Many Israelis establish companies in the United States for business activity, sales to U.S. customers, raising capital, hiring employees, working with suppliers, or creating a local commercial presence.
When the shareholders are Israeli residents, part of the management is carried out from Israel, or there is also an Israeli company operating alongside the U.S. company, the tax implications in both countries should be examined.
Alongside U.S. law, it is important to review the ownership structure, management, cross-border transfers, and Israeli tax and reporting obligations in advance
Corporate Tax Residency and Control and Management
A company incorporated in the United States is not necessarily disconnected from the Israeli tax system.
Under Israeli law, the place of incorporation is only one of the factors used to determine a company’s tax residency. A company incorporated outside Israel may be considered an Israeli tax resident if the control and management of its business are exercised from Israel.
In cases where the company’s owners reside in Israel and are involved in day-to-day management, it is necessary to examine, among other things, where the material decisions are made, who actually manages the activity, and where the key management functions are performed.
Classifying the company as an Israeli tax resident may have broad implications for its tax liability in Israel and for its reporting obligations. Even if the company is not considered an Israeli tax resident, there may still be tax implications in Israel where part of the activity is carried out in Israel or where employees or service providers are engaged in Israel.
Ownership Structure of the U.S. Company
One of the important decisions is who will hold the U.S. company.
In some cases, an Israeli resident will hold the company directly. In other cases, the U.S. company will be held through an Israeli company or as part of a broader group structure.
The ownership structure may affect the taxation of profits, dividend distributions, withholding tax, bringing in investors, financing the activity, and the tax implications in the event of a sale or restructuring.
There is no single structure that suits every activity. The ownership structure should be tailored to the nature of the activity, the identity of the shareholders, the expected distribution of profits, and the company’s future business plans.
Transferring Funds from the United States to Israel
The way funds are transferred between the U.S. company and its shareholders or related companies in Israel is of material importance.
An Israeli shareholder may receive salary or dividends from the company. An Israeli company may provide the U.S. company with management, development, marketing, or other services. In other cases, there may be loans, expense reimbursements, or other types of payments between the parties. Each type of payment may be treated differently for tax purposes.
It is necessary to examine the tax that applies in the United States, withholding tax, taxation in Israel, the possibility of obtaining a credit for tax paid in the United States, and the provisions of the tax treaty between Israel and the United States.
When ongoing activity is involved, it is advisable to regulate the manner in which funds are transferred in advance, rather than relying on ad hoc decisions during the year.
Activity of an Israeli Company with a U.S. Company
In many structures, the U.S. company operates alongside an Israeli company.
For example, the U.S. company may contract with customers and collect revenues, while development, marketing, management, or other services are performed in Israel. In such a case, it is necessary to determine how the revenues and profits will be allocated between the companies.
Transactions between related companies are subject to transfer pricing rules and must be conducted in accordance with market terms. The analysis considers, among other things, the functions performed by each party, the assets used by each party, the risks borne by each party, and each party’s economic contribution to the activity.
This issue is relevant, among other things, to management services, software development, marketing, financing, use of intellectual property, and expense reimbursements. Where there is material activity between the companies, it is also important to regulate the agreements and maintain supporting documentation for the pricing method.
Click here to contact the Transfer Pricing Department of Nimrod Yaron & Co.
LLC and the Impact of Classification in Israel
A Limited Liability Company (LLC) is a common structure for business activity in the United States, and it is sometimes treated as transparent for U.S. federal tax purposes. However, the treatment in Israel is not necessarily the same as the U.S. classification.
A mismatch between the classification of the same entity in the two countries may affect the timing of the tax charge, the identity of the taxpayer, and the ability to obtain a credit for tax paid in the United States.
Therefore, when an Israeli resident holds an LLC, it is important to examine the treatment in Israel in advance and not rely solely on the classification in the United States.
For more information about the differences between a C-Corp, LLC, and S-Corp, you can read our article on operating in the United States through different types of entities.
The Tax Treaty Between Israel and the United States
The tax treaty between Israel and the United States affects many cases of cross-border activity. The treaty includes provisions on matters such as residency, permanent establishment, business profits, dividends, interest, and royalties, and may affect the allocation of taxing rights between the countries and withholding tax rates.
However, the domestic law of each country and the classification of the entity and the income must first be examined. Only then can it be determined how the treaty provisions apply to the specific case.
