Israeli Foreign Corporation Taxation FPC & CFC
In 2014, tax laws were revised to clarify regulations surrounding corporations and their business activities overseas. Specifically, FPCs or Foreign Professional Companies are addressed.
An FPC has the following requirements:
- It must be owned by less than five individuals that are not in the same family
- 3/4th of the ownership and controllers of the company must be held domestically by Israelis. Individuals who have not lived in Israel for 10 years are not considered Israeli for this purpose
- More than ½ of the income must come from a “specified profession”
- Controlling owners/shareholders, controlling more than ½ of the company work in the “specified professions”
Specified Professions are defined from a list of profession provided by the Tax Authority:
- Accountancy
- Advertising & public relations
- Advice, including the fields of financial, personal, security, agriculture, technical, engineering, organizational, management, national, scientific, tax, business & economic
- Agronomist
- Aircrafts & boats
- Architect
- Art, including creation of art
- Audit (of various types)
- Communications & event organizers
- Computer software
- Creating and operating computer hardware
- Economics
- Engineering
- Investigations
- Journalism & editing
- Lawyers, patent attorneys, representation before law
- Management – including assets & investments, companies, organizations, institutions, businesses – including those in the process of dismantling, bankruptcy or administration
- Medical – including developmental treatment, psychology, physiotherapy & dentistry, and including para-medical and alternative medical services
- Modeling
- Music & entertainment
- Photography
- Realty
- Religious services
- Representation of any “Special Profession”
- Scientific research & development
- Security
- Sport
- Statistics
- Surveying
- Teaching & seminars etc.
- Telecommunications
- Translation
- Veterinarian
- Writing & composition
When a company is determined to be an FPC, for taxation purposes it represents itself like an Israeli company in all areas except that its shareholders are tax on their portion of the income, rather than as a passthrough entity.
Profit is calculated according to Israeli rules, if the company is a resident in a country where Israel has a tax treaty, local rules apply. Any tax paid in the country of the company’s residence can be claimed against the tax due. The rules for taxation on dividends are similar to the traditional Israeli regulation, although there are some slight differences.
Foreign Companies – Controlled Foreign Corporation
A Controlled Foreign Corporation, or CFC is in accordance with the Israeli Tax Ordinance No. 132. Passed in April 2010. It deals with the undistributed passive income of foreign corporations designated as CFCs. If the income falls within the ITA’s scope of passive income, the tax rate on the controlling shareholders is 25 percent on a current basis.
Determining which income is classified as “passive income” is important in contrast the classification “professional income”, the ITA defines business not in its entirety but by the activity they conduct. Specifically:
- The type of assets used for the company, such as investments, capital, or real estate will assist the ITA in determining the status of the business classification.
- Skills and ability of the people within the business. This allows the tax assessor to understand in what ways their income in generated to determine if it professional.
- The fundamental logistics of their operations, a business is usually characterized as a going concern, thus management within the company should reflect that.
- The situational circumstances of the company are also taken into consideration, such as the purpose of the business.
Whether your company is an FPC or CPC , consult a specialist when dealing with these sorts of regulations as taxation of this type of corporate structure is complex in nature.
