The Israel Tax Authority (“ITA”) is promoting legislation that will require foreign companies not subject to the Israeli tax regime today to report and even pay tax in Israel.

A draft amendment to the Income Tax Ordinance (no. 238) was promulgated recently, which proposes, inter alia, changing the definition of the term “resident of Israel” or “resident” as it pertains to companies.

According to the Draft Bill, a company will be deemed a “resident of Israel” if a resident of Israel directly or indirectly holds more than 50% of the company, due to the legislature’s presumption that, under these circumstances, it is reasonable to assume that that company is controlled and managed from Israel.

Nevertheless, the Draft Bill prescribes that a foreign company will not be defined as a “resident of Israel” if it fulfills both of the following conditions:

  • The tax rate imposed on the foreign company in its country of domicile is more than 15%; and
  • The foreign company’s country of domicile has not signed a double tax treaty with the State of Israel, or the foreign company is not taxed on income generated outside of its country of domicile.

We must stress that, even if a particular company does fall under the proposed definition in the Draft Bill, at issue is a rebuttable presumption, either by the company itself or by the tax assessor.

A company that falls under the definition of “resident of Israel” as proposed in the Draft Bill, but wants to rebut this presumption, can do so by providing factual details and supporting documents in conjunction with its annual financial reports.

Although the proposed amendment is not introducing any material innovation, since the Income Tax Ordinance already prescribes that any company managed and controlled from Israel is deemed a “resident of Israel,” this procedural change – which shifts the burden of proof of residence and imposes it on the taxpayers – will increase the friction between taxpayers and the ITA. Furthermore, taxpayers failing to pass the statutory management and control tests will now be required to incur additional expenses, such as legal opinions, in order to prove what they had not been required to prove up until now.