The Israeli Tax Authority (ITA) recently published a tax ruling relating to an international investment fund with a manager living in Israel (Ruling 1303/15 of June 30, 2015).This was sorely needed following earlier conflicting rulings issued to practitioners in recent years.The Issues[email protected]The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.A major question is whether foreign investors in a foreign fund are saddled with Israeli taxation just because a manager is an Israeli resident. The ITA generally thinks the fund has a taxable permanent establishment (fixed place of business) because of the manager in Israel.A second question is whether the manager is personally entitled to the ten year tax holiday for overseas income and gains if he became an Israeli resident on or after January 1, 2007.The Israeli economy has benefited enormously from inward foreign investment via venture capital funds and private equity funds – their foreign investors are now granted a statutory capital gains tax exemption if certain conditions are met (Income Tax Ordinance Section 97(b3)).But what about their management personnel? And what about the foreign investors of a fund that invests abroad but happens to have a manager operating from Israel? In each such case a tax ruling is vital, but the ITA was slow to respond and inconsistent. So the latest ruling should clarify things a bit. The Ruling Facts in BriefAccording to the ruling, an individual resumed Israeli residency on January 1, 2014 after residing more than ten years abroad – making him a “senior returning resident” entitled to the ten-year Israeli tax holiday for overseas income and gains like new residents (olim).While he lived abroad, he founded a foreign entity for investment and trade in foreign securities for his family and for other foreign investors.That entity is managed via a foreign management company owned wholly by the individual in consideration for a management fee and sometimes a success fee i.e. a “carried interest” or “carry.” Its activities are all conducted outside Israel and include: managing investments, raising money, marketing, investor relations, executing trades, various back office functions and, significantly, holding intellectual property such as software, hardware and business relationships. All such activities are apparently conducted abroad.Upon his return to reside in Israel, the individual established an Israeli service company to provide services from Israel, by employing traders and/or analysts for the management company regarding functions performed abroad.The individual himself acts as a portfolio manager and chief investment manager in the management company. He also oversees positions and confirms high risk transactions in advance. For this he receives a salary.The Ruling Decision The ruling confirms that the individual is entitled to the ten year tax holiday. This does not extend to dividends paid by the foreign management company to the individual out of Israeli source profits (see below).The activities of the foreign management company, Israeli service company and the individual amounted to a permanent establishment. Its taxable Israeli source profits are to be calculated based on transfer pricing principles in Section 85A of the Income Tax Ordinance (which are similar to OECD and US rules).The portion of Israeli source profits that are unrelated to the individual or his relatives are to be recorded also an expense for the investors and hence not taxable in Israel.The share relating to the individual or his relatives is subject to Israeli company tax or income tax as the ten year tax holiday is not applicable to Israeli source income, only foreign source income.His salary is to be taxed to the extent that it relates to days worked in Israel according to ITA Circular 1/2011 Paragraph 4.1.5. This says that one day of the week is to be treated as the Sabbath, not a working day.The foreign entity and foreign resident investors do not need to file an Israeli tax return unless required to for other reasons.The foreign management company does need to report to the ITA and attach a list of taxable Israeli resident investors.CommentsThe ruling clarifies that foreign investors of a foreign investment fund that invests abroad will not be taxed in Israel, nor will they be required to file an Israeli tax return.Therefore, this ruling may help Tel Aviv establish itself as a financial center if fund managers with investment expertise can service international investment funds in Israel without triggering an unintended “permanent establishment” tax liability for overseas investors.Unfortunately, the ruling is vague on a major issue – what about the “carry”? Even Donald Trump is reportedly interested in stopping “the hedge fund guys” pay less US tax on the “carry.” In our experience, the ITA has been known to spell out an olim exemption for the carry, but the above ruling merely says that Israeli source income will be taxed.Also unclear is whether the individual will enjoy the exemption if he works mostly in Israel – the ITA argues in the above circular and in another recent ruling (4528/15) that an oleh should work abroad at least 40 or 60 days to qualify for the tenyear tax holiday. This is controversial as the tax law contains no such threshold.As always, consult experienced tax advisers in each country at an early stage in specific cases.