Quick Answer: Under Section 75B of Israel's Income Tax Ordinance, a foreign company becomes a "controlled foreign company" (CFC) when Israeli tax residents hold more than 50% of its key rights and the company earns predominantly passive income. Israeli-resident shareholders are then treated as having received a deemed dividend equal to their share of that undistributed passive income — and must pay Israeli tax on it annually, whether or not the company actually distributes anything. New immigrants making Aliyah should audit their offshore holdings before or immediately after arriving in Israel.

If you own shares in a UK limited company, a US LLC, a BVI holding company, or any other foreign entity while living in Israel, Israeli tax law may reach into that company and tax its passive earnings as if you had personally received them — even if the company never paid you a shekel. This is the controlled foreign company regime, and it catches thousands of new immigrants and foreign investors off guard every year.

Israel introduced CFC rules in 2002 as part of a comprehensive overhaul of the Income Tax Ordinance (ITO). The policy logic is straightforward: without CFC rules, Israeli tax residents could park passive income — interest, dividends, rent, royalties — in a low-tax foreign holding company indefinitely and defer Israeli tax for decades. Section 75B closed that deferral window. Understanding how these rules work, and what exceptions exist, is essential for anyone making Aliyah with an existing business or investment structure, as well as for long-term residents who have built offshore holdings over the years.

1. Overview: Why Israel Has CFC Rules

Before the 2002 tax reform, Israel taxed residents only on Israeli-source income. A wealthy Israeli could legally hold a Cayman Islands company earning millions in interest and dividends, and as long as no distribution was made, no Israeli tax was owed. The 2002 reform switched Israel to a worldwide taxation model for residents and simultaneously introduced anti-avoidance provisions — including the CFC rules — to give substance to that shift.

The CFC regime under Section 75B targets a specific mischief: using a passive foreign company as a personal tax deferral vehicle. It does not affect foreign companies that run genuine active businesses. A foreign company that manufactures goods, provides services, or employs staff and earns most of its income from those activities is generally outside the regime. The rules are aimed at holding companies, investment vehicles, and "letter box" structures that accumulate passive income — interest on loans, rental yields, dividends from portfolio investments, royalty streams — without paying tax at a meaningful rate in their home jurisdiction.

In Practice — The Law: The CFC rules appear in Section 75B of the Income Tax Ordinance [New Version], 5721-1961 (as amended in 2002 and subsequently). The Israel Tax Authority (Rashut HaMasim, RHM) administers and enforces these provisions. Guidance on how the ITA interprets specific situations is published as circulars (*hozer*), of which Circular 5/2004 on foreign companies remains a key reference document for practitioners.

Three other areas of Israeli tax law intersect with Section 75B: the 10-year exemption for new immigrants under Section 14(a), the foreign tax credit rules under Section 200, and the reporting requirements tightened by the 2026 amendments to the ITO.

2. What Makes a Foreign Company a CFC Under Israeli Law?

Two tests must both be satisfied for a foreign company to be treated as a CFC in any given tax year.

Test 1: The Control Test (the "50% rule")

Israeli tax residents — whether individuals, companies, or a combination — must collectively hold more than 50% of any one of the following rights in the foreign company:

  • Voting rights at a general meeting of shareholders
  • Right to profits distributed by the company
  • Right to appoint directors or other managers
  • Right to assets on a liquidation or winding-up

It is enough to satisfy any one of these four limbs. Ownership is measured on a direct and indirect basis. Shares held through trusts, partnerships, nominee arrangements, or intermediate holding companies are all aggregated. If you own 60% of a Guernsey holding company through a Cyprus intermediate company, you are still treated as directly holding 60% of the Guernsey company for this test.

In Practice — Who Counts as an Israeli Resident? Israeli tax residency is determined under Section 1 of the Income Tax Ordinance using the "centre of life" test (with a quantitative presumption if a person spends 183 days or more in Israel in a tax year, or 30 days in a tax year plus 425 days over three consecutive years). For the control test, the ITA aggregates the holdings of all Israeli-resident shareholders — if five Israeli residents each hold 11%, the 55% combined holding makes the company a CFC even though no individual resident holds more than 50%.

