Globalization and internal issues in Israel are leading more and more Israelis to venture into business activities in various countries around the world. Many of them choose to conduct their operations abroad through a company, primarily due to economic considerations, convenience factors, and legal protection that comes with the legal separation between the company and its owner. In the present day, the increasing prevalence of anti-Semitism has motivated entrepreneurs to create foreign enterprises, aiming to conceal the link between their business operations and Israel.
The topics that must be reviewed before establishing a foreign company include:
- The jurisdiction of the foreign company.
- Corporate tax rates applicable to the company.
- The existence of relevant VAT implications for the company’s business activities and the residency of the shareholders.
- Consequences of opening a bank account for the company and considerations regarding payment settlements.
- Domestic legislation on non-tax matters not subject to the Tax Convention.
- The withholding tax rate on dividend income.
- Determining who will hold the foreign company and understanding the implications of this decision is crucial. Additionally, it’s important to assess whether there is a connection between the company and its shareholders.
- Whether to establish a company, partnership, or other legal entity.
- Inheritance tax considerations in the same jurisdiction.
- Statement: It is advisable to consider the appropriate type of company to establish. For instance, in the United States, the options include S-Corp, C-Corp (Inc), or LLC, which can function as a disregarded entity or partnership. In Germany, the choices include GmbH and UG (not to be confused with AG, which is a public company).
- The one-time costs of setting up the business structure and the annual holding costs of such a company in that jurisdiction.
- The need for appointing a local director.
The central and perhaps most crucial consideration in conducting business activities through a foreign company is meticulous advance planning in choosing the jurisdiction of incorporation and the location of its business operations. Careful planning can result in significant tax savings for both the company and its shareholders.
In certain cases, conducting activities through a foreign company may not lead to tax savings and, at times, may even result in higher taxation compared to other business structures. Therefore, it is advisable to first examine the ideal approach based on the unique circumstances and characteristics of each type and structure of business activity, whether as a company, partnership, or individuals.
In many countries, offshore jurisdictions often have lower corporate tax rates compared to Israel, aimed at encouraging investments by non-residents. Meeting specific conditions, such as control and management location and specialized business activities, can allow for tax optimization. It’s important to evaluate whether there is a tax treaty in place between Israel and the chosen foreign jurisdiction to reduce the risk of double taxation, especially concerning dividend income withholding tax. For more information on each country’s double taxation click here.
It’s important to note that establishing a foreign company without thorough planning can lead Israeli tax authorities to view it as an artificial arrangement, potentially affecting the company’s tax rates directly. Understanding the criteria Israeli tax authorities use to determine control and management, and its impact on tax status, is crucial.
Another critical aspect to consider is the banking component. While foreign banks may offer favorable terms and streamlined taxation procedures, recent regulatory changes have made international money transfers more complex.
Our office specializes in assisting with the establishment of foreign companies, facilitating the opening of bank accounts, and managing the necessary bureaucratic processes. We collaborate with local legal and accounting professionals well-versed in the domestic laws of the destination country.
In summary, there are numerous factors to take into account before establishing a foreign company. Our office offers comprehensive guidance and tailored recommendations, considering all relevant aspects, and provides professional support throughout the entire process.
