A U.S. Limited Liability Company (hereinafter: “LLC”) is a legal entity established in accordance with the legislation of many states in the U.S.A. its legal status, as well as its members’, is governed by the law of each state. For income tax purposes, however, the LLC is considered as a pass-through entity and is treated as a partnership or as a disregarded entity, as the case may be, according to the Internal Revenue Code (IRC). Hence, the LLC’s income and gains (or losses) are attributed to its members according to their share. Nevertheless, an LLC may elect to be taxed as a corporation, thus its income is liable to corporate income tax and is not attributed to the members.

Often, non U.S. tax-jurisdictions are faced with a practical need to define the LLC’s position vis a vis their own tax systems. This may be the case when an LLC conducts a business in that jurisdiction or when its own residents generate U.S. sourced income through an LLC.  Hence, it is required to decide how to tax such income. The Israeli tax authority has long been considering the tax implications of income or gains generated through an LLC. Two professional Circulars have been published on the subject. The first one established the idea that, generally, the LLC should be considered as a “Body-of-persons” and should not necessarily be treated as a pass-through entity whose income is attributed to its members (like a partnership). The second circular, however, presents Israeli members of a LLC operating in the U.S. with a practical solution to eliminate possible double taxation of the same income. The Israeli resident member may elect that his share of the LLC’s income be attributed to him. This attribution is made solely for the purpose of granting foreign tax credit on that specific income, and is not intended for any other purpose. Income so treated will retain its

character (e.g. business income or capital gain) and be reported in the member’s annual tax return. The profit will then be calculated according to Israeli tax law and domestic tax will be levied. Tax paid in the U.S.A will be credited against the Israeli tax, so situations of economic double taxation are avoided. Loss of the LLC, however, is not attributed to the member and may not off- et his other income or gains. The loss is retained in the LLC and may be off-set against its future income, subject to the general Israeli rules regarding off-setting losses; e.g. a loss generated from a business activity may be off-set against future business profits. This treatment of a pass-through entity is contingent upon the LLC being treated in the same manner for U.S tax purposes.  Unless an election is made (according to the said circular), the LLC will be treated by the Israeli tax authorities as a corporate entity and distributions there from as dividends paid to its members. We may note that this classification has not yet been debated nor decided upon by an Israeli court.