A few weeks ago, a verdict was handed down in the District Court in the matter of Yanco-Weiss Holdings (Tax Petition 1090-06) on the subject of the “Management & Control” criterion as a parameter for determination of the residency of a company. A similar verdict (the “Niago” case) was handed down about two years ago. It appears that the trend whereby the legal means for attacking (aggressive) tax planning that relies on an argument of foreign residency of a company, through a factual determination whereby the “Management & Control” of the business affairs is conducted in Israel, is continuing. Like the “Niago” case, here too, the extreme circumstances of the case of tax avoidance led the way to the inevitable ruling of the Court.

This was a case of an Israeli company with an activity in Israel and holdings in Israeli companies, when prior to the sale of one of its subsidiaries, the company made moves to change its residency for tax purposes, including its registration at the Company’s Registrar in Belgium, and also started to establish activity of acquisition of real estate properties there. The argument of the company was that at the time of the sale of the shares, it was a resident of Belgium for tax purposes and is therefore exempt from tax according to the provisions of the tax treaty between Israel and Belgium.

It shall be noted that from 2003, an “Exit Tax” was imposed in the ITO, so that in a similar case, if it were to apply today, it will be argued that as a result of the exit tax, there is no exemption from tax in the sale of shares (at least not a full exemption).

Examining the circumstances of the specific case revealed that the management personnel in Belgium was not significantly strong, authoritative and involved in the details of the financial activity of the company. According to the judge, today’s technology reasonably facilitates the management of a company by “remote control”, meaning that the level that is required for proving the opposite is more difficult. However, it was stated that the management by Israeli shareholders or managers could be done from outside of Israel, or in part in Israel too, as long as the main part of the management apparatus is located overseas.

In any case, on this matter, in view of the exceptional circumstances of the case, in Mutual Agreement Procedures that were conducted between the two states, the Belgian competent Authority consented to recognize that it was an Israeli resident company pursuant to the rule of effective place of management.