American Owners of Israeli CompaniesAmerican Owners of Israeli Companies
American Owners of Israeli Companies Have Specific Requirements that they should Keep. Here they are:
An American who owns a share of an Israeli company has reporting requirements depending very much on how much he owns of it and whether the company is managed by him or if it is an investment he does not operate. That way it is passive income. Either way, the client with American responsibilities who owns a share of an Israeli company has to be very careful with his CPA to help him be compliant now in the secure financial world.
The first metric to be very careful of is the percent ownership. The ownership of a CFC then requires the client to report on IRS Form 5471 which is very stringent. However, recently these laws change so often you have to have a great CPA to keep up with them. Even penalties up to 10,000 USD can be waived if your accountant can apply Revenue Ruling 2019-40 * . This allows waiving of certain penalties and Weinstein can help clients who have been hit with these. But under normal circumstances even, an owner may not even know he a CFC owner and have responsibilities. Here’s why:
Because attribution of ownership of Israeli companies may make an owner out of someone who doesn’t own any shares of the company. A good example is a wife who has American responsibilities and her husband is an Israeli who owns a share in an Israeli company. The client may not be responsible, and the wife may be responsible as a CFC owner and need to report on IRS Form 5471.
Most common is the Category 4 filer who owns more than 50 % ownership of the voting power or the shares of the Israeli company. Then, when a client sells or acquires more than 10 % of the total value of the stock or voting power during the year he is a Category 2 filer. Category 3 filer is also for clients who acquire or sell stock of the Israeli company during the year. Category 1 and Category 5 filers are those American reporting clients who own at least 10% of an Israeli company shares or voting interest.
* Revenue Ruling 2019-40 exempts Category 1 and Category 5 filers with a very low threshold of 10%, if they meet these tests:
– If the CFC is 51% or more controlled by Israeli (any non-American) interests, and
– The client does not own another company or partnership that controls the CFC, and
– The client is not a company or partnership that is controlled by the CFC,
Then that client does not have to report as a Category 1 or Category 5 filer. That is wonderful.
Revenue Ruling 2019-40 also exempts Category 1 and Category 5 filers from the very low threshold of 10 %, if:
– The client is a constructive shareholder and not a direct shareholder,
– But the client is related to the Israeli company.
Direct shareholder, Constructive shareholder, Indirect shareholder
A direct shareholder of an Israeli company is an American reporter who owns the stock or owns a portion of an Israeli corporation, whereas an indirect shareholder owns a company or partnership that itself owns the share of the Israeli company. Now, if an American reporting client owns shares in an Israeli company this way, he is a CFC shareholder. An indirect or constructive shareholder is a client who either owns shares in an Israeli through a company or partnership or through attribution rules of a relatives who owns stock.
Let’s suppose the client has an active operation of a company and owns 15 % of the company share. If the Israeli company is more than 50 % owned by Israeli interest then that client does not have to report on IRS Form 5471 unless the client buys or sells shares in the Israeli company. Then he might be required to report as a Category 2 or Category 3 filer.
The second metric involving American reporting clients who own Israeli companies (or shares in them) is the PFIC law, attributable to IRS Form 8621. If the Israeli company makes its income 75 % or more from passive income – or 50 % or more of the Israeli company’s average assets help the company make passive income like investments – then, the company is a PFIC and the client is required to put in IRS Form 8621.
