Amendment 168 to the ITA was designed mainly to absorb immigration to Israel; to bring back human capital and to encourage financially capable investors to become Israeli residents.

Within this amendment different provisions were added “to preserve the new immigrants and\or veteran residents (hereinafter: “beneficiary individuals“) rights so they will be considered as if they remained foreign residents for a period of 10 years” (see amendment commentaries). Example to this can be found in the control and management rules, the CFC rules, the FVC Rules, the Trust and Foundation chapter etc’.

however, it seems that amendment 168 skipped provision 68a, referring to a foreign resident body of persons that will not be entitled to any tax benefit, relief or exemption, for being a foreign resident, if an Israeli resident has control shareholding or is considered as a beneficiary, directly or indirectly, of 25% or more of the foreign resident body of persons income or profit. Beneficiary individuals were not excluded in this provision; hence an undesirable outcome occurs in which the rights of a foreign company that is held by a beneficiary individual are being denied. We believe that this situation represents a lacuna in the law and as such, may have significant implications on other provisions in the ordinance as we show in the following situations. Note that the situations mentioned herein may apply only in countries where Israel did not sign on a tax treaty (i.e. Australia, New Zealand, Cyprus etc’). In the event that a tax treaty exists between Israel and the other country, we believe that the treaty provisions will overcome provision 68a:

1. An individual that holds shares in an Israeli company through a foreign company arrives to Israel and is considered as a beneficiary individual. When selling the shares of the Israeli company, the foreign company will be denied from the exemption benefit due to provision 68a to the ordinance, as mentioned above. This exemption benefit would have been given to the individual if he had remained a foreign resident. It should be also noted that the benefit is given to the beneficiary individual but not to the foreign company held by this beneficiary individual.

2. A foreign resident with a foreign company that holds an Israeli participating exemption company. The foreign company will be subject to a limited tax rate of only 5% when receiving dividends from the Israeli company. However, when the foreign resident becomes a beneficiary individual, the foreign company will be subject to the regular Israeli tax rates of 20%-25% and even to a deemed dividend.

A solution to these problems may be found by transferring the foreign company to a family company, so that its income, including the profit from the realization of the Israeli company’s shares, would be attributed to the beneficiary individual. This way, to our opinion, the individual will be entitled to the exemption, assuming that the shares are not quoted (this, inter alia, in light of the ITA’s latest position that it is possible to attribute the family company’s beneficiaries the benefits given to a new immigrant, who is considered as a beneficiary individual (see tax decision No. 1010/09).