Israeli CFC Rules and the Canadian Family Shareholder

A retired couple in Toronto own sixty percent of a small investment company incorporated offshore. The other forty percent belongs to a sister in Ramat Gan. The company does nothing dramatic. It holds a few rental units and a bond portfolio, distributes little, and has ticked along for two decades. Then the sister's Israeli accountant asks a question that makes no sense to the Canadians: why has nobody been filing Form 150? The couple assumed Israel had no interest in a company none of them runs from Israel and that pays them nothing. They are right about themselves and wrong about their sister, and the reason is a provision that counts their Canadian shares against her.

This is the part of Israel's controlled foreign company regime that mixed Israeli and Canadian families almost never see coming. Your holding abroad is not taxed. It is used as evidence that the company is controlled from Israel, and that turns your Israeli relative's quiet minority stake into a live tax charge on money nobody has received.

What Section 75B Actually Catches

Israel's controlled foreign company rules sit in Section 75B of the Income Tax Ordinance [New Version] 5721-1961. A foreign company falls inside the regime when four things are true at once. It is a private company resident outside Israel. Most of its income or profits are passive. The foreign tax rate applying to that passive income does not exceed 15 percent. And Israeli residents hold the required share of the means of control.

Passive income here is a defined list: 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. A dividend that comes out of profits already taxed abroad above 15 percent is excluded. So a company that trades actively, employs people, and earns its money from operations is usually outside the regime. A family holding vehicle that collects rent and coupon income sits squarely inside it.

The control test is where the surprise lives, because it has two limbs. The first is straightforward: more than 50 percent of one or more of the means of control held, directly or indirectly, by Israeli residents. The second is the one that catches families spread across two countries. It applies where Israeli residents hold more than 40 percent, and where, together with a relative of one of them who is a foreign resident, the combined holding exceeds 50 percent.

Read that limb slowly, because it is counterintuitive. Your sister in Ramat Gan holds forty percent. On her own she is below the first limb. But you are her relative, you are a foreign resident, and your sixty percent added to her forty percent clears fifty percent easily. The company is now controlled from Israel for the purposes of Section 75B, and the trigger was your Canadian shareholding.

Who Pays, and How Much

Here is the reassuring half, and it matters for you as the non-resident: your direct Israeli exposure is nil. Israel does not tax a Canadian resident on the profits of an offshore company. You do not file an Israeli return because of this, you owe no Israeli tax, and there is no treaty question to argue.

The charge falls on the Israeli controlling shareholder. A controlling shareholder, meaning a person holding 10 percent or more, is treated as having received a dividend equal to his proportionate share of the company's undistributed passive profits. That deemed dividend is taxed in Israel at the ordinary dividend rates, 25 percent, or 30 percent for a holder of 10 percent or more, with a credit for the notional foreign tax the company paid.

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 more than 40% where a foreign-resident relative takes the combined holding past 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%. 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, is filed with the annual return, due by 30 April following the tax year for an individual.

Notice what that charge really is from the family's point of view. Your sister is taxed on NIS 400,000 she has not received and cannot compel the company to pay out, because the two of you together control the distribution policy and the money is staying in the company. That is a cash-flow problem, not a valuation dispute, and it is why families in this position usually end up either distributing annually or restructuring.

The Canadian Side Runs on a Different Clock

For a Canadian shareholder the second issue is that you have your own reporting on the very same company, and the two systems do not line up.

Canada taxes foreign accumulating income through its foreign affiliate and foreign accrual property income rules, and a Canadian resident with an interest in a foreign affiliate files Form T1134 with the Canada Revenue Agency. Where the offshore company holds specified foreign property above the reporting threshold, the separate T1135 foreign income verification statement can also come into play. The mechanics differ from Israel's, but the direction is the same: both countries want to see inside a privately held foreign company, and both increasingly get the information through automatic exchange rather than waiting for a voluntary disclosure.

The timing mismatch is the practical trap. Israel taxes your sister on a deemed receipt in the year the profits accrue. Canada generally taxes on distribution, or under its own accrual rules on a different measure. When the company finally distributes, the foreign tax credit each of you claims can fall in the wrong year, so that relief which should offset a charge is stranded because the two taxing events happened in different tax years. The Canada-Israel tax treaty relieves genuine double taxation on the same income, but it does not synchronise two domestic regimes that measure and time that income differently, and that is the gap a family has to manage deliberately. Whether Israel taxes any part of your own income is a separate question, and the general rule for a non-resident is set out in our guide to the Canadian-owned Israeli company and CRA reporting.

