The Israeli Tax Authority (ITA) recently published two interesting tax rulings, regarding the Israeli tax consequences, or lack of them, upon migration. This matters for a wandering people.  When a tax ruling is issued, other taxpayers can assume similar consequences in similar cases unless the law changes (or the facts were mis-represented).

Senior Returning Resident Ruling:

In this ruling (3331/24), an individual who moved from Israel to reside in the US over 10 years ago to conduct scientific research at a senior level at a leading US university. During that period, he enjoyed a sabbatical year in which he returned with his family to live in  Israel and conduct research at an Israeli academic institution. After the sabbatical he and his family resumed residence in the US and he returned to his post at the same US university. A few months later, he accepted an offer to take up a senior position at the Israeli academic institution. The question was whether he qualified for the Israeli tax exemption for foreign income and gains of senior returning residents by being a foreign resident for over 10 years, or did the sabbatical back in Israel ruin that exemption?

The Ruling starts by pointing out that he qualified to be treated as a foreign resident researcher during his sabbatical under Israeli tax regulations. Therefore, the Ruling concluded that he notched up 10 years of non-residence for Israeli tax purposes and qualified for the ten year exemption for senior returning residents. But his family did not qualify for the exemption as they were not researchers in his sabbatical year.

Corporate migration:

A company is a separate person in law but it is a really notional concept on paper. You don’t see companies walking down the street. So how can a notional concept migrate? Sometimes by re-registering the company in a different country, sometimes by shifting its management and control to another country.

Why would anyone want to migrate a company? One scenario is that moving an offshore company onshore may reduce anti-money laundering issues at financial institutions and official bodies. Also various OECD initiatives are starting to blunt the offshore tax advantage.

In a recent Israeli Ruling (3168/24) a foreign parent company wanted to change its residency by  migrating from one treaty country to another treaty country  i.e. between two countries that each have a tax treaty with Israel. The foreign parent company had a wholly owned Israeli resident subsidiary company.

The issue at stake: if the foreign parent company were to sell shares in the Israeli subsidiary, Israeli capital gains tax would be payable (the shares were apparently acquired before 2009). So would a migration of the parent company be considered a taxable sale of the subsidiary company’s shares?  Or would Israel’s exit tax somehow be triggered?

The Ruling concludes that moving the place of residency of the foreign parent company does not result in a taxable event regarding the shares of the Israeli subsidiary company i.e. no sale, no tax. This no-tax ruling came with conditions: (1) the cost and acquisition date of the shares of the subsidiary company remains unchanged for the purposes of any future sale of the shares of the subsidiary, and (2) if the Israeli pays any dividends, withholding tax will be due at the higher of the rates applying Israel’s tax treaties with the two treaty countries.

Comments:

The ruling seems reasonable. But it would be helpful if the Israeli tax law could be amended similarly instead of leaving the Israeli Tax Authority to decide the issue.

What happens if shareholders sell shares in the foreign parent company? That is not covered in this ruling, only migration of the parent company. But a sale if parent company shares may be considered a taxable sale of shares in the Israeli company, directly or indirectly (ITP Sec 88), unless an exemption applies under the Israeli tax law or an Israeli tax treaty.

The United States?

It is interesting to note that on June 28, 2024, the US Supreme court overturned the Chevron deference doctrine – and US courts may now need to clarify ambiguous laws instead of deferring to US federal administrative authorities (see Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce).

This raises comparable questions about the planned Israeli legal reform and the authority of Israeli governmental bodies versus the authority of the Israeli courts….

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

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(c) Leon Harris 2.7.2024