The hope of increasing their market and plenty of possible collaborations encourage many Israeli companies to move or expand their operations to the United States. Operating using an Israeli company, as opposed to a local subsidiary, may have many advantages, but also quite a few disadvantages. In the following article, we will elaborate more about the Foreign corporate tax.
In order to maximize your company’s profits, you should have strict tax planning that will take into account the specific circumstances of your activity and will help you establish an optimal structure for investment.
Foreign company – What is it?
Company
In American law, there are a few possible types of local associations (a company, a transparent company for tax purposes, a limited liability company, a partnership, etc.). However, when it comes to a “foreign company”, only an association (the Israeli equivalent of C-CORP), which originates not in the United States, will be considered for that matter a foreign company.
This means that when referring to a foreign company, other types of associations such as a partnership or a limited collateral company do not count as such, but only as an association. Such a company is an association for the purpose of making profits held by shareholders through shares that reflect their share of the company, and which is a legal entity separate from its owners.
Foreign
The American law examines the laws according to which the company incorporated, as stated in its incorporation documents (e.g., the company’s terms). There is no relevance to management and control tests for determining the company’s foreignness.
Foreign corporate tax – How is it work
Reporting obligations
A foreign company that generates income originating within the United States must file a report to the U.S. Internal Revenue Administration. The report will address the company’s income within the United States and will be made using Form F-1120. In the form, the company will report its revenues, profits, expenses, deductions, and credits.
Taxation of foreign companies – deducting tax
In order to prevent the evasion of income and tax by foreign entities (whether individuals or companies), U.S. Law requires foreigners to deduct tax from its source. According to the obligation, the income of a foreign entity originating in the United States requires the entity to act as an “agent” of the U.S. Tax Authority and to deduct from the original tax an income at a rate of 30%.
In this way, it is guaranteed that the foreign entity, in our case the foreign company, will submit its annual tax report and will be liable for its tax obligations. Their activity will be taxed in accordance with the rules applicable to it, and they will be able to request a refund for the tax surplus if such a surplus exists.
It should be noted that in light of the double taxation treaty signed by Israel and the United States, certain revenues will be tax deductible at source. Therefore, correct classification of the type of income by a qualified tax consultant may prevent deducting tax at the source.
Capital gains
The income of foreign companies generated within the United States will be taxed, like local companies, with a corporate tax of 21%. Unlike an L.L.C, local individuals and companies, a foreign company will not benefit from capital tax rate benefits for assets held for more than a year.
It should be noted that, like in the case of local companies, the taxation contains two stages: corporate tax on income, and a dividend tax when distributing profits. While corporate tax applies to the company, the dividend tax applies to the dividend recipient.
Branch tax
In the case of a foreign company, when the dividend is distributed (which is to foreign entities), the US Tax Authority will not benefit from collecting the dividend tax. Therefore, in an attempt to compare the situation of foreign companies to those local, foreign companies were subjected to an additional tax, the branch tax.
Thus, a foreign company is exposed to branch tax liability on the company’s profits transferred by the shareholder outside the United States. The branch tax rate is 30%, but by using the Tax Treaty between Israel and the United States, the rate can be reduced to only 12.5%.
Estate tax
An estate tax is a tax that applies to the transfer of the value of a person’s assets at the time of his death. The tax applies to the deceased’s heirs, and its rate in the United States relative to foreign nationals is skyrocketing: 35% for any value of assets over $60,000.
However, since the shares of a foreign company are under American law an asset outside the United States, the estate tax does not apply to them. This means that the foreign company provides legal protection against the applicability of the tax – even in the investor’s death, his share of the company will not be subject to estate tax.
Israeli taxation on Israeli companies operating in the United States
Israeli companies operating in the United States are also taxable in Israel for their income generated in the United States. According to the double taxation treaty signed between Israel and the United States, the company must be taxed at the highest tax rate.
In practice, this means that the company will pay corporation tax in the United States at a rate of 21%, and in Israel, it will add an additional 4% payment to supplement to a tax rate of 25%. Moreover, when the dividend is distributed, an additional tax will be levied on each of the recipients of the dividend.
Concluding words
Many Israeli companies are expanding operations into the United States. It is necessary to consider in-depth tax planning regarding this activity, in order to reduce exposure to tax liability and increase the company’s profits. The experienced and skilled team of MasAmerica is familiar with the various tax provisions, and especially foreign corporate tax, and will be able to assist you in optimal tax planning.
