Israeli Tax Alerts | Practical Interpretations | 2008-2020

83 deemed sale of assets and deemed distribution of dividend has been determined, with some exceptions). 4.3 In accordance with the current provisions of the ITO, a family company may change its classification to an ordinary company via a notice to the assessment officer until the filing date of the annual tax return, and this does not prevent it from resuming its family company status in the future (there is a three year cooling-off period in force). In accordance with the Budget Law, a company that will cease to be a family company will not be able to become a family company again. (August 2013) Tax credit in Israel for branch profits taxes that were paid abroad An Israeli company that operates directly abroad, and not through a local company, may be subject to corporate tax (or equivalent taxes) for its income in a foreign country, subject to the provisions of the local tax law in that country and in accordance with the provisions of the relevant tax treaty, which usually provides for the first right of taxation when there is a permanent establishment in that foreign country. In addition to the foreign corporate tax, there may also be branch profits tax liability to the extent that this tax is imposed in that foreign country. As a rule, branch profits tax constitutes an alternative to tax on dividends that would be imposed if the activity in the foreign country had been performed through a local company. Three common options may be identified in which tax on profits distributions is imposed, whether on an annual basis or at the time of the actual distribution, in which the manner of imposition of the tax may affect the ability to credit it against the corporate tax in Israel, as set forth below: Case 1: there are countries that impose branch profit tax on foreign companies that operate in their territory (usually with the existence of a permanent establishment), such as the USA and the Philippines. According to the domestic law in the USA, for example, branch profit tax at a rate of 30% is imposed, but in accordance with the tax treaty with Israel, this rate is limited to just 12.5% (the same as the withholding tax rate apply on dividends in accordance with the treaty). We must point out that in the USA, branch profits tax is imposed each year on the profits of the branch (except for amounts that were used for reinvestment in a business under certain