Israeli Tax Alerts | Practical Interpretations | 2008-2020

165 The basic condition is that this involves a foreign company. The circular discusses a case in which a company is considered a resident of Israel in accordance with Ordinance provisions (for example, when the company has been incorporated in Israel); however, in light of the provisions of the relevant treaty, the company is considered a resident of the treaty country (in light of the tie breaker rules applied with regard to a company, usually a test of the effective place of management). In such a case, the circular determines that a company should be seen as a non-Israeli company, even if this decision derives from the treaty provisions only ; therefore, the relevant anti-planning provisions shall apply to its shareholders. Another interpretation may lead to the conclusion that on the one hand the company shall not be taxed in Israel for its income outside of Israel (since according to treaty provisions it is not a resident of Israel) and on the other hand the FPC anti-planning provision shall not apply (since this does not involve a non-Israeli company according to Ordinance provisions). 2. Exit tax: How are the exit tax provisions stipulated in Israeli law applied, in the event in which a person is still considered an Israeli resident according to the provisions of internal law, since he has not yet transferred the center of his life to the relevant foreign country; however, the same individual is already considered a resident of the treaty country according to treaty provisions (the tie breaker rules in the residency section). The question asked is, what law applies in a case in which that person, during the same “twilight period”, sells an asset he had abroad. If it is claimed that exit tax provisions do not apply, since pursuant to internal law the status of residency remains unchanged, then at the sale's stage no tax shall apply in Israel, since that person is not a resident of Israel according to treaty provisions, and in any case is not seen as one who has sold the asset prior to severance of his residency. If the Tax Authority should claim that change of residency, according to treaty provisions alone “triggers” the exit tax, then the portion of capital gains attributed to the period of Israeli residency may be taxed at the sale's stage, according to a linear mechanism. The Tax Authority hasn't published an official announcement of its stance on this matter; however, to the best of our knowledge, its position is that the exit tax applies even if the change of residency is according to treaty provisions only . 3. New immigrants: Let‘s assume a case of an individual gradually returning to Israel from a treaty country after living there for nine years. We assume that at that time, according to the Israeli Tax Ordinance provisions he is considered a resident of Israel; however,