Form 150, known as the “Declaration of Holding in a Foreign Corporation,” is the Israel Tax Authority’s primary tool for monitoring Israeli residents who hold interests in foreign companies. The form serves as an annex to the annual tax return of an individual or a company.

The purpose of the form is to enable the Tax Authority to draw relevant conclusions regarding the possible taxation of such companies in Israel.
Completing Form 150 is not a simple task. Inaccurate reporting may lead to significant tax consequences. This article highlights key points to consider when filling out the form.

Who Must File Form 150?

Before diving into the main aspects of the form, it is important to clarify who is required to file it:

• An Israeli resident (individual or company) holding any interest in a private foreign company.
• An Israeli resident holding at least 10% of a public foreign company.

Form 150 must be filed both by individuals and companies. The obligation applies to both direct and indirect holdings (through another company).

For example, if an individual owns 100% of an Israeli company, which in turn holds 1% of a private British company, two Form 150s must be filed: one for the Israeli company’s direct holding in the British company, and another for the individual’s direct and indirect holdings.

Types of Foreign Companies

In the context of Form 150, there are three main types of foreign companies:
a foreign resident company, a controlled foreign company (CFC), and a foreign professional company (FPC).

The questions in the form are designed to help the Tax Authority identify CFCs and FPCs that have not been properly reported.

Foreign Resident Company

A company incorporated and managed outside Israel. Such a company is taxed on its income in the country of incorporation. In Israel, it is not subject to tax. Israeli shareholders are taxed only when withdrawing funds from the company.

Controlled Foreign Company (CFC)

The CFC regime aims to prevent tax planning in which Israeli residents divert passive income through foreign companies.
A foreign company is considered a CFC if it meets the conditions set out in Section 75B of the Israeli Income Tax Ordinance.
These include, among others, that 50% or more of the company’s control is held by Israeli residents and that most of its income or profits are passive.
Note that a company classified as a CFC is taxed in Israel.

Foreign Professional Company (FPC)

An FPC is a company that meets the conditions set out in Section 75B1 of the Ordinance.
These include at least 75% ownership by Israeli residents, with at least 50% held by controlling shareholders engaged in a “special profession.”
When a company is classified as an FPC, its professional income is attributed to the Israeli shareholders according to their ownership percentage.

Tax Classification of the Company

A company may be classified for tax purposes as either a transparent or a non-transparent entity.

A transparent company’s income is attributed to the shareholder who holds the largest share of profits. It is taxed at the shareholder’s marginal rate rather than the corporate rate (a single-tier tax, as opposed to the two-tier system applied to non-transparent companies). In this case, dividends need not be distributed for the shareholder to be taxed, as the income is already attributed to them.

In contrast, a non-transparent company’s income is taxed at the corporate level. When the shareholder later withdraws funds, dividend tax applies.

Often, the company’s legal suffix in English indicates its classification for tax purposes in its country of incorporation. For example, entities designated as “LTD” are usually non-transparent, while “LP” entities are typically transparent.

However, the classification abroad does not necessarily match the classification in Israel. A company may be transparent abroad but non-transparent in Israel. That said, U.S. limited liability companies (LLCs) may be treated as transparent in Israel as well, pursuant to Circular 5/2004.

Classification mismatches can create tax exposure and difficulties in claiming foreign tax credits.

Note that the Israel Tax Authority’s position, as established in case law, is that a company’s classification cannot be changed once initially declared.

Country of Residence vs. Country of Incorporation

The country of incorporation is where the company was formed. The country of residence is where the company is considered a tax resident (similar to individual residency). In most cases, these two are the same.

However, a company may be considered a tax resident of another country, usually because its management and control are exercised there.

For example, a company incorporated in the U.S. with no employees other than its Israeli shareholder-manager will likely be considered an Israeli tax resident.
If so, it must file tax returns and pay taxes in Israel, which can result in double taxation.

It is essential to determine the company’s country of residence accurately to avoid unnecessary reporting obligations and double taxation.

For further reading on corporate residency, click here.

Business Activity and Nature of Income

Business activity refers to what the company does. The nature of income indicates whether it is active or passive.

Passive income is recurring income that requires little ongoing effort, such as interest or royalties. Active income, on the other hand, requires continuous effort, such as employment income.

When completing the form, ensure consistency between business activity and nature of income. If the activity is marked as passive but the business type suggests otherwise (e.g., sales or marketing), review the reason for the mismatch.

Failure to File Form 150

Failure to file Form 150 by a person holding a foreign company poses a significant risk before the Tax Authority. If the form is not submitted, the assessing officer may claim that the annual return cannot be reviewed. In such a case, the taxpayer may be deemed not to have filed a return at all.

This situation has several serious consequences:

• Cancellation of the statute of limitations – When a return is not filed, or when filed without Form 150, the statute of limitations does not begin to run.
  This means the Tax Authority may at any time demand submission of the return or issue an assessment (known as a “Section 04 assessment”). The limitation period begins only once the return is filed or the assessment is issued.
• Criminal sanction – Failure to file a return as required by law, including Form 150, may constitute a criminal offense and lead to legal proceedings.
• Late filing penalties – If a return is invalidated due to the absence of Form 150, the taxpayer must file an amended return. Late submission will result in penalties for delay.

For more information about Form 150, click here and here.

Conclusion

Timely and accurate submission of Form 150 is essential to reduce financial and criminal exposure.Failure to comply may result in severe consequences, including penalties, loss of limitation periods, and criminal sanctions.
The firm Nimrod Yaron & Co. – Israeli and International Taxation assists accounting firms and shareholders holding foreign companies in properly completing the form and minimizing legal and tax risks before the Tax Authority.

For assistance – click here.

Questions and Answers