Establishing a Company Abroad

More and more Israelis are choosing to conduct business activity outside Israel through a foreign company, for commercial, operational, tax and legal reasons. Establishing a company abroad may offer advantages such as legal separation, greater flexibility in managing international operations, and easier access to customers, suppliers and banking systems. However, in order to realize these advantages properly, it is important to plan the operating structure in advance and carefully examine the tax and regulatory implications in each of the relevant jurisdictions.

Even before establishing a company abroad, it is important to examine whether a foreign company is indeed the appropriate operating structure in the circumstances. In some cases, another alternative – such as operating personally, through a partnership, through a different corporate structure or through another holding model – may be more suitable from a business and tax perspective.

Before establishing a company abroad, it is advisable to carry out a series of preliminary checks in order to select the most appropriate operating structure and reduce tax, regulatory and banking exposure.

Establishing a Company Abroad Is Not Just a Tax Matter

In some countries, corporate tax rates are lower than those applicable in Israel, and in some cases there are also preferential tax regimes or specific benefits for foreign companies. However, a low tax rate alone does not justify establishing a foreign company. It is also necessary to examine the place of control and management, the nature of the activity, the local tax laws and the manner in which the company and its owners will be taxed in Israel. In addition, even if the company benefits from reduced taxation in the foreign jurisdiction, the distribution of dividends to a shareholder who is an Israeli resident may create a tax liability in Israel.

Once it is understood that a foreign company is not merely a tax decision, the next step is to examine the foundations of the structure itself.

Choosing the Jurisdiction of Incorporation

Choosing the jurisdiction of incorporation is one of the first and most important decisions in the process of establishing a company abroad. Not every jurisdiction that is considered convenient or attractive for incorporation is suitable for every type of activity. It is necessary to examine the nature of the services or products, the location of the customers, the language in which the business is conducted, the level of legal stability, the regulatory requirements, access to banking and payment processing, and how the market perceives that jurisdiction from a business perspective.

For example, in certain cases, a jurisdiction with a slightly higher tax rate may be more suitable because of its commercial reputation, regulatory certainty or better operational capabilities. At the same time, it is also necessary to examine the corporate tax rate, the local tax rules and the possible tax benefits that may apply to the company in the jurisdiction of incorporation and in the jurisdiction where the activity is carried out.

As part of choosing the jurisdiction of incorporation, it is also important to examine whether inheritance tax, estate tax or intergenerational transfer tax considerations exist in the jurisdiction of incorporation or in the jurisdiction where the activity is carried out. These issues are not always at the center of attention at the incorporation stage. However, in certain structures – especially where there is personal ownership, family activity or assets outside Israel – they may have a real economic and family impact.

Already at the planning stage, it is advisable to assess the one-time costs of establishing the operating structure, including incorporation costs, advisory fees, bank account opening costs, registrations, translations, approvals and initial filings. Beyond the setup costs, it is also necessary to examine the annual costs of maintaining the company, including bookkeeping, government fees, fiduciary services, a registered office, filings and compliance with regulatory requirements.

In addition, it is important to examine whether local law or practical considerations require the appointment of a local director, local representative, registered office or management function in the jurisdiction of incorporation, as such requirements may have a direct impact on costs, the management of the activity and the practical implementation of the structure.

Holding Structure and Type of Entity

Another issue is the holding structure. There are cases in which the shareholder will hold the foreign company directly, and there are cases in which it is more appropriate to consider holding it through an Israeli company, a holding company or another structure. The manner of holding may have a significant effect on ongoing taxation, dividend distributions, risk management, the admission of partners, and even a future sale of the activity.

A separate but related question is whether it is appropriate to operate through a company at all, or whether a partnership, a tax-transparent entity, direct holding or another legal framework would be preferable. Even when a decision is made to operate through a company, it is important to examine which type of entity is suitable for the activity. Different jurisdictions offer different alternatives – regular companies, LLCs, tax-transparent structures, partnerships or other forms of incorporation – and each alternative has different implications in terms of legal liability, taxation, fundraising ability, ease of management, reporting requirements and suitability for future growth.

