U.S. Tax Planning for Israeli businesses This article is the first in a series that considers the key operational and US tax issues that arise when an Israeli business commences business in the U.S. The series of articles will accompany the business from its initial stages of U.S. activity to mature U.S. business activity. How should a business initiating activity in the U.S. conduct itself to minimize U.S. taxes on its U.S. activity? In general, under the U.S. - Israel tax treaty ("Treaty"), an Israeli business is not subject to U.S. tax on its business income until it has a "permanent establishment" (PE) in the U.S. What activity amounts to a PE is highly complicated and involves many factors. An office, warehouse or sales outlet is a PE, but facilities used for display or storage are not. As set forth below, the tax implications of establishing a PE in the U.S. are significant. However, an Israeli business can become subject to U.S. tax even if it does not establish a PE in the U.S. Under the Treaty, U.S. taxes can arise due to activities in the U.S. of certain agents of the Israeli business. There are generally two types of agents – dependent and independent. Under the Treaty, the presence of a dependent agent (such as an employee) will give rise to a PE in the U.S. if the agent regularly concludes contracts in the name of the Israeli business. Thus, if an Israeli company sends employees to the U.S., work performed within the U.S. by such employees may amount to the conduct of a U.S. trade or business through a permanent establishment of the Israeli company. On the other hand, an independent US agent does not create a PE so long as it is acting in the ordinary course of its business. Once an Israeli company has a PE in the U.S. for any of the reasons set forth above, the U.S. may impose tax on any profits that would reasonably be expected to have been derived by the U.S. activity. For purposes of calculating the tax, the U.S. treats the U.S. activity as if it were an independent entity engaged in the same or similar activities under the same or similar conditions. The U.S. basically treats the U.S. activity as completely independent from the Israeli company, and imposes tax on profits that are reasonable to the U.S. taxing authority. In light of the above, an Israeli company initiating business in the U.S. should plan its activities carefully in regard to the nature of (i) its U.S. physical presence, and (ii) the U.S. activities of its agents and employees. Monte Silver Monte Silver is a U.S. lawyer based in Israel specializing in U.S. tax matters. He formerly worked for the Internal Revenue Service and the U.S. Tax Court. This article does not constitute legal advice. Please contact us if you have further questions