There is a practical documentation burden too, and it lands on you. Form 150 asks for the company's financial data, so your sister cannot file her Israeli return until you have produced accounts she can hand to her accountant, on an Israeli timetable that has nothing to do with your Canadian filing deadlines. Where the Israel Tax Authority queries the return, supporting documents signed abroad, such as a shareholders' register or a directors' resolution, usually have to be executed before a notary in Canada and apostilled. Canada acceded to the Apostille Convention on 11 January 2024, and an Ontario apostille is issued by Official Documents Services, which removed the old consular legalisation step but still adds days to any document you send from your side.

When a New Immigrant Joins the Picture

Families in this position often have one member contemplating aliyah, and that changes the analysis for a period without removing the reporting.

In Practice: A new immigrant benefits from the ten-year exemption on foreign income under Section 14 of the Income Tax Ordinance, which can suspend the Israeli tax on a Section 75B deemed dividend during the exemption window. But Amendment 272 to the Ordinance removed the matching reporting exemption for anyone becoming Israeli resident on or after 1 January 2026, so Form 150 must still be filed with the Israel Tax Authority with the annual return due 30 April following the tax year, even where no tax is due. On the couple's NIS 1,000,000 passive pool, a returning member holding 40% would still disclose a NIS 400,000 deemed dividend to the authority while the exemption defers the roughly NIS 120,000 charge.

The point is that the privacy that used to come with the ten-year exemption is gone. A family that structured its affairs on the assumption that a new immigrant simply disappears from the Israeli tax system for a decade is now working from a rule that no longer exists.

What Often Goes Wrong

The recurring error is a confident misreading of the arithmetic. A family sees that no single person holds a majority and concludes the company cannot be Israeli-controlled. The relative limb is precisely designed to defeat that conclusion.

Common Mistake: Assuming the company is safe because the Israeli shareholder holds only 40 percent and no one holds a majority. Under the second limb of Section 75B, a foreign-resident relative's shares are added to the Israeli holding, so a 40 percent Israeli stake plus a Canadian sibling's shares can cross 50 percent and bring the whole company inside the regime. The consequence is that the Israeli relative carries an unreported deemed dividend, taxed by the Israel Tax Authority at 25 or 30 percent, with interest and linkage differentials that the Income Tax Ordinance runs from the original due date, so a NIS 400,000 deemed dividend left off three years of returns can turn a roughly NIS 120,000 charge into materially more once the reassessment lands.

Two related traps sit alongside it. The first is the foreign real estate company. Israeli practice has applied the CFC rules to foreign companies whose income is rental, which catches a large number of family property vehicles that were never thought of as investment funds. The second is the nominee fix. Reducing the Israeli holding below 40 percent works only where the change is genuine, and an arrangement that leaves the same person in economic control through a nominee will be looked through by the assessing officer.

Practical Checklist

• Establish, before assuming anything, whether most of the company's income is passive and whether the foreign rate on it is at or below 15 percent, because if either answer is no the regime may not apply at all.
• Map the family holdings against both limbs, counting foreign-resident relatives, and treat a 40 percent Israeli stake as a warning sign rather than a safe harbour.
• Prepare company accounts on a timetable that lets your Israeli relative file Form 150 with the annual return due 30 April, not on your own domestic deadline.
• Coordinate the Canadian T1134 position and any T1135 statement with the Israeli filing so the same company is described consistently to both the Canada Revenue Agency and the Israel Tax Authority.
• Model the foreign tax credit across both countries before the company distributes, so relief is not stranded in the wrong tax year.
• Have any supporting corporate document signed before a notary in Canada and apostilled through Official Documents Services or the equivalent provincial authority.

Speak With an Israeli Attorney

We test whether a family-held foreign company genuinely falls inside Section 75B, model the deemed dividend against the Canadian credit position, and restructure the holdings or the income mix where the exposure is worth removing. For a mixed Israeli and Canadian family, getting the reporting and the timing right is usually more valuable than any single planning idea.

Contact us for a confidential initial consultation.