Double Tax Treaties

When establishing a company abroad, it is important to examine whether relevant tax treaties exist between the countries involved and what their possible implications are for the company’s activities, profit distributions, withholding taxes and holding structure. A tax treaty may be an important tool in planning the structure, but it does not replace an examination of the domestic law in each of the relevant jurisdictions, and it does not always provide a complete answer to every practical issue or complex classification question.

Therefore, alongside examining the very existence of a treaty, it is also necessary to review its practical provisions regarding the allocation of taxing rights, withholding tax, dividends, interest, royalties and capital gains, as well as the reporting and compliance requirements that will apply to the company in the jurisdiction of incorporation and in Israel. Only a combined examination of the treaty and the local law can provide a complete picture of the tax implications.

The Control and Management Test for a Foreign Company

Even when a company is duly incorporated outside Israel, this does not necessarily mean that it will be regarded as foreign for Israeli tax purposes. One of the central issues is the question of tax residence, including the control and management test. The Israel Tax Authority examines, among other things, where the company’s material decisions are actually made, who manages it in practice, where business instructions are issued from, where financial decisions are made, and where the company’s real center of management is located.

From a practical perspective, Israeli business owners and entrepreneurs should ask themselves not only where it is advisable to establish a company, but also how it will actually operate. If all decisions are made from Israel, if contracts are negotiated and managed from Israel, if the controlling shareholders effectively operate the company from Israel, and if the entire commercial and managerial framework remains in Israel, a gap may arise between the formal structure and the substantive reality. Such a gap may create tax implications that were not taken into account at the outset.

It is important to remember that establishing a company outside Israel without early and well-founded planning may give rise to claims by the Israel Tax Authority, including a claim that the chosen structure does not reflect sufficient commercial substance or that the foreign company is merely a formal framework. Therefore, it is advisable to establish in advance the business, operational and managerial rationale for the structure, and to document the decision-making process and the genuine connection to the foreign jurisdiction.

For further information on corporate residency, read the article “Determining the Tax Residency of a Company”.

Banking, Payment Processing and Compliance

Even a foreign company that is properly structured from a legal and tax perspective must be capable of operating in practice. This is where banking and operational considerations come into play: whether it is possible to open a bank account, whether payment processing services can be obtained, what documents the bank will require, whether a local presence is needed, and how sensitive the bank is to the ownership structure, the jurisdictions involved or the type of activity.

In practice, many business owners discover that the most complex stage is not registering the company, but operating it. Without a bank account, without payment processing infrastructure and without supporting documents, even a duly incorporated entity may encounter significant difficulties.

In recent years, banks and financial institutions have tightened their compliance, identification and documentation requirements. Therefore, already at the planning stage, it is necessary to examine whether a bank account can be opened, what documents will be required, whether suitable payment processing solutions are available, and whether the chosen legal structure supports the ongoing activity rather than making it more difficult.

In conclusion, establishing a company abroad may be suitable in many cases, but the right decision depends on a combination of tax considerations, control and management, the type of entity, the holding structure, tax treaties, banking, regulation and ongoing costs. A preliminary review tailored to the specific circumstances of each client can improve the operating structure, reduce risks and help prevent costly mistakes.

Local advisors in the foreign jurisdiction usually have strong knowledge of local law, but they are not always familiar with the tax and reporting rules that apply to Israeli residents. As a result, a structure that appears efficient under foreign law may prove less suitable when examined in light of the tax implications in Israel. It is therefore advisable to coordinate between local advice in the target jurisdiction and Israeli advice from professionals experienced in international taxation.

Nimrod Yaron & Co. has extensive experience in advising on foreign companies, international tax planning and the design of holding structures for private and business clients. If you are considering establishing a company abroad, it is advisable to carry out a preliminary review before incorporating the entity. Proper analysis at an early stage can reduce tax exposure and improve business certainty.

Contact us for an initial review of the alternatives suitable for your activity.