By: Eli Doron, Adv; Yaron Tikotzky, Adv, (C.P.A); Dr.Slomo Nass, Adv, (C.P.A)
A company that was established outside of Israel and managed from outside her, as well, is a foreign company for tax purposes, exempt from all foreign derived income. However, as the Israeli legislature wished to prevent Israelis, who are subject to tax on foreign derived income, from using the foreign occupation company for tax avoidance, determined that such a company is subject to income tax for the special occupation that in trades in.
A “special occupation” is, among other definitions, defined as consultant (including the financial, personal, military, agricultural, technical, engineering, management, political, scientific, taxation, business and economical fields) and management (including managing files, investments and property, company and organization management in receivership, dismantling procedures and bankruptcy).
Therefore, a foreign occupation company is a company that consists of four accumulating conditions:
- The company has no more than 5 managers and administrators (as defined in the Israeli Tax Code); it is not a subsidiary and not a company with public interest. However, foreign companies that accumulate only conditions (2)-(4) will also be considered foreign occupation companies.
- At least 75% of the foreign occupation company is directly or indirectly held (as defined in article 88 of the Israeli Tax Code) by Israeli residents or citizens (as defined in article 3A of the Israeli Tax Code).
- Those holding 50% of the management in the company are occupied by the company for the special occupation that the company provides.
- The majority of income and revenue of the company in a given tax year are derived from the special occupation of the company.
These conditions, although well established both in legislation and in court rulings, should nevertheless be interpreted according to the law’s end, which is to fight tax avoidance.