Australian Owners of an Israeli Company: Tax Guide

An Australian software developer builds a product with two engineers she hires in Tel Aviv, sets up an Israeli company to employ them and hold the intellectual property, and keeps living in Melbourne. She assumes the Israeli company is simply an Israeli tax matter and that her Australian return has nothing to do with it. Both assumptions are wrong, and the gap between what she thinks and what is true is where the real tax cost hides.

Owning an Israeli company from Australia is entirely legal and often sensible. The complication is that two tax systems now look at the same company and the same profits, and they do not see them the same way. Israel taxes the company because it was incorporated there. Australia may tax the company, or tax you on its income, because of who controls it and where. Getting the structure right means understanding both sides at once, not treating the Israeli entity as if it exists in isolation. This guide walks an Australian resident through the parts that matter. For the mechanics of setting the entity up, see our guide on registering a company in Israel as a foreigner.

Ownership Is Simple. Residence Is the Trap.

Start with the good news. The Companies Law 1999 places no residency or nationality bar on owning an Israeli private company (chevra ba'am), so an Australian can hold every share and be the sole director. Nothing in Israeli company law objects to a Melbourne address on the shareholder register.

The trap is not ownership but tax residence, and it catches owner-managers in particular. An Israeli-incorporated company is an Israeli tax resident because it was formed in Israel, and Israel taxes its worldwide profit on that basis under the residence definition in Section 1 of the Income Tax Ordinance 1961. So far, so expected. The problem is that Australia has its own residence test, and a company is an Australian resident if its central management and control is exercised in Australia. If you make the company's genuine decisions, the strategy, the contracts, the hiring, from your desk in Australia, you risk making your "Israeli" company an Australian tax resident at the same time.

A company resident in both countries is a dual resident. The Australia-Israel tax treaty, in force since 1 January 2020, resolves that under Article 4, generally by looking to where the company is effectively managed or, failing a clear answer, by agreement between the two tax authorities. That is a slow and uncertain place to end up. The cleaner path is to build real decision-making substance in Israel from the start, with directors who actually direct, rather than discovering the problem in an Australian Taxation Office review years later.

Israeli Corporate Tax and Getting a Dividend to Australia

While the company operates, Israel taxes its profits. The Israeli corporate tax rate is 23 percent, assessed by the Israel Tax Authority (Rashut HaMisim). When the company distributes profit to you as a dividend, Israel then applies dividend withholding tax on the way out.

This is where the treaty earns its keep. Israel's domestic withholding on dividends to a non-resident substantial shareholder is high, but Article 10 of the Australia-Israel treaty caps it.

In Practice: Under Article 10 of the Australia-Israel tax treaty, dividend withholding is limited to 5 percent where an Australian company holds at least 10 percent of the Israeli company, and 15 percent otherwise, assessed by the Israel Tax Authority (Rashut HaMisim). On a company profit of NIS 1,000,000, Israeli corporate tax at 23 percent is NIS 230,000, leaving NIS 770,000; distributed to a qualifying Australian corporate shareholder, the 5 percent withholding is NIS 38,500. To apply the treaty rate rather than the higher domestic rate, the company or its withholding agent should obtain a withholding approval from the Israel Tax Authority, which typically takes four to eight weeks; without it the payer must withhold at the domestic rate and the shareholder is left reclaiming the difference afterward.

On the Australian side, the same dividend is assessable income. You claim the Israeli withholding tax as a foreign income tax offset (FITO) so the profit is not taxed twice on the same amount. One point trips up owners used to Australian company dividends: Israeli corporate tax does not generate Australian franking credits, because franking attaches only to Australian tax paid. An Australian company shareholder holding at least 10 percent may instead access the non-portfolio dividend exemption, which can make the dividend non-assessable, so the choice between holding the shares personally or through an Australian company genuinely changes the outcome and should be modelled before incorporation.

Australia's CFC Rules Reach Across the Ocean

Because you control the Israeli company, it is a controlled foreign company (CFC) under Australia's rules, and that brings the possibility of being taxed in Australia on profits you have not received.

The rules do not tax every retained shekel. The central filter is the active income test. A company that is a genuine active trading business, and whose passive or "tainted" income is a small fraction of its turnover, generally passes the test, and in that case Australia does not attribute its undistributed profits to you. You are taxed in Australia when a dividend is actually paid, as above. The picture changes if the company earns substantial passive income, such as rent from property, interest, royalties, or income from dealing with related parties. That tainted income can be attributed to you and taxed in Australia in the year it arises, whether or not the company distributes anything.

