Controlled Foreign Company and Foreign Professional Company: When a Foreign Company's Profits Are Taxed in Israel as a Deemed Dividend

Many Israelis today hold a company abroad: a company in Cyprus holding investments, a company in Romania carrying out a project, or a US company through which an Israeli founder sells consulting services to clients around the world. The common assumption is that as long as the money stays in the foreign company, there is no tax in Israel. That assumption is correct in principle, but the Income Tax Ordinance contains three mechanisms that override it in certain situations.

This guide explains the conditions of each mechanism according to the text of the Ordinance, and the warning signs worth identifying early. It does not calculate tax for a specific case: the calculation and the reporting are done with an Israeli accountant or tax adviser, because the result depends on the data, the year and the treaty. Investors in a foreign project company will find further detail in the tax guide for an Israeli investor in a foreign project company.

1When are a foreign company's profits taxed in Israel before a dividend is distributed?

In three situations: when the company is a controlled foreign company, when it is a foreign professional company, and when it is treated as an Israeli resident altogether because it is managed from here. In the first two the company remains foreign, and the Israeli controlling shareholder is taxed on a "deemed dividend", that is, as if it had received its share of the profits. In the third, the company itself is liable to tax in Israel.

2What is a controlled foreign company under section 75B?

A controlled foreign company is a non-resident body of persons in which all of the following conditions are met, according to the text of the section we reviewed (as of November 2026). It is enough that one of them is not met for the section not to apply in that year:

1. Not traded, or traded only in a small part: the shares are not listed for trading, or less than 30% of them have been issued to the public or listed for trading.
2. Passive income: most of the income in the tax year is passive income, or most of the profits derive from it.
3. Low foreign tax: the tax rate that applied to the passive income abroad does not exceed 15%.
4. Israeli control: more than 50% of one or more of the means of control are held, directly or indirectly, by Israeli residents; or more than 40% by Israeli residents who, together with a non-resident relative, hold more than 50%; or an Israeli resident has the right to prevent material management decisions, including the distribution of a dividend or liquidation. The test is examined at the end of the tax year, or on any day in the year and any day in the following year.

Passive income under the section includes interest and linkage differentials, dividends, royalties, rent and consideration from the sale of an asset not used in a business, as well as consideration from the sale of securities under the conditions in the section. The important exclusion: income that, had it been produced in Israel, would have been treated as income from a business or occupation is not passive, subject to exceptions. In other words, a company with real business activity generally does not meet the passive income condition. A dividend originating in income taxed at a foreign rate above 15%, from a company held at the percentage set in the section, is not counted as passive income.

A controlling shareholder is an Israeli resident who holds, directly or indirectly, alone or together with another, at least 10% of any of the means of control. "Together with another" includes a relative, and also another Israeli resident with whom there is permanent cooperation under an agreement on material matters of the company. Such a controlling shareholder is treated as having received as a dividend its proportionate share of the "undistributed profits", that is, of the year's profits from passive income that were not distributed, after deducting taxes and losses as provided in the section.

3What is a foreign professional company under section 75B1?

A foreign professional company is a foreign company whose Israeli owners personally work for it in their profession, and most of whose income comes from that work. The section is intended to prevent a situation in which an Israeli consultant, engineer or programmer "moves" their income to a company abroad. According to the text of the section, all of the following must be met:

1. The company is a non-resident body of persons, and if it is a company, it is a closely held company within the meaning of section 76(a) of the Ordinance.
2. 75% or more of one or more of the means of control are held, directly or indirectly, by individuals resident in Israel. Holdings of a new immigrant or senior returning resident in the first ten years are not counted.
3. The controlling shareholders or their relatives, who together or separately hold 50% or more of any of the means of control, engage on behalf of the company in a special occupation, personally or through a company in which they hold at least 50%.
4. Most of the company's income or profits in the tax year derive from a special occupation.

Special occupation is defined in the Income Tax Order (Determination of Special Occupation), 5763-2003, provided that the main income is not from the sale of inventory. The list is broad, and includes among others: consulting in many fields (financial, technical, engineering, management, business, tax and more), engineering, architecture, computer programming, management (including management of companies, investments and assets), law, accountancy, medicine, appraisal, brokerage, advertising and public relations, scientific research and development, teaching and lecturing, translation, journalism and photography.

