits shall be calculated by multiplying the right to the
profits of every body of persons in the chain of companies which
he holds indirectly;
(9) repealed
(10) "foreign tax" – the tax which – under the tax laws applicable in a
foreign country – is due on income in that country;
(11) "relative" – as defined in section 88, who is an Israel resident;
(12) "unpaid profits" – profits that stem from the passive income of a
controlled foreign company that was produced during the tax year,
other than profits that stem from dividends received from a foreign
resident body of persons that was proven – to the Assessing
Officer's satisfaction – to stem from income on which foreign tax
was paid at a rate in excess of 20%, which in the course of that
year were not paid to persons with rights in it; in the calculation of
said profits the taxes due on the passive income of the controlled
foreign company and its losses in that year and its losses brought
forward from preceding years that stemmed from the said sources
shall be subtracted; for this purpose, the amounts of profit, of
foreign tax and of loss shall be calculated in accordance with the
applicable tax laws, as defined in section 5(5)(c);
(13) "applicable tax rate" – the amount of foreign tax which the
controlled foreign company was charged in respect of its passive
income in the tax year, divided by the total of its profits that stem
from passive income in that year;
(14) "chain of companies" – two or more bodies of persons, which
directly or indirectly hold each other;
(15) "Israel resident" – including an Israel citizen resident in an area
as defined in section 3A, and exclusive of a person who became
an Israel resident for the first time or a veteran returning resident,
as said in section 14(a), when ten years have not yet passed since
he became an Israel resident as aforesaid. 102
(b) (1) if a controlled foreign company has unpaid profits, then its
controlling member shall be treated as if he had received his
proportional share of those profits as a dividend;
(2) if means of control were acquired in the course of the year, then
the controlling member's proportional part of the unpaid profits
shall be calculated according to the proportional period in which he
held means of control in the course of the tax year in which they
were acquired;
(3) the provisions of paragraphs (1) and (2) shall not apply to a
controlling member who controls another controlling member in
respect of unpaid profits of the controlled foreign company, if the
provisions of the said paragraphs apply to the other controlling
member in respect of the unpaid profits.
(c) (1) If an obligation to pay foreign tax applies to the controlled foreign
company in the state of its residence, inter alia by deduction at the
source in respect of a dividend distribution, then a tax credit shall
be allowed in the amount of the foreign tax that would have been
paid if the unpaid profits had been distributed as a dividend;
however, if the income under this section is income that stems
from a company in a chain of companies that is not held directly by
the controlling member, then to the aforesaid credit shall be added
the foreign tax that would have been paid in respect of the
distribution of dividends by each of the companies in the chain of
companies and for which full or partial credit cannot be obtained
by any of the companies in the chain; for purposes of the
calculation of the credit under this paragraph the amount of foreign
tax that would have been paid as aforesaid and for which no credit
can be obtained shall be taken into account, multiplied by the
proportional right to profits in each body of persons in the chain of
companies, which is directly or indirectly held by the controlling
member.
(2) The amount of credit said in paragraph (1) shall not exceed the
tax, to which the controlling member is liable in Israel on his
chargeable income under this section.
(3) If the company is the resident of a state that is not a reciprocating
state, then a credit under paragraph (1) shall be given on unpaid
profits in a controlled foreign company only if the controlling
member proved to the Assessing Officer's satisfaction that a
foreign tax obligation would apply if the said profits were
distributed as a dividend in that year and the rate of the foreign tax
that would have applied to a said distribution.
(d) If a dividend was actually paid to the shareholder of a controlled foreign
company out of profits on which he or his alternate paid tax under the
provisions of subsection (b), then a credit shall be given against the tax
that applies to the actually paid dividend; the credit shall be in the
amount of tax paid under the provisions of subsection (b), but not more
than the amount of the tax he paid on that part of the said profits which
were paid as a dividend, and it shall be adjusted according to the rate of
the index increase from the end of the tax year in which the profits were
charged to him under subsection (b) and until the date of the actual
dividend payment; if a credit balance remains under the provisions of
this subsection, then it may be subtracted in coming the tax years, one
after the other, from the tax that will be paid on dividends actually paid
out in those years out of the undistributed profits of that controlled 103
foreign company; for this purpose: "his alternate" – whoever received a
share from a shareholder in a tax exempt sale.
(e) (1) If a controlling member sold all or some of his means of control in
a controlled foreign company, then he shall be exempt of the tax
that applies to that sale in the amount of the tax he paid in
preceding tax years as said in subsection (b) on unpaid profits in
respect of the means of control that are being sold, and which had
not been distributed as dividends until the date of the sale; the
amount of tax paid as aforesaid in preceding tax years shall be
adjusted at the rate of the index increase from the end of the tax
year in which it was paid until the date of sale of the said means of
control;
(2) the amount of the credit shall not exceed the tax that applies to the
said capital gain after any lawfully allowed set-off and deduction.
(f) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe provisions on trusteeship and also provisions for
the implementation of this section, rules on reports by a controlling
member on his means of control in a controlled foreign company and on
reporting the controlled foreign company's income.
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Miss Sahara Kaplan, will attend to you
(in English) at Phone No. +972 3 546 88 88
In case of emergency, call Gabriel Hanner
at his
cellular: +972 50 552 33 33
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