One of the suspected tax planning methods that the Israeli government doesn't like is for those investing overseas to form a company on a tax haven to hold the investments. The thinking would be to hold the investments within the company without withdrawing any funds, and thereby not pay any Israeli tax on the income until funds are needed.
As such, the tax law includes a section on Controlled Foreign Companies (CFC), whereby the Israeli shareholders are deemed to have received a dividend based on their share of the profits of the company, even if they didn't actually receive them.
A CFC is defined as follows:
1. A company resident outside Israel (see here for more), where the tax rate in the country if residence is no more than 15% (from 2014. It was 20% previously).
2. The majority of the income of the company is from passive income (interest, dividends, royalties, property, capital gains), or is based on such income - this prevents a holding company being used to get round the problem.
3. The company is a private company, or no more than 30% of the shares are available to the public.
4. More than 50% of the control of the companies are held by Israelis. This needs to hold true either on 31st December or on at least one day of the tax year and one day of the following tax year. For these purposes, people within their 10-year exemption period do not count as Israelis.
There are rules regarding ownership via a string of holding companies, which are too complicated for the purposes of this blog. Suffice to say that you should take advice if necessary.
If the country in which the company is resident taxes dividends, you can get a tax credit for taxes that will be paid (in the future) on the undistributed profits which are currently being taxed.
It should be noted that the profits under discussion are those profits made from passive income after deduction of any (corporate) taxes due on the income as well as after offsetting any losses that may have accrued in the past or in the relevant tax year.