Corporate Residence (November, 18, 2009)
1.1"Construction Company” and "Management Company” were
incorporated in Country "A”.
1.2The companies under consideration are actively engaged in
business in Country B wherein the Construction Company is engaged in the
construction of a public facility while Management Company runs another public
1.3The companies are owned by "C”, an Israeli tax
resident who is the sole director of the companies. Half of the shares are held
by "C” in trust for "D” – his business partner, which is a
non-Israeli resident based on a legal opinion.
1.4In order to operate and run the companies, "C”
often lands in "B” and sojourns there for a few consecutive weeks.
1.5The companies have a work force active in "B” as
well as a service company in Israel with a local office employee for purchasing
equipment and recruiting personnel.
1.6The companies are liable to tax in "B”.
What are, if any, the Israeli tax
ramifications of the operations of the companies?
3.1The opinion examined the statutory provisions relevant to
the determination of the fiscal residence of a corporation. Since the companies
were incorporated outside Israel they could only be held Israeli tax residents
if the "control and management” of their businesses was in Israel. The opinion
sets forth the "do” and "don’t” recommendations to avoid Israeli residence and
stresses the need to place the "brain” of the companies outside Israel. It
therefore recommends that the Board of Directors include non-residents and that
the activities of the Israeli service company be strictly limited to purchasing
and recruiting. The opinion concludes that if implemented, its recommendations
will render the companies non-resident status.
3.2The opinion also deals with the definition of a
Controlled Foreign Company and a Foreign Vocation Company and denies their
applicability to the Companies (active business and the fact that a business
cannot, by definition, be a profession, respectively).