Beginning on January 1st, 2003, Israel has reformed its income tax system, and adopted a new taxation method, based upon personal affinity rather than territorial affinity for Israeli residents. As a result, companies and individuals are now taxed relying on their national residency. For instance, an Israeli resident company is subject to tax upon all of its income (personal affinity), whereas a foreign company is subject to tax only on income derived from inside Israel (territorial affinity).
The tax reform of 2003 has raised the importance of inquiring a company’s residency. Many Israelis believe that investment via a foreign established company will avoid Israeli taxation, however, this may not always be the situation. To this cause, we will now shortly pinpoint a few criteria of corporate residency.
In the Israeli Income Tax Code there are two tests that determine a company as a resident or not. Only on of which must apply in order for the company to be considered an Israeli resident for tax purposes.
(1) Location of establishment: a company established inside Israel, according to the Israeli regulation shall be an Israeli resident company. However, a company that was established abroad but complies with the second test will, nevertheless, be considered an Israeli resident company because one condition is sufficient for tax purposes.
(2) Location of the company’s management and control: this test is an essential test, which aims to seek the location from which the company is been controlled and managed, in order that registration abroad will not be used to avoid taxation when, de facto, the company is Israeli resident. When examining residency according to this test, the tax authority will consider, among other criteria, the following:
 Location of deciding business policy.
• Location of making strategic decision and their execution.
• Location where it is necessary to make decisions; and,
• Location where necessary preparation for decision-making were made.
In addition to the above essential criteria, if an Israeli resident has full ownership of the foreign registered company’s shares that will be considered as well.
These criteria enable the businessmen to prepare their actions in a wiser way that may also reduce taxation. For instance, because location of decision-making is essential, and because decisions are made in the directories’ meetings and the general shareholders meetings, it may be wiser to hold these meetings abroad. Moreover, it might be wise if the company’s connections were with foreign organizations, bookkeeping will be managed from abroad and such. Consultant with a tax expert may, in many cases, assist to decrease costs.

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