Leon Harris

Forms are important and should be respected. Sometimes legislation drives the forms, sometimes they drive the law by stretching its meaning. There is no shortage of Israeli tax forms. As it is the tax return season, we discuss below two forms which usually take far longer than expected to complete and don’t really say what they mean to say.

Form 150 – Foreign Companies

Form 150 is entitled “Declaration of a Holding in a Foreign Resident Entity Held Directly or Indirectly – Annex to Annual Tax Return”. In fact, it targets various types of offshore companies.

Form 150 was recently amended with no fanfare. Below we review what the Israeli Tax Authority (ITA) now want. The footnotes explain that the form is intended for Israeli residents that are major shareholders in a foreign resident entity, Israeli residents that hold rights in a foreign resident entity whose rights are not traded on a stock exchange, and anyone the Assessing Officer requests “that they do so” (presumably file the form).

Both Israeli resident individuals and entities (i.e. companies) must file the Form 150 in applicable cases according to the form. A foreign resident entity is stated to be one incorporated and controlled and managed abroad

As for a foreign company held indirectly (usually via another entity), reporting is required on the form by an Israeli resident that holds 10% or more of any means of control as defined in Section 88 of the Income Tax Ordinance. This appears to mean a simple multiplication exercise. If Moshe, who lives in Tel-Aviv, holds 30% of Company A in the USA which holds 30% of Company B in the USA, Moshe holds 30% of Company A and 9% of Company B (=30% X 30%). Neither company  in this example is publicly traded on a stock exchange. So Moshe must report Company A but apparently not Company B on Form 150.

The old Form 150 didn’t spell out the 10% threshold for indirect holdings. So the new form provides a welcome clarification, we just don’t know when from. We suggest using the new Form 150 for all open tax years.

What needs reporting on Form 150?

Form 150 requires disclosure of various identifying details of the foreign entity and the taxpayer’s holding in it. In the first year of reporting a holding, the incorporation certificate is requested  – we suggest providing a copy – it is not clear if such a copy should be certified by an Israeli or foreign lawyer or by no lawyer….

The Form asks whether the entity is transparent (a flow-through) in its country of residence – a “Yes” will generally be required for US LLCs and S Corporations.

Then the Form asks two difficult questions. Is the foreign entity a controlled foreign corporation (CFC) as defined in Section 75B of the Income Tax Ordinance (ITO), or a foreign professional corporation (FPC).

In brief, a CFC is essentially foreign resident entity for which all the following:

• Less than 30% of its shares or other rights are listed on a stock exchange;
• The majority of its income or profits are passive;
• The passive income is taxed at 15% or less;
• Israeli residents control over 50% of any means of control, or 40% if the holding of an overseas relative would take that control over 50%, OR an Israeli resident has veto rights with respect to material management decisions, including decisions regarding the distribution of dividends or liquidation;

An FPC is not defined on the Form but you will find the definition in ITO Section 75B1. A company is considered to be an FPC if a company meets all of the following conditions:

• . it has five or fewer individual shareholders;
• . it is owned 75 per cent or more by Israeli residents;
• . most of its 10 per cent or more shareholders or their relatives conduct a special profession for the company; and
• . most of its income or profits are derived from a special profession.

The special professions include engineering, management, technical advice, financial advice, agency, law, medicine and many others.

CFC and FPC companies are important, because their Israeli resident shareholders may need to pay Israeli tax, generally at rates of 25% – 32% on deemed dividends according to a detailed body of rules in the Israeli tax law

Comments on Form 150:

A major failing of Form 150 is that it makes no mention of Olim. The tax law provides a ten year exemption from all Israeli tax and reporting relating to CFCs and FPCs for “new residents” and “senior returning residents” (who lived abroad 10 years) who became residents or after January 1, 2007. Briefly, a resident is someone whose center of living is in Israel.

Also, it is not clear when the ITA amended Form 150 or whether the changes have retroactive effect.

Furthermore, is unclear whether foreign partnerships need to be reported – are they entities?

Many other points of detail are  not clarified on Form 150. In practice, specialist advice is needed.

Form 1385 – Transfer Pricing:

Form 1385 is entitled “Declaration Regarding International Transactions as Defined in ITO Section 85A”. If you go to that section you will find it contains Israel’s transfer pricing rules. Therefore, Form 1385 is must be filed by any taxpayer doing international transactions with related parties, which includes parties where one holds 50% or more of any means of control over the other, or parties under common control to the same extent.

The form requires a description of a related party transaction in a small box on the form, and signature on an innocuous declaration: “I hereby declare that the transaction with related parties abroad is on market terms as defined in ITO Section 85A and related regulations”.

Comments on Form 1385:

Form 1385 does not say who has to fill it in nor who has to sign it. Most multinationals do many related party transactions every year, but there is space on the form for one, with no explanation. In practice, a transfer pricing study is needed according to detailed rules in the Israeli tax regulations. These are similar but not identical to Section 482 of the US Internal Revenue Code and the OECD Transfer Pricing Guidelines.

Transfer pricing is one of the hottest topics in international tax at present, and the OECD is working on proposals for curtailing perceived abuses in this area. Specialist advice is again is needed.

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

The above is a brief summary only. As always, consult experienced tax advisors in each country at an early stage in specific cases.