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Observe or not observe - LLC view or seal - Entrepreneur of the Week - Natalie Alter - Day 3

Natalie Alter

# Post 3

** 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.


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So what is an LLC anyway? - Entrepreneur of the Week - Natalie Alter - Post 1 + Post 2

Natalie Alter

# Post 2

** Possession of property in the United States under private registration or under LLC? **

One of the most common questions asked by US real estate developers is whether to hold the property in a private registry or under an LLC.

I will try to explain in a simple way the concepts that are worth knowing about the subject, and especially - the advantages and disadvantages of each choice.

** So what is an LLC anyway? **

Similar to Company Ltd. LLC is considered a separate legal entity from the holders of its rights.

Those who hold the LLC rights are called ** members **.

The LLC is registered with the Registrar of the LLC in the specific country in which it is incorporated in the United States.

** What is important to know? **

The obligations of the rights holders in this form of holding are under limited warranty.

That is to say - the debt is limited to the amount that the rights holders undertook to invest in the establishment documents of the LLC.

The liability of the shareholders of the company is limited to the amount of their investment in the company, the so-called ** limitation of liability **.

This is the main reason that motivates investors to hold the property under LLC and not in a private listing.

** Why is incorporation within an LLC considered flexible and easier to operate? **

This form of incorporation is considered more flexible and easier for both the LLC manager and investors for the following reasons:

1. Incorporation within the LLC is not subject to company laws and does not require institutions such as a board of directors and a shareholders' meeting at all.

2. It can be determined that a dividend will not be distributed proportionally among the rights holders.

3. The establishment of the LLC and its activities are based on an establishment agreement similar to the establishment of a partnership and not on an official document as the company's articles of association.

4. Limitation of Liability.

** How is LLC registered in the United States? **

A distinction must be made between an LLC with a single member and one with two or more members.

** Single member LLC ** - Held by a single rights holder.
Is considered a completely transparent body for tax purposes in the United States and all of its income and losses are directly attributable to its sole rights holder.
In addition, it does not file reports in the United States.

** With two or more members ** - The holding of the company is conducted in a similar way to a partnership.

* Partnership - a form of association designed to enable a person to work with others to generate income together, regardless of whether the parties to that partnership are individuals or companies, and whether a partnership is registered in the Partnership Registry or not.

The LLC in this case files Report 1065 and gives each member their share of the partnership capital.

Under US tax law, as long as the LLC's account in the LLC is higher than zero, the distribution of funds will not be considered income, as it is a distribution at the expense of funds that the member has transferred to the LLC.

Finally, we need to fill out two reports - Report 1040 which is a federal report (to the US) plus the state level report.

** How is all this reflected in the State of Israel? **

► ** According to Income Tax Circulars 3/2002 and 5/2004 - LLC is a company for all intents and purposes (this even received support in the ruling). **

► ** The Mismatch Problem **: In Israel, tax law treats LLC as a company - that is, profits that are distributed will be considered as a dividend, while in the US the reference is as a transparent partnership.

* Transparent partnership - an arrangement according to which the company's income and expenses are attributed to the shareholders in accordance with their shares in the right to profits in the company.

* Dividend tax - a tax imposed on a dividend distributed by a company to its shareholders.
In Israel, receiving a dividend is taxable income like any other income.
The result: an Israeli resident will pay taxes without having any income under Israeli law.

In the future when the profits continue we will see them as a dividend without the ability to offset the foreign tax.

► ** Solution proposed by the Tax Authority under Circular 5/2004 ** ** - As long as the LLC is transparent in the United States, its rights holders may report its income in Israel on an ongoing basis and use it as a credit for foreign taxes paid in the United States. After that, the distribution of its profits is not dissolved. Must be consistent and take the same approach every year, starting with the first year.


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