Israel's status matters here. Australia gives concessional CFC treatment only to seven listed countries, and Israel is not among them, so an Israeli company is an unlisted-country CFC and the attribution rules apply more broadly than they would to a UK or US company. For an active technology or trading business the practical result is often no annual attribution, but the classification of the company's income is not something to assume. An Australian adviser should confirm that the company passes the active income test each year, particularly if it starts holding cash, investments, or Israeli property that throws off passive returns.

Selling the Company or Winding It Down

Eventually the shares change hands, whether through a sale, an exit, or closing the company. Both tax systems have a claim on that moment.

Israel taxes capital gains on the disposal of shares in an Israeli company. To secure payment from a non-resident seller, the buyer can be required to withhold tax under Section 164 of the Income Tax Ordinance 1961 unless the seller obtains a reduced or nil withholding certificate from the Israel Tax Authority in advance. The treaty then allocates the taxing right: under Article 13 of the Australia-Israel treaty, gains on shares are generally taxable only in the seller's country of residence, so Australia, unless the company's value is derived principally from Israeli real estate, in which case Israel keeps the right to tax. Australian capital gains tax applies to the gain on your side, with the CGT discount available to individuals in the usual way and a FITO for any Israeli tax that the treaty does allow Israel to charge.

In Practice: An Israeli private company is incorporated at the Companies Registrar (Rasham HaChevrot) under the Companies Law 1999 for a fee of about NIS 2,176 online or NIS 2,645 on paper, usually completed within one to three business days once the Hebrew articles and signed forms are filed. The company then owes an annual fee of roughly NIS 1,500 to the Companies Registrar every year regardless of activity. An Australian owner who lets that fee lapse risks the company being recorded as a defaulting company (chevra mefiratet), which blocks filings and can end in administrative dissolution, and reinstating it later costs far more in fees and lawyer time than the annual amount ever would.

Banking, Substance, and the Beneficial Owner Question

None of the above works without an Israeli bank account, and this is frequently the hardest single step for a foreign-owned company. Under Bank of Israel Directive 411 and the Anti-Money Laundering Law 2000, an Israeli bank opening a business account must identify the ultimate beneficial owner and understand the source of funds. A company whose sole owner and director sits in Australia, with no Israeli-resident officer and no local premises, is exactly the profile banks scrutinise most heavily.

Building some genuine Israeli substance solves several problems at once. A local director, a real office, and an Israeli accountant make the bank account achievable, support the argument that the company is genuinely managed in Israel rather than from Australia, and help it pass muster if the Israel Tax Authority or the ATO ever asks where the business really operates. Substance is not a formality to minimise; it is the thread that ties the whole structure together.

What Often Goes Wrong

Common Mistake: Australian owner-managers run the Israeli company entirely from Australia to save on local costs, making every real decision themselves from home, and treat the company as purely Israeli for tax. This risks the company being an Australian tax resident under the central management and control test while remaining Israeli-resident by incorporation, producing a dual-resident company that must be untangled under Article 4 of the Australia-Israel treaty. Sorting that out through the two tax authorities can take many months and leave profits exposed to assessment in both countries at once, with corporate tax at 23 percent in Israel and up to the 30 percent company rate in Australia contested over the same income. Deciding early where the company is truly managed, and putting real Israeli decision-making substance in place, avoids a dispute that is expensive and slow to fix after the fact.

Practical Checklist

• Decide before incorporating whether to hold the shares personally or through an Australian company, as it changes the dividend and CGT outcome
• Build genuine Israeli decision-making substance so the company is not caught as an Australian resident under central management and control
• Obtain an Israel Tax Authority withholding approval to apply the treaty dividend rate of 5 or 15 percent rather than the domestic rate
• Claim a foreign income tax offset in Australia for Israeli tax paid, and remember Israeli tax does not create franking credits
• Review the active income test with an Australian adviser each year, especially if the company earns rent, interest, or royalties
• Pay the annual Companies Registrar fee of about NIS 1,500 on time to avoid defaulting-company status
• Obtain a Section 164 withholding certificate before selling the shares to a buyer, and plan the Australian CGT position in advance

Speak With an Israeli Attorney

An Israeli company owned from Australia works well when the two tax systems are coordinated from day one, and badly when the Israeli entity is treated as if Australia is not watching. The decisions that matter most, where the company is managed, how the shares are held, and how profits come home, are made at setup, not at exit. An Israeli lawyer working alongside your Australian adviser can structure the company so that both the Israel Tax Authority and the ATO see a clean, defensible position.

Contact us for a confidential initial consultation.