Israelis Who Raise Money in America and Own Ltd.’s in Israel: Trump Law in Common Terms

Introduction

Sometimes Israelis set up American companies to raise money to finance their Israeli Ltd.’s here in Eretz Yisrael to operate and perform globally. If those Israeli Ltd.’s are owned by the American company, or if those Israeli Ltd.’s are owned by someone with American tax reporting responsibilities, in 2017 the American tax laws started becoming more stringent about American taxpayers (both people and companies) who own Israeli Ltd.’s. This includes American businesses that are set up to raise money for Israel.

The American tax reports for those American companies and people who report to America who own Israeli Ltd.’s became more stringent and much care is now warranted and required by your CPA to perform the work. If you are an American citizen, or ever had a green card or permanent resident visa to America and you own an Israeli Ltd. or other business it is very important to now use a CPA you trust and find very helpful. We are happy to help you.

One way to avoid these more stringent American tax reporting requirements for American companies and people who own Israeli Ltd.’s is to file consolidated tax reports with the Israeli Ltd. income and expenses shown also on the American tax reports. This is not always the best choice, because if you do this you will be reporting all the Israeli Ltd. revenues to America also. As a consolidated report you may be liable for American income tax even though you already report to Eretz Yisrael.

Treaty Help

The treaty between Eretz Yisrael and America protects us from being double charged between all American income tax and Israeli income tax and Ltd. taxes. There are other provisions. When an American company raises money for its own Israeli Ltd., the treaty provides a restriction that the income is taxed in America only where the company has permanent establishment. Keep in mind that financing a company and raising capital is not income.

The treaty between us provides tax to be levied on the Ltd. in the location where the company is located, which is here in Eretz Yisrael. The company’s presence in America is be exempt from income tax in America unless the company “has a permanent establishment” in America. What is a permanent establishment in America? That has to be evaluated carefully by your competent certified public accounting professional with your circumstances in mind. In that case, American tax is to be charged on the company to the extent where the income is effectively connected to the American aspect of the business. The law writes,

To determine whether income is effectively connected with a
permanent establishment, the factors taken into account shall
include whether the rights or property giving rise to such income
are used in or held for use in carrying on an activity giving rise to
industrial or commercial profits through such permanent establish-
ment and whether the activities carried on through such permanent
establishment were a material factor in the realization of such income.
For this purpose, due regard shall be given to whether or not such
property or rights or such income were accounted for through such
permanent establishment.

We have to be very careful if the client is an American citizen or ever had a green card or permanent resident visa, because as you do business in Eretz Yisrael America follows you. Without a competent CPA, you may have income tax obligations in America in addition to the Ltd. income tax that was already accrued or paid for you in Eretz Yisrael.

Trump Law in Common Terms

Some people know new American tax reporting rules as “Trump Law,” but we here at Weinstein know them as controlled ‘foreign’ corporation laws and ‘foreign’ reporting rules. When considering Americans or American businesses who own 10% or more of the Israeli Ltd, and counting close relatives together to make that threshold, an Israeli Ltd. who is 50% owned by American citizens, residents or companies is a controlled ‘foreign’ corporation. These controlled ‘foreign’ corporation laws you should know require the Ltd.’s income reported to America. This does not mean your Ltd. has to pay American taxes. Your competent CPA can help you determine if you have to pay American taxes, and how to best portion your businesses and personal assets so you don’t expose yourself to much to unnecessary obligations.

Having us prepare your controlled ‘foreign’ corporation documents is not the same as filing a consolidated report of your Israeli operations to America. The calculations Weinstein will provide are Subpart F income, which can be rent, financial income, or sales to any related party among other things. Weinstein will also provide computations of your GILTI (global intangible low taxed income) which is income tax over a certain percentage of fixed assets. There may be more taxes due in some instances, but if you’re careful you can portion your assets so the tax rate is lower than the American corporate rate of 21%. Loans you take out we record if you are named as a shareholder. They may have to be reported. We will measure American effectively connected income, but when you don’t have that you may be best to withhold 30% (or less with a treaty provision) of your FDAP (fixed or determinable annual or periodic income) and pay that to America to avoid having to file a tax return. Sometimes paying a small amount is better than avoiding responsibilities, because then later the amount becomes larger and larger. We here at Weinstein want to help you avoid that.

These tax calculations are not simple, and where there is a new tax levied there may also be a great new deduction or credit to help you offset your obligation. We work very hard to keep you compliant and happy. So please let Weinstein help you decide if you have a controlled ‘foreign’ corporation. If your company in America owns an Israeli Ltd. or if you are an American citizen or permanent lawful resident of America who works in Eretz Israel you probably have American reporting requirements. Weinstein can advise you on these and other questions you may have.

** None of the foregoing should be taken verbatim as tax advice to any particular situation, or applied without a CPA’s advice on the particulars. Clients and those who want specific advice are encouraged to provide documents revealing the source and nature of income, cash flows, and financing to Weinstein or any other accountant so that those documents may be carefully looked at to provide competent advice tailored to your particular situation. **