Israeli Company for US Owners

Controlled Foreign Corporation (CFC)

Your Israeli company is a CFC if:

• It's a foreign corporation (not US-domiciled)
• US persons (each owning 10%+ of vote or value) collectively own more than 50% of the stock

If you're the sole owner, your Israeli company is automatically a CFC. Even with co-founders, if any combination of US persons owns >50%, CFC status applies.

CFC consequences

• Annual Form 5471 filing — extensive disclosures of company financials, ownership, related-party transactions
• GILTI inclusion — discussed below
• Subpart F income — discussed below
• PFIC overlay — for some passive-heavy CFCs
• Anti-deferral on intercompany transactions

GILTI — Annual US Tax on Foreign Earnings

GILTI (Global Intangible Low-Taxed Income) is the most impactful CFC rule for most American-owned Israeli companies.

The basic formula: GILTI = Net CFC Tested Income − 10% × QBAI

• Net CFC Tested Income — most of the company's earnings (excluding Subpart F income and certain other items)
• QBAI — Qualified Business Asset Investment, basically depreciable tangible assets

For most service-based or software companies (low tangible assets), QBAI is negligible — meaning almost all earnings are GILTI.

Tax rates on GILTI

With Foreign Tax Credit for Israeli corporate tax (23%), the Section 962 effective rate often drops to 0% additional US tax on GILTI.

Subpart F — Passive Income & Related-Party Transactions

Subpart F is the older anti-deferral regime that taxes certain "tainted" income immediately, regardless of distribution.

Common Subpart F categories

• Foreign Personal Holding Company Income — interest, dividends, rents, royalties, capital gains
• Foreign Base Company Sales Income — buying/selling related-party goods through low-tax jurisdictions
• Foreign Base Company Services Income — services to related parties outside the country of incorporation

Why it matters for Israeli companies

If your Israeli company:

• Has significant interest income (e.g., from cash investments)
• Receives royalties on IP
• Provides services to a related US company
• Buys/sells goods through a related party

...then portion of the income is Subpart F and immediately taxable to you in the US, regardless of whether dividends are paid.

Section 962 Election — Game Changer

Section 962 is a critical election for individual US owners of Israeli companies. It lets you opt to be taxed on GILTI and Subpart F as if you were a US C-corporation.

Why Section 962 is so valuable

• 21% corporate rate instead of up to 37% individual rate
• Foreign Tax Credit eligible — credit for Israeli corporate tax (23%) typically eliminates US tax entirely
• Section 250 deduction — 50% deduction on GILTI brings effective rate to 10.5%
• Combined with FTC: usually 0% additional US tax on GILTI

The catch

When you eventually distribute the earnings as a dividend, Section 962 election creates a "second tax" — but only on the portion that was actually subject to US tax (very small after FTC). Net effect: massive deferral and possible tax reduction.

Who should elect 962

Almost every US individual owner of an Israeli company should consider Section 962. The only common exception is when you'll distribute earnings immediately (no deferral benefit) or when GILTI is already fully sheltered by other planning.

GILTI High-Tax Exception (HTE) — For High-Tax Israeli Companies

The GILTI High-Tax Exception allows you to exclude GILTI from US tax entirely if the income is taxed in the foreign jurisdiction at a rate above 18.9%.

Israeli corporate tax is 23% — comfortably above the 18.9% threshold. So if your company is a normal Israeli operating company paying full Israeli corporate tax, you can elect HTE and eliminate the GILTI inclusion entirely.

Considerations

• HTE election is binding for 5 years for that CFC
• Must apply on a CFC-by-CFC basis for all controlled CFCs
• Some Israeli tax incentives (preferred enterprise, R&D credits) lower effective rate below 18.9% — disqualifying HTE
• Trade-off: no GILTI tax, but no Foreign Tax Credit for Israeli tax either (since income is excluded)

For most "normal" Israeli operating companies, HTE is the simplest path to zero US tax on operating earnings.

Structuring Options — Choose Wisely

For Americans setting up an Israeli operation, several structures are common:

1. Direct ownership (Individual → Israeli LTD)

Simplest structure. CFC, GILTI, Subpart F apply. Good with Section 962 + FTC or HTE election. Most flexible for restructuring later.

2. US C-corp → Israeli LTD

Adds US entity layer. Useful if you have US co-investors, need US-domiciled IP holding, or want simpler estate transfer. Adds US compliance overhead.

3. Israeli LTD as branch of US C-corp

Israeli activity is a branch (not a separate corporation) for US tax. Avoids CFC issues but loses Israeli tax incentives. Rarely optimal.

4. Two parallel companies

Separate US C-corp and Israeli LTD with no parent. Each operates independently in its country. Used when activities are truly separate or to isolate legal risk.

5. US LLC ↔ Israeli LTD with services agreement

Common for services companies. US LLC (often disregarded) holds US assets and bills clients. Israeli LTD employs the team. Requires careful transfer pricing.

Choosing the right structure depends on: investor base, type of activity (IP-heavy vs services), exit plans, tax incentives sought, and personal circumstances.