When the conditions are met, an Israeli-resident shareholder who is a controlling shareholder is treated as having received as a dividend its proportionate share of the profits from the special occupation produced outside Israel, and under the section the tax rate set in section 126(a), that is, the corporate tax rate, applies to it. Foreign corporate tax paid by the company is credited, up to the amount of the Israeli tax. A shareholder who is not a controlling shareholder is taxed only when a dividend is actually paid to it. When an actual dividend is later distributed, there is a special mechanism preventing double taxation, and a cap on the cumulative tax rate.

4When is a company incorporated abroad treated as an Israeli company?

When control and management of its business are exercised in Israel. Under section 1 of the Ordinance, a body of persons is an Israeli resident if it was incorporated in Israel, or if control and management of its business are exercised in Israel. The implication: a company in Cyprus, Romania or the US whose decisions are all actually made in Israel may be treated as an Israeli company, and then it is liable to corporate tax in Israel on its income.

The test is factual. The Israel Tax Authority published Income Tax Circular 4/2002 on the subject, and in 2016 a supplement to the circular reviewing case law on the matter. The central question is where the company's business policy is set and where strategic decisions are made. The PwC tax summary (reviewed in June 2026) notes that there is no statutory definition of this, and that the question is examined on the merits of each case.

• Where the directors sit and who actually makes the decisions: a local director who signs decisions made in Israel does not move management abroad.
• Where board meetings take place and what is documented in them: minutes, the place of the meeting and the identity of the participants.
• Who approves transactions, budgets, fundraising and material engagements, and from which country.
• Who operates the bank account and who is the authorized signatory.
• Correspondence and documents: emails, instructions and decisions sent from Israel can indicate the place of management.

When a company is treated as resident in two countries, most tax treaties include a tie-breaker rule, so it is important to check the relevant treaty. See the guide to Israel's tax treaties. According to the text, there is an exception for a company managed from Israel by a new immigrant or senior returning resident in the first ten years, under the conditions in the section, and the assessing officer may require it to file reports under section 135A1. Anyone moving abroad and leaving a company in Israel will find the reverse side in the guide to relocating with an Israeli company.

5Which situations raise a question mark?

The table presents common situations and the question worth checking in each. It does not determine an outcome, because each case is examined on its facts and for each tax year separately.

6What must be reported to the Israel Tax Authority?

A controlling shareholder in a controlled foreign company or a foreign professional company must file an annual return, under section 131(a)(5c) of the Ordinance, even if it has no other income. A controlling shareholder in a foreign professional company must attach to the return audited financial statements of the company, prepared under generally accepted accounting principles in Israel, and if the company files a return in a treaty country, also a tax return under the laws of that country (section 131(c2)).

• Form 150: an annex to the annual return declaring a holding in a non-resident body of persons. The exact threshold and how to complete it follow the Israel Tax Authority's instructions for that year.
• Calculating the deemed dividend: done on the basis of the foreign company's financial statements, so orderly annual financial information must be received from the company on time.
• Foreign tax certificates: without evidence of corporate tax or withholding paid abroad, it is difficult to claim a credit.
• Documenting the place of management: minutes and resolutions showing where decisions were made, if it is claimed that the company is managed abroad.

On the general reporting obligations of an Israeli holding assets abroad see the guide to the Israeli side of an asset abroad, and on comparing countries for forming a company see the comparison of 8 countries. A foreign company employing a remote employee or selling to customers in the European Union will also face questions of permanent establishment and of VAT on services to customers abroad.

7What to check before forming or holding a company abroad?

1. Who holds the shares, directly and indirectly, and what the holding percentage of Israeli residents is, including relatives and partners with an agreement.
2. What type of income is expected each year: passive, business or from a special occupation.
3. Who actually works for the company, and whether they are the Israeli shareholders themselves.
4. What the effective foreign tax rate is on each type of income.
5. Where decisions will be made, who the directors are and who operates the bank account.
6. What the tax treaty with the company's country provides, if there is one.
7. How the financial statements and tax certificates required for the annual return in Israel will be obtained from the company.

8What we review and how we accompany it together with the accountant

Before forming a company abroad, or when an existing company changes its activity or owners, it is worth reviewing the holding structure, the incorporation documents, the shareholders' agreement and how decisions are made. We work on the legal side: the holding structure, the founders' and shareholders' agreements, appointing directors and documenting management, in coordination with local lawyers in the company's country. The tax classification, the calculation of the deemed dividend and the reporting to the Israel Tax Authority are done by your Israeli accountant or tax adviser, and we work with them so that the legal documents reflect what was decided.

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