Last Updated 1 year ago
If you’re an American living in Israel and running a business overseas, the recent U.S. election results may bring some stability to your corporate tax strategy. With President Trump back in office and Republicans in control of both the Senate and the House, we can expect things not to change too dramatically.
U.S. Corporate Tax Rate and the GILTI High-Tax Exemption
Vice President Harris had previously advocated for increasing the U.S. corporate tax rate to 28%, a significant jump from the current 21% rate. With Trump and the Republican Party, the corporate tax rate will likely remain 21%. This consistency brings some reassurance for American business owners abroad, particularly those in Israel. Given that the corporate tax rate in Israel is 23%, U.S. citizens running Israeli companies can continue to benefit from the favorable High-Tax Exemption for GILTI (Global Intangible Low-Taxed Income) tax treatment.
Understanding the GILTI Tax Implications
The GILTI tax, introduced in 2018 as part of the Tax Cuts and Jobs Act (TCJA), aims to tax profits from controlled foreign corporations. However, it includes an exception for foreign corporate taxes that are at least 90% of the U.S. corporate tax rate.
With the U.S. corporate tax rate staying at 21%, many U.S. citizens living in Israel who own Israeli companies remain exempt from GILTI tax. Given the Israeli corporate tax rate of 23%, this exemption applies as long as certain conditions are met.
If the U.S. corporate tax rate had changed to 28%, the 90% High-Tax Exemption would have been limited to 25.2%, and the Israeli corporate tax would have fallen short. However, U.S. citizen business owners in Israel should be mindful of other potential pitfalls.
Two examples are carryover losses from prior years and reduced Israeli corporate taxes for hi-tech firms. Both of these would reduce the current Israeli corporate tax due, subjecting the owner to the GILTI tax on their personal U.S. tax return.
Structuring High-Tech Ventures Between the U.S. and Israel
Another key aspect is structuring high-tech ventures involving U.S. and Israeli entities. Many startups and tech companies have adopted a U.S. parent company with an Israeli subsidiary structure. If the corporate tax rates between the U.S. and Israel diverged significantly, such structures would need to be reconsidered or adjusted to maintain tax efficiency. With Republicans taking back control, the risk of a significant shift in corporate tax rates has been mitigated, and existing structures are less likely to require immediate changes.
Potential Corporate Tax Changes in Israel
Israel is currently considering its own set of corporate tax reforms, which may include updated regulations such as taxing retained earnings. These potential changes, influenced by the financial burden of the ongoing war, mean that even with some potential stability on the U.S. tax side, there are considerations to keep in mind in Israel.
While nothing has been finalized yet, U.S. citizens owning Israeli businesses should keep these possible changes in mind as they could impact the overall tax situation for their businesses.
Revisiting Your Corporate Tax Strategy
If you’re managing a foreign corporation and feeling uncertain about how these potential changes apply to you, now is a good time to revisit your corporate tax strategy. Having a company that understands the changes and implications of U.S. and Israeli corporate tax policies can assist you in making informed decisions, keeping your business compliant, and minimizing tax liabilities.
Do you think these changes will affect your business?
Feel free to reach out if you’d like to discuss the impact on your corporate tax strategy.
We suggest catching up on our new 3-part blog series: Taxes Under the Trump Administration.