Test 2: The Passive Income Test

The foreign company's passive income must exceed 50% of its total income in the relevant tax year. Passive income for this purpose includes:

  • Dividends received from other companies (excluding dividends from subsidiaries in which the CFC holds more than 50%)
  • Interest — on loans, bonds, bank deposits, or any other credit
  • Rent from real property, equipment, or intellectual property
  • Royalties from intellectual property rights
  • Capital gains from the sale of assets that generate passive income (shares, bonds, real property held for investment)

Income from an active business — manufacturing, software development, consulting, professional services, trading of goods — does not count as passive income, even if those services are provided to related parties, provided the transactions are at arm's length and the business has real commercial substance.

Exceptions and Safe Harbours

A number of foreign companies are carved out of the CFC definition even if both tests are nominally satisfied:

  • Listed companies: A foreign company whose shares are listed on a recognized stock exchange is not a CFC, because its ownership is publicly dispersed and there is market discipline on its earnings.
  • High-tax jurisdictions: Where the effective tax rate actually paid by the foreign company on its passive income in its home jurisdiction is broadly comparable to what would have been paid in Israel, the ITA may accept that no Israeli CFC tax is owed. This comparison is fact-specific and is not a formal statutory safe harbour, so professional advice is required.
  • De minimis passive income: Very small amounts of passive income incidental to an active business may not trigger the 50% passive income test. The threshold must be assessed on the facts of each company.
In Practice — Common CFC Scenarios for Olim: The ITA regularly identifies the following structures as potential CFCs: (1) a UK Ltd or BVI company used as a personal holding vehicle for investment portfolio returns; (2) a US LLC (treated as a corporation for Israeli purposes) receiving rental income from foreign properties; (3) a Cayman or Channel Islands fund that accumulated interest income over many years; (4) a family holding company that lends money to operating subsidiaries and receives interest. If any of these descriptions match your structure, a CFC analysis is warranted before you file your first Israeli tax return.

3. The Deemed Dividend Mechanism: How CFC Income Is Taxed

Once a foreign company is classified as a CFC, each Israeli-resident shareholder is treated as having received a "deemed dividend" — *divi'dend rashum* — equal to their proportionate share of the CFC's undistributed passive income for the tax year. This deemed dividend is fictitious: no money actually moves from the CFC to the shareholder. But it is fully taxable in Israel in the year the CFC earns the income, as if it had been paid out.

What Income Is Deemed Distributed?

The deemed dividend equals the shareholder's proportionate share of the CFC's passive income (as defined above), reduced by:

  • Foreign tax actually paid by the CFC on that passive income in its home jurisdiction
  • Amounts that the CFC has already actually distributed as dividends during the same year

If the CFC has already distributed 40% of its passive income as a cash dividend and paid 15% foreign corporate tax on the rest, the deemed dividend calculation credits both of those amounts before arriving at the taxable base in Israel.

Tax Rate on the Deemed Dividend

The deemed dividend is taxed as a dividend received from a foreign company. For Israeli-resident individuals:

  • A "regular" shareholder (holding less than 10% of the CFC): 25% flat rate under Section 125B of the ITO.
  • A "significant shareholder" (*baal shlitta*, holding 10% or more, directly or indirectly): the deemed dividend is added to ordinary income and taxed at the individual's applicable marginal rate (up to 50%, including the surtax on high earners).

For corporate shareholders, the deemed dividend from a CFC is generally included in the corporation's taxable income at the standard corporate rate of 23%.

Avoiding Double Taxation When the CFC Actually Distributes

A deemed dividend that has already been taxed in Israel is not taxed again when the CFC actually distributes those profits. The ITO excludes actual dividends from Israeli income to the extent they represent earnings already subjected to the deemed dividend regime. The same money is not taxed twice. What matters in practice is keeping clear records of which CFC earnings have gone through the deemed dividend cycle, because the ITA will ask.

In Practice — Foreign Tax Credits: A credit for foreign tax paid by the CFC is available under Section 200 of the Income Tax Ordinance. The credit is calculated per-country and per-income-category. If your BVI company paid zero corporate tax but used a Cyprus subsidiary that paid 12.5% corporate tax on the same passive income, only the tax actually paid by the entity generating the income is eligible for the credit. The Israeli Tax Authority requires documentary evidence of foreign taxes paid — typically audited accounts and official tax payment receipts from the foreign jurisdiction.
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4. Olim and the 10-Year Tax Exemption: Interaction with CFC Rules

The question every Oleh with an offshore company eventually asks is whether Israel's 10-year tax exemption covers the deemed dividend. The short answer: it has historically helped, but the 2026 legislative changes shifted the ground.