This is especially important where there are differences between the Israeli and U.S. classification of the same entity or the same income.
To read the treaty, click here.
Obligations of the Israeli Shareholder
When an Israeli resident holds a U.S. company, their reporting and tax obligations in Israel should also be examined
In some cases, holding a foreign company requires reporting as part of the annual tax return in Israel. Depending on the company structure, the ownership percentage, and the type of income, additional provisions under Israeli law relating to the holding of foreign entities may also be relevant.
Therefore, even when the profit remains in the U.S. company and is not distributed to the shareholder, it is necessary to check whether there is a reporting obligation or a tax implication in Israel.
U.S. Estate Tax
In some cases, U.S. estate tax should also be taken into account. This issue may be relevant when an Israeli resident directly holds U.S. assets or rights, particularly where significant investments or family and intergenerational transfer planning are involved.
Therefore, when choosing the ownership structure, it is advisable to examine the long-term implications as well, and not only the ongoing tax position.
What Should Be Checked Before Establishing the Company?
Before establishing an Israeli-owned U.S. company, it is advisable to examine, among other things:
- Who will be the shareholder of the company
- Where the activity will actually be carried out
- Who will manage the company and from where
- Whether there is also an Israeli company
- What services will be provided between the companies
- How the activity will be financed
- How profits or payments will be transferred to Israel
- Whether investors or fundraising are expected
- What tax and reporting obligations will apply in each country
Choosing the type of entity, including an LLC or C-Corp, is part of the overall picture. After the company is established, there are also ongoing obligations in the United States, including filings, payments, and maintenance requirements. For more information, you can read our article on opening a company in the United States and the obligations to be aware of after incorporation.
Tax Support in Israel and the United States
When the activity spans Israel and the United States, both tax systems should be examined as part of the same picture.
A structure that is suitable for U.S. tax purposes may create implications in Israel, and vice versa. It is therefore important to examine in advance the ownership structure, the way the activity between the companies is conducted, and the way funds move between the countries.
At Tax Link, we advise Israelis and companies with activity in the United States, from the stage of planning the structure and setting up the activity through to ongoing reporting in Israel and the United States.
To contact our experts, click here
Frequently Asked Questions
Is an Israeli-owned U.S. company subject to tax in Israel?
Not necessarily, but incorporation in the United States does not prevent tax liability in Israel. It is necessary to examine, among other things, where management is actually carried out, whether there is activity in Israel, who the shareholders are, and the nature of the income.
Is a U.S. LLC also treated as transparent in Israel?
Not necessarily. An LLC may be treated as transparent for U.S. tax purposes, but its classification in Israel may be different. A mismatch between the classifications may have implications for the timing of the tax charge, the identity of the taxpayer, and the credit for foreign tax.
Is it preferable to hold a U.S. company personally or through an Israeli company?
There is no single answer. The ownership structure depends, among other things, on the nature of the activity, the expected distribution of profits, fundraising from investors, financing of the activity, and future plans for a sale or restructuring.
Can funds be transferred from the U.S. company to Israel in any way?
Funds can be transferred in various ways, such as salary, dividends, payment for services, expense reimbursement, or a loan, but each method may have different tax implications in Israel and in the United States.
When are transfer pricing rules relevant?
Transfer pricing rules are relevant where there are transactions between related parties, for example between an Israeli company and a U.S. company in the same group of companies. In such cases, it is necessary to examine whether the prices and terms between the parties are consistent with market terms.
Does the tax treaty between Israel and the United States prevent double taxation?
The treaty can reduce situations of double taxation and affect withholding tax and the allocation of taxing rights between the countries, but it does not resolve every mismatch between the tax systems. Each case should be examined under Israeli law, U.S. law, and the provisions of the treaty.
Is there a reporting obligation in Israel even if the profit remains in the U.S. company?
Possibly. Depending on the company structure, the ownership percentage, and the nature of the income, reporting obligations and even additional tax provisions in Israel may apply, even where the profit has not actually been distributed to the shareholder.
Can U.S. estate tax be relevant to Israelis?
Yes, in some cases. When an Israeli resident directly holds U.S. assets or rights, questions of U.S. estate tax may also arise.
When should tax planning be carried out before establishing a company in the United States?
It is advisable to carry out the review before incorporation or before significant activity begins. At that stage, it is possible to examine the ownership structure, the type of entity, the manner of management, the flow of funds, and the relationship between the activity in Israel and in the United States.
