It was only recently that we published an article reviewing the recently enacted tax provisions concerning corporate taxation and capital investments encouragements, which were enacted as part of approving the economic policy program and the government budget for the years 2017 and 2018. Surprisingly, this week, the Israeli government published a new bill ("the Bill"), proposing additional amendments of the Israeli Tax Ordinance (New Version), 1961 ("the ITO"). The Bill proposes revolutionary provisions concerning management and control of companies registered outside Israel ("Management & Control") amendments to the provisions concerning Controlled Foreign Company ("CFC"), and new liabilities concerning Transfer Pricing ("TP").
Management & Control
The current wording of section 1 of the ITO provides that a body of persons would be deemed an Israeli resident if it was either incorporated in Israel or if its business is managed and controlled in Israel. The legislator has not set clear rules or conditions for examining the place of Management & Control of a body of persons and, therefore, this issue has caused numerous disputes between the Israeli Tax Authority ("ITA") and taxpayers holding shares in foreign companies.
The Bill proposes amending the provisions of section 1 of the ITO by adding a list of conditions under which the Management & Control of a foreign company would be presumed in Israel, unless the presumption is refuted by the ITA or the taxpayer. Please find below the said conditions:
More than 50% of any kind of controlling means in the body of persons are held, directly or indirectly, by Israeli residents, at any time during the tax year or the following tax year; In addition, if the body of persons would not be deemed an Israeli resident, the tax liable on its profit would not exceed 15% of its total profits, and it would also be recognized as a resident of a non-treaty company or it would be deemed a resident of a treaty country but it would not be taxable on income or profits derived outside the said country. It should also be noted that the Bill proposes imposing a reporting liability on a body of persons that claims that the above-described presumption does not apply to it, together with a requirement to attach the documents supporting its claims.
As may be discerned from the above-described provisions, the conditions set out by the legislator are based on mere technical examinations, by determining a presumption...