I live in Canada and own a foreign company with my brother in Israel. Can Israel tax the company's retained profits because of his holding?

Families that hold an offshore investment company jointly across two countries almost never see this coming. The Israeli sibling is not the majority owner, has taken no dividend, and reasonably assumes there is nothing to report. Section 75B says otherwise, and the provision that catches the family is the one that counts a foreign relative's shares alongside an Israeli resident's. Your Canadian holding is not taxed. It is used to establish that the company is controlled from Israel.

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Detailed Answer

The Israeli controlled foreign company regime sits in Section 75B of the Income Tax Ordinance. A foreign company falls within it where it is a private company resident abroad, most of its income or profits are passive, the foreign tax rate applying to that passive income does not exceed 15%, and Israeli residents hold the requisite share of the means of control. Passive income for this purpose means interest, linkage differentials, dividends, royalties, rent and the proceeds of the sale of an asset, in each case where the income does not amount to business income, and a dividend arising out of income that already bore foreign tax above 15% is left out. The control test has two limbs, and the second is the one that surprises mixed families. The first limb is more than 50% of one or more of the means of control held directly or indirectly by Israeli residents. The second limb catches holdings of more than 40% by Israeli residents where, together with a relative of one or more of them who is a foreign resident, the combined holding exceeds 50%. Where the company qualifies, a controlling shareholder, meaning a holder of 10% or more, is treated as having received a dividend equal to his proportionate share of the undistributed passive profits, and that deemed dividend is taxed in Israel at the ordinary dividend rates of 25%, or 30% for a shareholder holding 10% or more, with a credit for the notional foreign tax.

For you as the non-resident, the direct exposure is nil. Israel does not tax a Canadian resident on the profits of a Canadian or offshore company, and no treaty argument is needed to get there. The exposure is your brother's, and the practical damage tends to be threefold. He carries an Israeli tax charge on money he has not received and cannot compel the company to distribute, which is a cash-flow problem rather than a valuation one. He must file the annual declaration of holdings in a foreign corporation, Form 150, alongside his Israeli return, and that form asks for the company's financial data, which means you have to produce accounts on an Israeli timetable. And the two of you are now exposed to a mismatch, because Canada taxes on distribution while Israel taxes on deemed receipt, so the foreign tax credit can fall in the wrong year for one of you. There are structural answers. Converting the company's income mix so that it is genuinely active rather than passive takes it outside the definition altogether. Distributing annually removes the undistributed pool the section works on. Restructuring the holdings so that the Israeli side is below the 40% limb works, but only if it is real, and a nominee arrangement will be looked through. What none of these fixes is the reporting side, which is separate; the general question of what Israel does and does not tax a non-resident on is covered in our answer on whether Israel taxes a non-resident's worldwide income.

In Practice: Section 75B of the Income Tax Ordinance treats a private foreign company as a controlled foreign company where most of its income is passive, the foreign rate on that income is no more than 15%, and Israeli residents hold more than 50% of the means of control, or hold more than 40% and together with a foreign-resident relative exceed 50%. A controlling shareholder holding 10% or more is deemed to receive a dividend of his share of the undistributed passive profits, taxed by the Israel Tax Authority at 25% or 30%, so on an undistributed passive pool of NIS 1,000,000 a 40% Israeli holder faces a deemed dividend of NIS 400,000 and a charge of roughly NIS 120,000. Form 150, the declaration of holdings in a foreign corporation, goes in with the annual return, due by 30 April following the tax year for an individual, or later where a representative files under an extension.

When to Consult a Lawyer

• The Israeli shareholder is below 50% but above 40%. Whether the relative limb applies turns on the definition of a relative and on indirect holdings through trusts and other entities, and a family that assumes it is safe because no single person holds a majority is usually reading the section too narrowly.
• The company holds foreign real estate. Israeli practice has applied the CFC rules to foreign property-holding companies whose rental income is passive, which catches a great many family holding vehicles that were never intended as investment funds.
• One shareholder is planning aliyah. A new immigrant's ten-year exemption under Section 14 changes the analysis for a period, but Amendment 272 to the Income Tax Ordinance removed the matching reporting exemption for anyone becoming Israeli resident on or after 1 January 2026, so the form still has to be filed even where no tax is due.

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Speak With an Israeli Attorney

We test whether a family-held foreign company actually falls inside Section 75B, model the deemed dividend against the home-country credit position, and restructure the holdings or the income mix where the exposure is worth removing.

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