Ever since, on October 16, 1962, President John F Kennedy took time out from the Cuban Missile Crisis to sign the world’s first Controlled Foreign Corporation (CFC) legislation into law, it has been becoming harder and harder for residents of the planet to park their savings tax free within companies in foreign jurisdictions.

Israel has had CFC legislation since 2002. A draft amendment tabled last week is about to give it a makeover. While hardened locals will take this in their stride, first time residents who have become accustomed to their 10 year tax exemption on foreign source income are likely to feel the changes more keenly as they approach the end of their exemption period and try to plan ahead.

In a nutshell, current Israeli CFC legislation seeks to tax as dividend on a current basis the passive income of a foreign company subject to low taxation abroad. For the legislation to kick in there needs to be direct or indirect majority Israeli ownership of the foreign company, the majority of profit or turnover must be passive, and corporate tax abroad must be no higher than 15%. The majority Israeli ownership requirement is reduced to 40% where, together with foreign related parties, the 50% threshold is exceeded.

According to the proposed amendment, the majority passive income/turnover test is to be replaced by a requirement of only a third, passive income is to be renamed moveable income reflecting the geographic mobility of income in the modern world, and shifting income via intercompany interest bearing loans will be more difficult.

The situation will be more draconian for companies in jurisdictions that either have no exchange of information agreement with Israel or are deemed harmful tax regimes (list of bogeymen to be announced). There will be no lower limit on moveable/passive income to deem the company a CFC and substantially reduced limits where foreign related parties also invest. Overall, it is going to be much harder for passive income to be ‘protected’ in an active business structure outside of Israel.

One crude planning device involving new residents should disappear – currently, a regular Israeli resident can make a case for no CFC by partnering with a new resident who doesn’t count as an Israeli resident for the majority Israeli ownership test. That will no longer apply where the investment is made after the individual becomes resident.

On President Kennedy’s mind that fateful day in 1962 was M.A.D. (Mutual Assured Destruction). The CFC legislation that has mushroomed over the last six decades has proven considerably more one-sided.