Israeli Tax Alerts | Practical Interpretations | 2008-2020

84 conditions). We must also point out that in many cases, including in the absence of a permanent establishment in the USA (such as passive possession of real estate), a foreign company would opt for tax liability as though it were a permanent establishment (instead of being subject to the high rate of the withholding tax) and therefore will be liable for branch profits tax. In effect, branch profits tax is considered to be a second tier of the U.S. corporate tax that is imposed on activity in the USA. In view of this, it is our position that branch profits tax that is paid in the USA will be credited against the Israeli corporate tax. Case 2: In certain countries, it is common practice to impose on a foreign company, a corporate tax at a higher rate than the corporate tax imposed on a local company. In Congo, for example, the corporate tax that is imposed on a foreign company that operates in its territory is at the rate of 35%, compared to the rate of 30% that is imposed on a local company. The difference in the corporate tax rate that is imposed on a foreign company compared to a local company effectively constitutes an alternative to branch profits tax. However, in our opinion, regarding the right to receive foreign company tax credit, there is no doubt that this tax is fully credited against the corporate tax in Israel, including the transfer of credit surpluses to upcoming years in accordance with the provisions of the Israeli income tax ordinance (hereinafter: "the ITO "). Case 3: There are countries that impose tax on the distribution of profits that are classified as dividends to all intents and purposes, even when these profits are not classified as dividends in the recipient country of residency. For example, in Spain, the distribution of profits by a local partnership to an Israeli company will be subject to a withholding tax as though they were dividends, whereas in Israel, these profits distributions are not classified as dividends income, due to the transparency regime that applies to partnerships. Thus, it may be argued that the Spanish tax on profits distribution cannot be credited in Israel because the profits distribution is not classified as a distribution of dividends in Israel. It is our opinion this tax should be considered as part of the Spanish corporate tax, because its similar nature to the branch profits tax that applies to the profits of the Israeli company through the partnership (similar to our position concerning branch profits tax in the USA). In order to enjoy the foreign tax credit in the year the income was derived and its taxation in Israel, the Israeli company must be kept to the statutory time limit for payment of the foreign tax – no later than twenty- four months after the end of the year in which the income from the partnership was taxable in Israel – and in effect it must make sure that the profits of the partnership are distributed during that period.