43 / 72
/43/
company instead of being reinvested in the U.S. branch. A reduced treaty rate applies to
the branch profits of an Israeli company. Also under the tax treaty passive income such
as dividends, interest, and royalties from U.S. sources are subject to reduced rates of
U.S. gross withholding tax.
Federal tax law also requires certain disclosure of the U.S. company’s foreign ownership.
Companies that conduct business in California are subject to California franchise tax
measured by the income from the previous year and, where there is no taxable income,
subject to a minimum tax per year. Companies that do not conduct business in California
but derive income from sources within California are subject to California income tax
based on the company’s net income derived from California sources.
Israeli companies seeking to flip into the U.S. can generally do so on a tax-free basis
with respect to Israeli taxes, so long as they comply with certain ongoing business and
ownership continuity requirements, and obtain specific approval from the Israel Tax
Authority prior to completing the transaction.
Employment
An Israeli entity can engage employees to do business in the U.S. subject to certain
business and tax considerations and registration as an entity qualified to do business in
any state where it is engaged in business. U.S. employers are required to obtain a federal
employee identification number, pay applicable payroll taxes and withhold certain tax
contributions from its employees. Employers may be required to register employees
with the specific state in which they are employed (varies from state to state).
In California, absent an agreement to be employed for a fixed period of time, the
relationship is for an indefinite term and deemed “at will” (i.e. either party may terminate
the employment relationship at any time). Independent contractors must be truly
independent and not be closely directed by the principal.
Regulation of foreign investment in U.S. companies
There are a number of laws, rules and regulations that may be applicable to a foreign
entity investing in or acquiring a U.S. entity. For example:
1. The Committee on Foreign Investment in the U.S. (“CFIUS”). CFIUS authorizes the
President of the U.S. to block acquisitions that result in foreign control over a U.S.
company based on potential present or future national security impact. To obtain
pre-transaction certainty on whether/how the President will exercise discretion,
CFIUS offers to review voluntary notices of covered transactions.
2. Securities Act of 1933 (“Securities Act”), state blue sky laws. Any offer or sale of
securities, pursuant to the Securities Act, must be registered with the Securities and
ExchangeCommission (“SEC”),andunder each state’s own securities laws (known as
“Blue Sky Laws”) must be registered with the applicable state, unless an exemption
from such applicable registrations exist. Many investments in U.S. companies are
made through private placements exempt from registration, which exemption may
have certain conditions such as the manner in which the offering may be made and
the type of investor that can be solicited to participate in the offering.
However, under the Israel-U.S. tax treaty, Israeli companies are exempt from
U.S. income tax, unless the company has a permanent establishment (“PE”) in
the U.S.