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31 July 2014

Overseas companies, part 1 - General issues

It is fairly common for people to invest overseas, be it in businesses or other assets (eg property, shares etc.). One of the most common ways to invest is to set up a company in the country of investment, owned by the foreign investors.

The first issue that Israelis must consider when setting up a foreign company is the residency of the company. Any company incorporated in Israel is automatically considered Israeli-resident, but an overseas company can also be considered Israeli-resident if it is "controlled and managed" from Israel.

The concept of "control and management" refers to the activities of the company (at the comany level), NOT the actual underlying business or investment. Although the law does not define these terms clearly, the concepts developed in the court cases relate, primarily, to shareholder and board meetings discussing the overarching strategy of the company.

If the company were to be set-up in a country with which Israel has a Double Tax Treaty, the Treaty will set criteria for determining where the company would be considered resident. As such, it is likely to be the country in which the company is incorporated. The issue though is particularly acute when setting up companies in countries with which Israel does not have a Double Tax Treaty (Australia would be a classic example).

The implication of the company being considered Israeli-resident is that (a) the company would be required to file Israeli tax returns (taxes being levied at the Corporate Tax Rate, currently 26.5%), and (b) there is the potential for foreign taxes paid not to be recognised.

As such, it is important to consider the residency of any company that is intended to be set-up, so as not to fall into any traps.

In the coming posts, we will look at two specific types of foreign company - the Controlled Foreign Company and the Foreign Professional Service Company.

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