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Although that the British corporate agenda of companies’ independent legal status is widely accepted and adopted in Israel, in some cases this distinction is being overlooked, regarding certain legal issues, tax amongst them.
According to the Israeli Tax Code, a controlled foreign company’s passive income is subject to an Israeli resident who controls the company, under certain criteria. The Israeli Tax Code defines a controlled foreign company as a company that consists of the four following accumulated conditions:

  1. The company’s shares and/or rights aren’t open to public trade (i.e. a private company), and if registered, then less than 30% were offered to public trade.
  2. Israeli resident or related residents control, directly or indirectly (as defined in article 88 of the Israeli Tax Code), at least 50% of the company; or the resident has the power to prevent essential decision makings (including dividends distribution or dismantling) in a certain tax year.
  3. The majority of income in the given tax year is passive income or from passive income, while calculating income of subsidiaries as well.
  4. The company is not subject to income tax in its residence country greater than 20%.

If all four conditions occur simultaneously, the company shall be registered as a controlled foreign company, and the Israeli resident will be subject to income tax for its passive income, all under the Israeli laws and codes.
 

 

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