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Israeli Tax Resident for Companies

Pursuant to the Section 1 of the Ordinance two alternatives tests apply to classify a "body of persons" (including a company) as an Israeli resident for tax purposes. Under the first test, a "body of persons" which was incorporated in Israel is treated as an Israeli resident for tax purposes. Pursuant to the second test a body of persons whose management and control is performed from Israel also constitutes an Israeli tax resident (the "Management and Control test").

The determination of management and control is dependent to a large extent on the relevant facts and circumstances. There are very limited judicial precedents with respect to this matter. However, several scholars and English case law indicate that the management and control test is comprised of two separate components namely "management" (where the activities of the company are conducted) and "control" (where the shareholders of the company reside).

This approach is also inferred from the Solel Bone case. The court stated that the "management" location could be identified within an examination of the board meetings location, the directors' residence and whether the company has an economic ties with Israel (bank account, financing and suppliers). The Court's interpretation for the term "control" is the power to make binding instructions and decisions within a company. The term "control" is not related to the location of shareholders' residence and as long as directors conduct and manage a company for their independent discretion, it's hard to argue that the "control" is situated in Israel. However, it should be noted that the Solel Boneh Case is not necessarily considered a binding precedent for the Ordinance purposes, since it focused on the provisions of the Law of levy and not to the provisions of the Ordinance.

According to more recent cases Shai Tzamarot, Yanko Weiss and Niago, the place of effective management is the place where the key management and commercial decisions that are necessary for the conduct of an entity’s business are in substance made, i.e. the place where the actions to be taken by the entity as a whole are, in fact, determined. All the relevant facts and circumstances must be examined to determine the place of effective management.

The ITA has issued the Circular 4/2002 which provides guidelines for determining the location of a company’s management and control as for the ITA's approach. According to the Circular 4/2002, the meaning of “management and control” refers to one combined test according to which the place where business policy is determined and where the strategic decision-making takes place will be examined. The place of “control” in the sense of shareholding or legal ownership of the company, would not determine control and management in this context, but rather the ability to determine effective decision making, direction of business management and the ability to state definitive, binding instructions to the company.

Respectively, the ITA's approach is to determine the body authorized to effectively manage the company. In this regard the Circular 4/2002 indicates that the ITA will examine the following factors as they relate to any company:

  1. The Company's constitutional documents;

  2. Details regarding the shareholders of the Company;

  3. Minutes of the meetings of the Board of Directors;

  4. Correspondence and documents relating to significant and strategic decisions;

  5. Inter-group management agreements and / or agreements with third parties with emphasis on signature rights;

  6. Agreements with service providers;

  7. Details with respect to the Company's bank account and authorized signatories;

  8. Power of attorneys and authorizations granted to third parties;

  9. Details regarding where the Company's books and records are held;

  10. List of the Company's employees and their place of employment with emphasis on senior employees.

In August 2016, the ITA published an addendum to the Circular 4/2002 (the "Addendum"). The Addendum continues with the approach that was performed in the Circular 4/2002, emphasizing substance rather than form and provides more details as to the various criteria. The addendum emphasizes inter alia that it is necessary to consider the experience of the directors, their understanding of the activities of the company, whether they are employed by a professional management company that provides services to many other additional companies, what their compensation is and who determines it, whether they are fluent in the language in which the company conducts its activities, etc.


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