** Observe or not observe - LLC view or seal **
So we got into the right deal, read post number 2 and chose to list the property under LLC.
In the first year we open the company we will be required to submit a Form 150 in which we will declare a holding in a foreign company, and whether we wish to observe it.
Before we decide whether to observe the LLC or not, we should know key concepts and understand the meanings.
Before that it is important to understand - what is a company's view and what is sealing?
** View ** - An arrangement similar in nature to an American arrangement known as the S-corp. The arrangement means that the Company's income and expenses will be attributed to the Company's shareholders in accordance with their share of the right to profits in the Company.
** To seal ** - the opposite of observing. The tax will apply to the LLC as a regular company, not as a partnership.
First, a few points to consider when deciding whether we want to look at the LLC:
1. High salaries - when we have high salary income we are sometimes interested in continuing to roll over the income at the company level (to seal) and one day draw a dividend.
2. High tax payment in the US - the more we pay taxes in the US it is worthwhile for us to observe the LLC in Israel and complete the tax in Israel.
We own a number of companies, some with profit and some with loss - in this situation in the US, it is possible to offset profits and losses between different companies, in some cases we are not required to pay tax at all.
In Israel, on the other hand, there is no ability to offset the losses, which is why we sometimes choose to seal off the companies.
** What to watch out for? **
When choosing a view or a non-view we must be careful of anti-planning allegations.
Anti-planning tools: tools that face income tax and allow them to contain the taxes and dividend distribution on the entrepreneur.
What are these tools?
** Foreign Controlled Company ** (CFC) - A taxation method that applies to a foreign resident company that meets additional conditions. The provisions of the law concerning companies of this type are intended to reduce the feasibility of diverting income outside the state in order to reduce or avoid paying tax on them.
This is an anti-planning tool which is intended to ensure the taxation of passive income on an ongoing annual basis, regardless of the actual receipt of the said income.
The principle: A controlling shareholder in a foreign controlled company that resulted in passive profits that were not distributed, will be taxed as if he had received as a dividend his proportionate share in the said profits.
The Assessing Officer can apply this taxation method only if all four of the following conditions are met by the developer:
1. Its shares or rights are not listed for trading on the stock exchange (or less than 30% of them have been offered to the public.
2. Most of his income is passive income or most of his profits come from passive income.
* Passive income - interest from interest or linkage differences, income from dividends, income from royalties, income from rent, proceeds from the sale of a property.
3. The tax rate applicable to his passive income in foreign countries does not exceed 20% - it must be ensured that this is a final tax that will not be refunded to the company or its rights holders in any way.
4. More than 50% of one or more of the means of control in it are held, directly or indirectly, by the residents of Israel (or an alternative to this).
* Means of control - the right to participate in profits, the right to appoint a director, the right to vote, the right to share in the balance of human assets after the liquidation of his debts at the time of liquidation, the right to order his own one of the above rights to exercise his right.
** Tax planning ** - various actions such as legal buyers and interpretive pranks designed to reduce the tax liability of an individual or company. Given different options for performing a particular action, the tax planner compares the tax results of the courses of action in order to choose the course of action that will yield the best tax results for him.
* If the tax rate in the country where the real estate is located is higher than 15, the definition of HNZ (foreign controlled company) will not apply.
* This anti-planning claim can be avoided if the entrepreneur has American partners and the foreign company is held at a rate of less than 50 percent by Israeli residents.
2. Application of the control test **
In cases that raise questions regarding "control and management" of the business of a company incorporated outside Israel, the income tax examines the following parameters: Who are the controlling shareholders in the company in practice? Who are the directors of the company? And who makes the decisions in the company?
A distinction must be made between current and day-to-day decisions and general and strategic decisions, where day-to-day decisions are not necessarily "technical" in nature, and sometimes establish the day-to-day management that outlines the company's course of action, which is also part of the control and management test.
Implementation of the control test - If the income tax determines that the control and management are from Israel, the LLC becomes a regular Israeli company and must open a file in Israel and manage books like an Israeli company.
Usually in real estate in the United States control and management are not in Israel. But it is important to recognize that even in real estate, income tax sometimes claims control and management in Israel in certain circumstances.
**In conclusion **
A person with a high income who does not use sensible profit money would want to seal the LLC and pay dividend tax on the day he wants to withdraw the money.
2. Please note - the income tax can bypass us and force us to distribute a dividend even though we did not withdraw the money on the grounds of credit or control and management.
3. The amount of tax paid abroad - the more taxes we have paid abroad and the smaller the tax surcharge in Israel, the better it will be for us to observe the company.
So far today. Hope everything is clear. If not - always welcome to comment and ask.
In the next two days we will dive into the depths of interesting issues and understand how to avoid common mistakes, and how to invest in real estate with the money of a limited company.
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