Israeli Tax Alerts | Practical Interpretations | 2008-2020

11 Management and control from Israel - a landmark case and guiding principles (Niago case) On 12 January 2012, the Israeli District Court of Appeals (case n o 1029/00), published a ruling which highlights the guiding principles on when a company established abroad will be considered to be Israeli resident for tax purpose, as far as the management and control of its business are conducted in Israel. In this case, shareholders of an Israeli company (the " Israeli Company "), engaged in export of textile products, established in 1990 a foreign company in the Bahamas (the " Foreign Company ") and transferred to the latter the Israeli company's activity regarding non-Israeli customers. It should be mentioned that three years later, the Foreign Company sold back the activity to the Israeli Company, resulting in a substantive tax benefit for the Israeli shareholders according to the Israeli Tax Ordinance (" ITO "), as formulated before the implementation of a worldwide tax system in Israel. According to appellants (the Israeli Company and its shareholders), the Foreign Company's business was conducted by managers and employees living outside Israel: the foreign board included three non-Israeli members; board meetings were held outside of Israel and the decisions of the board were made by the directors independently without involvement of the Israeli Company or its shareholders; the foreign directors had thorough knowledge of the relevant activities; the Foreign Company's head office and two other offices were located outside Israel; the orders from around the world, the financial management and the issuance of receipts and letters of credit were all made from the Foreign Company's offices abroad. The Israeli Tax Authority (" ITA ") argued that the management and control of the Foreign Company were carried-out in Israel. Further alternatives claims were argued, including artificiality of the acts according to the general anti-avoidance rule set up in Article 86 of the ITO. The court examined the evidences and facts and ruled that the Foreign Company should be seen as a company whose business is managed and controlled in Israel and accordingly, as an Israeli- resident company for tax purpose. The main principles arising from the contemplated case are discussed henceforth: Foreign Company's activity - prior to the establishment of the Foreign Company, the activity with foreign buyers and Israeli manufacturers was performed through an independent agency in the U.S. (run by an American individual); therefore, there was no substantial need of the Foreign Company's existence. The ruling emphasized that under the circumstances, the facts indicate that: " a corporate mechanism that includes board, offices, bank accounts and so forth, is not enough to indicate that there is an independent corporate entity separated