The Baseline Exemption

Under Section 14(a) of the Income Tax Ordinance, a new immigrant (*oleh chadash*) or a returning resident (*toshav chozer*) who qualifies for the exemption is not subject to Israeli tax on their foreign-source income and assets for a period of 10 years from the date they became an Israeli resident. This exemption is broad and covers most categories of passive foreign income — dividends, interest, rental income, and capital gains from the sale of foreign assets.

For many years, the prevailing professional view was that deemed dividends under the CFC regime also fell within the scope of this exemption, because the deemed dividend is economically derived from foreign passive income. The Israel Tax Authority did not aggressively challenge this position, and Olim with CFCs generally reported their foreign holdings but claimed an exemption from the deemed dividend tax during the 10-year window.

The 2026 Reporting Change

From 1 January 2026, the reporting exemption that had historically allowed new immigrants to avoid filing disclosure forms about their foreign assets was repealed. New immigrants who become Israeli tax residents on or after that date must file Form 150 annually to disclose their CFC holdings, even during the 10-year income tax exemption period. The income exemption — not paying Israeli tax on the deemed dividend — may still apply, but staying silent is no longer an option.

For immigrants who arrived before 31 December 2025 and are currently within their 10-year window, the reporting obligations apply on a transitional basis. Consult an Israeli tax advisor promptly to understand where your situation sits.

The 2026 Special Aliyah Incentive

A separate temporary order covers immigrants arriving between 5 November 2025 and 31 December 2026. Qualifying new immigrants under this order may pay 0% Israeli income tax on up to approximately NIS 1 million of Israeli-source income annually for a transitional period — a deliberate incentive to encourage Aliyah. Even so, anyone benefiting from this order who holds interests in CFCs or foreign professional companies must still submit Form 150 to the ITA. The reduced tax liability does not eliminate the reporting obligation.

In Practice — The Exemption Cliff: The 10-year exemption does not last forever. Once it expires, all your foreign passive income — including deemed dividends from CFCs — becomes fully taxable in Israel at normal rates. Many Olim who have not restructured their offshore holdings during the exemption window face a significant tax event when Year 11 arrives. Proactive planning (distributing accumulated earnings before the cliff, converting holding companies to actively managed structures, considering the "family company" election) is far more effective at the 7- or 8-year mark than at Year 10. The ITA does not grant extensions to the exemption period.

A South African tech entrepreneur made Aliyah in 2021 holding 100% of a Mauritius holding company that received royalty income — passive income under Section 75B — from a software licence portfolio worth approximately USD 2.8 million annually. Under the Section 14(a) ten-year exemption, no Israeli income tax was owed on the deemed dividend during the exemption window, but Form 150 was still required from the 2026 tax year onward. His accountant in Johannesburg had advised him the exemption covered both the tax and the reporting, which was accurate before 2026 but ceased to be accurate after the legislative amendment took effect on 1 January 2026. By the time the oversight was identified at year-end, the ITA's online filing portal had already flagged the client's tax file for missing returns. Filing two amended annual returns with Form 150 attachments — and submitting a voluntary correction letter explaining the error — cost NIS 22,000 in professional fees and avoided what would otherwise have become a formal penalty assessment under Section 190A of the Income Tax Ordinance.

5. Reporting Requirements: Form 150 and Annual Filing

Israeli-resident taxpayers who hold (directly or indirectly) an interest in a foreign company that meets or may meet the CFC definition are required to disclose that holding annually to the Israel Tax Authority using Form 150 (Tipas 150 — Hodaat Haahzakot Bechevra Zarit, Declaration of Holdings in a Foreign Company). This form is filed as an attachment to the taxpayer's annual Israeli income tax return.

What Form 150 Requires

Form 150 calls for the following information in respect of each foreign company disclosed:

  • The company's name, country of incorporation, and registered address
  • The taxpayer's percentage holding (direct and indirect) in each of the four rights: voting, profits, director appointment, and liquidation assets
  • The company's total income for the tax year, broken down between passive income and active income
  • The amount of foreign tax paid by the company on its passive income
  • Whether an actual dividend was distributed and, if so, how much
  • The taxpayer's calculated deemed dividend amount

Filing Deadline

Israeli individuals must file their annual income tax return — including Form 150 attachments — by 30 April of the year following the tax year. Taxpayers who are represented by a licensed Israeli tax practitioner (accountant or attorney) receive an automatic extension to 30 June. The Israel Tax Authority operates an online filing portal (a professional portal for advisors and a self-service portal for individuals) for electronic submission. Late filing attracts interest under Section 190A of the ITO and may also attract administrative penalties.

