Will HMRC tax me on my Israeli company's profits even if I don't take a dividend?

A UK resident opens an Israeli company, leaves the profits inside it to reinvest, and expects no UK tax until money actually reaches their pocket. HMRC does not always wait that long. UK anti-avoidance rules can reach across to an offshore company's income and tax the person behind it while the profit is still sitting in Tel Aviv. Understanding when that happens is the difference between a clean structure and an unexpected assessment.

---

Detailed Explanation

The provision to know is the transfer of assets abroad code, in sections 714 to 751 of the Income Tax Act 2007. It is aimed at UK-resident individuals who transfer assets so that income becomes payable to a person abroad, such as a foreign company, while the individual retains the ability to benefit. Where a UK resident sets up or funds an Israeli company and has the "power to enjoy" its income, HMRC can charge that income on the individual as it arises inside the company, regardless of whether a dividend is ever declared. The charge is on the person, not the company, and it does not depend on the money leaving Israel.

There is an important safety valve: the motive defence. If the arrangement was genuinely commercial and not designed to avoid UK tax, the charge can be disapplied. The test looks at the purpose of the transactions, and it is subjective, so simply being aware of tax consequences is not the same as having a tax-avoidance purpose. A UK resident who builds a real Israeli operating business, with substance and commercial reasons, stands in a very different position from one who parks passive income in a shell to keep it out of HMRC's reach. Because the defence is fact-sensitive, the reasoning behind the structure should be documented from the outset rather than reconstructed under enquiry.

A distinct but related trap is corporate residence. A company incorporated in Israel is Israeli for company-law purposes, but its tax residence can follow where it is actually managed and controlled. If a UK-based owner makes the real strategic decisions from the UK, HMRC may argue the Israeli company is UK tax resident by central management and control, which brings its worldwide profits into UK corporation tax on top of, or instead of, the personal attribution point. This is a separate issue from the transfer of assets rules and is covered in our answer on an Israeli company managed from the UK becoming UK tax resident. The two risks can arise together, and they are analysed differently.

Where UK and Israeli tax both bite on the same profits, the UK-Israel double taxation convention is the relief mechanism, allowing credit so the income is not taxed twice over, but it allocates and relieves; it does not repeal the UK charging provisions. Israel will tax the company's profits at its corporate rate of 23 percent and apply withholding on dividends, and those Israeli taxes feed into the UK credit calculation. For a UK owner the practical answer is to design the structure with substance, keep genuine management decisions properly located, and take the UK and Israeli advice together, because the cost of getting attribution or residence wrong is an assessment on profits you have not distributed.

In Practice: Under the transfer of assets abroad code in sections 720 to 730 of the Income Tax Act 2007, HMRC can charge a UK-resident individual on an Israeli company's income where they have the power to enjoy it, subject to the genuine-commercial motive defence. Israel taxes the company at 23 percent corporation tax plus dividend withholding, and the UK-Israel treaty relieves the double charge by credit. An HMRC enquiry into an offshore structure commonly runs 12 to 24 months, and the contemporaneous commercial rationale is the decisive evidence for the motive defence.

Key Considerations

• The transfer of assets abroad rules (ITA 2007, ss.714 to 751) can tax a UK resident on an Israeli company's income before any dividend.
• The charge applies where the individual set up or funded the company and has the power to enjoy its income.
• A genuine-commercial motive defence can disapply the charge; its purpose test is subjective and fact-sensitive.
• Separately, an Israeli company managed from the UK can become UK tax resident by central management and control.
• The UK-Israel treaty relieves double taxation by credit but does not switch off UK charging rules.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• You are a UK resident setting up or already owning an Israeli company and want to know your UK exposure on retained profits.
• HMRC has opened an enquiry into an offshore structure or raised the transfer of assets rules.
• Real management decisions are being taken from the UK, putting the company's tax residence in question.

A qualified adviser coordinating UK and Israeli tax should review the structure before profits build up, because attribution and residence are far cheaper to plan than to unwind.

---

Speak With an Israeli Attorney

We work with UK owners of Israeli companies and their UK advisers to build structures with real substance, document the commercial rationale, and keep the Israeli and UK tax treatment aligned so undistributed profits do not produce a surprise UK charge.

Contact us for a confidential consultation about your Israeli business.