Gadi Solomovich C.P.A. Firm
Establishing businesses abroad - International taxation aspects
When an Israeli entrepreneur or an Israeli company wishes to establish a business or an operation abroad, they must take into consideration the regulatory and tax implications that directly affect the economic viability of entrepreneurship.
The first and most significant aspect is the classification of the company abroad or activity abroad. According to the Income Tax Ordinance, a company shall be deemed to be a resident of Israel if one of the following is fulfilled:
- The Company was incorporated in Israel – registered in the Israeli Registrar of Companies as an Israeli company.
- Control and management of the Company’s business are in Israel.
The first condition is clear and unequivocal. On the other hand, the second condition is not clear and contains many interpretations and examination of the facts and details in order to determine whether the activity is in Israel. If it becomes clear that the Company is a resident of Israel, all laws and obligations applicable to an Israeli company in Israel shall apply to it. Therefore, the activity must be carefully examined and planned. Our firm specializes in the accompaniment and establishment of overseas businesses and includes providing professional opinion according to customer needs and, if necessary, physical accompaniment abroad to find suitable professionals for business such as accountants, lawyers and bookkeeping to understand clearly all the implications and actions in accordance
International taxing – for renting a residential apartment abroad
Revenues from renting a residential apartment outside Israel by an individual resident, who has had income in the course of the tax year receive preferred tax rates, i.e., under section 122a of the income tax order, the tax payer is obligated to pay tax of 15% instead of marginal tax for rent-generated income (not from business) outside Israel, including real estate.
An individual choosing to pay such 15% tax (המסלול המוטב) may not deduct expenses accrued by rent-generated income or by the tax applying to it.
It must be stressed here that section 122a of the income tax order does not apply to a corporation’s rent-generated income, i.e., the companies tax rate applies to it. Such corporation is entitled to be credited for the tax it paid abroad.
You should understand that there is no distinction between renting residential or business properties.
A. When the resident is an individual:
a. Permanent home
b. Place of residence of the individual and their family
c. The individual’s regular or permanent place of vocation or employment
d. The individual’s place of essential and active financial interests
e. The individual’s place of activity in organizations, associations or other institutions
a. If they had stayed in Israel 183 days or more in the course of such tax year
b. If they had stayed in Israel 30 days or more in the course of such tax year and a total of 425 days or more in the course of such tax year and the two preceding years.
1) It is associated in Israel:
2) Control and management of its business is in Israel, unless it is a body of persons whose control and management are done by an individual who first became a resident of Israel or is a veteran returning resident, as set forth in section 14(a), and less than ten years have elapsed since they became residents – or anyone acting on their behalf, provided however that such body of persons was not a resident of Israel even when such control and management of their business was not so done by an individual or anyone acting on their behalf, unless otherwise requested by such body of persons.
International taxing – veteran returning resident
Regular returning residents are exempt of tax on their passive incomes for five years after becoming Israeli residents.
Regular returning residents are exempt of tax on their capital profits for ten years after becoming Israeli residents.
There is a tax exemption on overseas incomes by a company managed by a veteran returning resident.
There is a ten year tax exemption for a veteran returning resident on their passive incomes (interest, royalties, pension, dividend and rent originating from properties outside Israel, which were owned by the tax payer prior to them returning to Israel.
Full exemption of reporting exempt incomes for a veteran returning resident.
Veteran returning residents will be exempt from tax for ten years after becoming such residents of Israel on incomes from a business, vocation, random transaction of a business nature, earnings or profit from gambling, raffles or prizes generated outside Israel or from properties outside Israel, unless they had requested otherwise for their incomes.
A veteran returning resident will be exempt from tax on capital profits generated by selling a property they had outside Israel, which was purchased prior to their returning to Israel and sold within 10 years of their return. Where the property was sold after such ten years, a relative exemption will be calculated on part of the capital profits.
Under the income tax order, a veteran returning resident is an individual who became an Israeli resident again after being a foreign resident for 10 consecutive years.
The foregoing notwithstanding, an individual becoming an Israeli resident for the first time or a veteran returning resident will not be seen as Israeli residents for one year after immigrating or returning to Israel as the case may be (adjustment year), provided however that the individual gave notice of the same within 90 days of the date of their arrival in Israel on a form determined by the manager.
For counseling and help in all international taxing matters
contact our office at 972-3-726999
International taxing – tax treaties
In light of the amendment in force as of January 2003, which was essentially adopting a taxing system on a personal basis (paying a tax on the incomes of an Israeli resident, which were generated I Israel and out of it, regardless of the location of such income generation) over the preceding taxing system on a territorial basis (paying a tax on the incomes of an Israeli resident, which were generated solely in Israel).
The change in international taxing policy means that an individual who is a resident in Israel might be required to pay a double tax for incomes generated abroad because under the rules applied by tax authorities in both Israel and the foreign country would impose taxes on the same source of income.
The applicable practice is that the country of origin is entitled to the “first bite” of active incomes, while the country of residency benefits from the tax on any passive incomes.
So therefore, the solution to the problem described above (Israeli resident being required to pay a double tax for incomes outside Israel). Is a tax treaty. Where it is difficult to determine which country is paid taxes, a tax treaty is required to avoid double taxation.
Most such tax treaties to prevent double taxation are currently based on one of the primary models or a combination of both.
The UN model
Israel’s tax treaty is based on the OECD international treaty model
These tax treaties are agreements by which the two countries who are parties to the agreement set the taxing rules applying to incomes and properties linked to both countries. The tax treaty rules are an addition to each country’s tax laws.
It must be stressed here that the provisions of a tax treaty to prevent double taxation prevail over tax laws applicable in each country.
The state of Israel is currently a party to 52 international taxing agreements.