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Controlled Foreign Corporation (the CFC)

Pursuant to the Section 75B of the Ordinance a tax should be imposed on an undistributed passive income of a controlled foreign corporation (the “CFC”) as if it were distributed to an Israeli resident shareholder holding a controlling interest.

The CFC is defined as a non-Israeli (Foreign) company, which meets all of the following conditions:

  1. Its shares or rights in it are not listed for trading on a stock exchange…;

  2. Most of its income in the tax year is a passive income or most of its profits derive from a passive income, …;

  3. The tax rate that applies to its passive income in foreign countries does not exceed 15%;

  4. More than 50% of one or more of its means of control are directly or indirectly held by Israeli residents or more than 40% of one or more of its means of control are held by Israeli residents, who – together with a relative of one or more of them – holds more than 50% of company's means of control.

  5. "Relative" – as said in section 88 of the Ordinance, who is a foreign resident;

According to the Section 75B(a)(5)(a) of the Ordinance, a passive income is each of the following types of income, except of the income that if it had been produced or accrued in Israel, it would have been deemed as income from business or profession under the Ordinance:

  1. An income from interest or linkage differentials;

  2. An income from dividends; for the purposes, a dividend that arises from income on which foreign tax has been paid at a rate exceeding 15% should not be considered.

  3. An income from royalties, rents and proceeds from the sale of a property within the meaning of the Section 88, except of proceeds from the sale of a property used in a business or occupation, and except of proceeds from the sale of a security.

  4. Proceeds from the sale of a security, unless the security has been held by the company for less than a year and it has been proved to the tax official that it used by the company within a business or profession.

  5. Income derived from all types of income specified above, even if it is income from a business or occupation.

To summarize above, a company will be considered as the CFC, if, five cumulative conditions are met:

  1. A company is a foreign resident according to the Ordinance;

  2. Company's shares and rights are not listed for trading on a stock exchange;

  3. Most of its income or most of its profits in the tax year derived from a passive income, as defined above;

  4. The tax rate that applies to the company's passive income in foreign countries does not exceed 15%;

  5. More than 50% of one or more of company's means of control are directly or indirectly held by Israel residents or more than 40% of one or more of its means of control are held by Israel residents, who – together with a relative of one or more of them – hold more than 50% of one or more of its means of control.

Section 75B(a)(15) of the Ordinance stipulates that First Time Residents and Veteran Returning Residents will not be considered as ”Israeli Residents” for CFC purposes, during the Benefits Period.


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