In Practice — Penalty Exposure: The ITA has pursued CFC non-disclosure aggressively since a 2016 enforcement push. Penalties for failure to file Form 150 can reach NIS 500 per day of delay for each unreported entity, in addition to the back-tax owed plus interest accrued at the statutory rate (currently linked to CPI under Section 159A of the ITO). In cases where the ITA concludes there was intentional concealment, it may refer the matter to the Attorney General for criminal prosecution under Section 220 of the ITO, which carries fines and potential imprisonment. Voluntary correction — amending prior returns and submitting missing Form 150 filings — is always preferable to waiting for an ITA inquiry.

Record-Keeping Obligations

The ITO requires taxpayers with foreign company holdings to maintain books and records sufficient to substantiate the figures reported on Form 150. This means retaining the CFC's audited financial statements, minutes of shareholder meetings, bank statements showing foreign tax payments, and documentation of any actual dividend distributions — all for at least seven years from the end of the relevant tax year, as required under Section 25 of the Tax Ordinance on Bookkeeping. The ITA has increasingly requested these records in cross-border audit situations.

6. Practical Planning Considerations for Olim with Offshore Companies

Whether you are planning to make Aliyah or are already within your 10-year exemption window, there are legitimate planning steps worth reviewing with a qualified Israeli tax attorney before the clock starts or expires.

Pre-Aliyah Distribution of Accumulated Earnings

If your foreign company has accumulated passive income over many years, consider distributing those earnings as dividends before you become an Israeli tax resident. Once you are an Israeli resident, those historic undistributed amounts fold into the ongoing CFC calculation. Distributing them beforehand means they are taxed only in your home country. Israeli residency typically begins on the date you arrive in Israel with intent to settle, so the exact date matters — a few weeks can make a significant difference to your tax position.

Converting Passive Companies to Active Businesses

A company that earns more than 50% of its income from active trading or services is not a CFC. If your holding company currently invests passively, restructuring it to conduct genuine active business activity — for example, becoming the operating entity rather than a passive holder of assets — can remove it from the CFC regime. However, this restructuring must have commercial substance: the ITA's General Anti-Avoidance Rule (GAAR) under Section 86 of the ITO allows it to recharacterise artificial arrangements that lack economic substance.

The "Family Company" (*Chevra Mishpahatit*) Election

Section 64A of the ITO allows Israeli-resident shareholders of a qualifying foreign company to elect for that company to be treated as a "family company" for Israeli tax purposes. In that case, the company's income is taxed transparently — it flows through to the individual shareholders and is taxed at their personal rates rather than under the CFC deemed dividend mechanism. This election can be advantageous where the foreign company has losses that the shareholder wishes to offset against other Israeli income, or where treaty access at the individual level produces a better tax outcome than the deemed dividend route.

Reviewing Structures Under the 2026 Rules

Beyond eliminating the reporting exemption for new Olim, the 2026 amendments introduced more detailed rules on when a foreign company co-owned by an Israeli resident and related foreign-resident family members counts toward the 50% control threshold. If control is shared between Israeli and non-Israeli relatives, a company that was previously outside the CFC regime may now fall inside it. Any change in Israeli residency status within a family group warrants a fresh structure review with an Israeli tax specialist.

In Practice — Practical Timeline for Incoming Olim: A typical pre-Aliyah tax planning process involves: (1) 6 months before Aliyah: map all foreign company holdings and identify CFC exposure; (2) 3–4 months before Aliyah: distribute accumulated passive earnings from offshore companies where beneficial; (3) 2 months before Aliyah: obtain a formal Israeli tax opinion on remaining holdings; (4) First Israeli tax year: register with the Israel Tax Authority (Misrad HaMasim), obtain a tax file number, and begin annual Form 150 filing obligations. New immigrants are encouraged to contact a qualified Israeli CPA or tax attorney at the earliest opportunity — ideally before purchasing a ticket.

Double Tax Treaties

Israel has signed double tax treaties with over 60 countries. Some explicitly address CFC rules and their interaction with treaty benefits. Where a treaty applies, it may limit Israel's right to tax deemed dividends from CFCs incorporated in the partner country, or allow credits beyond the standard Section 200 credit. The analysis turns on the specific treaty language and is genuinely fact-specific, but it is worth pursuing before concluding that full Israeli CFC tax is unavoidable.