Israeli Tax Alerts | Practical Interpretations | 2008-2020

58 Far-reaching changes expected in the CFC and FVC rules We wish to bring to your attention some of the expected significant changes in the Israeli tax legislation, concerning two of the main international anti-abuse provisions - Controlled Foreign Companies (CFC) and Foreign Vocation Companies ("FVC"). The expected proposed changes are set forth below in summary format (as stated below, those are proposed changes only): 1. Controlled Foreign Company: 1.1 Within the proposed changes in the provisions applying to a controlled foreign company (CFC), amendments are proposed, which are intended inter alia to cope with issues to which the Tax Authority has been exposed since the introduction of the CFC regime in 2003. The relevant set of rules states that a controlling shareholder (an individual or a company that is a resident of Israel, holding at least 10% of the controlling interest) in a CFC will be subject to tax for its share in the undistributed profits of the CFC at the end of the tax year as though it had received them as a dividend (deemed dividend). The provisions relate to profits that originate from passive incomes of the CFC, upon which the imposed foreign tax has not exceeded 20%. The proposed changes to the CFC provisions are set below: 1.2 The tax rate threshold to which the CFC provisions will not apply has been decreased from 20% to 15%. In this case, a number of countries in which income is subject hitherto to the CFC rules in Israel, will be excluded from the Israeli CFC regime, including: The Czech Republic (19%), the Netherlands (20% for an income that does not exceed 200,000 euro), Poland (19%), Hungary (19%), Germany (approximately 16%), Great Britain (20% for an income that does exceed 300,000 pounds). According to the law currently practiced, the taxable income of the Israeli controlling shareholder is calculated according to the tax laws of the CFC country in the case of a company that resides in a foreign country with which Israel has signed a tax treaty (a “treaty country”), and in other cases, according to the generally accepted accounting principles. Pursuant to the amendment, in the case of a CFC residing in a treaty country, the taxable income will still be calculated according to the tax laws of that country, but the following amounts will be added: (A) dividend or capital gains that have been exempted from tax or that are excluded from the tax base according to the laws of that country (unless if resulting from a re-organization or asset exchange) and (B) specified