Corporate Tax 2024 Comparisons

Most businesses conducting business activities and trade in Israel are incorporated as companies limited by shares, which may be public or private, or as partnerships (see 1.2 Transparent Entities). Public company shares are listed on a stock exchange or offered to the public pursuant to a prospectus. A private company is any company other than a public company.

Israeli companies are generally respected as entities separate from their owners. The Israeli corporate tax regime is based on two-tier taxation ‒ ie, firstly at the company level and then, upon distribution of dividends to the company’s shareholders, at the shareholder level. Dividend income is subject to a lower tax rate than ordinary income. See 3.2 Individual Rates and Corporate Rates for further detail.

Commonly used transparent entities include partnerships, which are treated as pass-through entities for Israeli tax purposes and thus are not subject to two-tier taxation. Only the partners in the partnership are subject to tax with regard to its income, based on the pro rata rights of the partners to the partnership income. Partnerships are widely used in the case of private equity firms, venture capital and hedge funds.

In a general partnership, each partner is liable for all the partnership’s liabilities; however, in a limited partnership, the limited partners are liable only to the extent of their contribution to the partnership. Limited partnerships must have a general partner, who has unlimited liability. Only the general partner is allowed to participate in the management of a limited partnership.

Additional entities that are not subject to two-tier taxation and are treated as transparent for Israeli tax purposes include so-called “house companies”, which are minority-controlled companies (ie, those controlled by five or fewer persons) in which the assets and business are property holdings. Certain family companies may appoint a “representative assessee” (a tax matters partner), who holds the rights to the highest percentage of the company’s profits. The taxable income of the company is attributed to the representative assessee and will not be subject to two-tier taxation.

A company is considered resident of Israel for tax purposes if it is:

• incorporated in Israel; or
• incorporated abroad but managed and controlled from Israel.

According to guidance published by the Israel Tax Authority (ITA), a company is managed and controlled in the place where the business strategy of the company is determined (ie, where the business decisions of the company are made). The location of the board of directors’ meetings is an important ‒ albeit not determinative ‒ factor, especially where the board authorises another organ of the company to manage the company.

In a 2012 Supreme Court decision, the directors of a foreign company acted as an artificial platform for conducting the business of an Israeli company and were not substantially involved in the business management of the foreign company. The Supreme Court ruled that the foreign company was to be regarded as managed and controlled from Israel.

Transparent entities are not considered residents of Israel for double tax treaty purposes and are usually eligible to claim treaty benefits based on the residency of the interest holder (that is, the ultimate beneficial owner of the income).

The corporate tax rate for incorporated businesses in 2024 is 23%. Permanent establishments (PEs) of corporations are also subject to the regular corporate tax rate.

Capital gains and losses arising from real estate transactions located in Israel (including real estate associations) are taxed in accordance with the Land Taxation Law 5723-1963 at the applicable corporate income tax rate.

Transparent entities (such as business partnerships) are generally not subject to Israeli taxation at the level of the transparent entity but are instead taxed based on the pro rata rights of the partners to the partnership income. Thus, individuals may be taxed at up to a 50% marginal tax rate (which includes a 3% surtax applicable to individuals with annual income above a certain threshold) and companies are taxed in accordance with said corporate tax rate.

Israeli companies’ income is taxed on a worldwide basis, whereas foreign companies are only subject to Israeli tax with regard to their Israeli-sourced income.

The company’s net income ‒ calculated using Israeli accounting principles and reconciled with the provisions of the Israel Tax Ordinance (the “Ordinance”) and regulations – determines the tax base for corporate income tax purposes. In general, the accrual method of accounting is used by Israeli companies to report their income for accounting and tax purposes.

Tax and accounting rules differ in several areas, including with regard to:

• accounting income derived from grouping rules that is eliminated for tax purposes;
• depreciation and amortisation rates; and
• specific categories of expenses that may not be fully deductible – for example, overseas travel expenses, vehicle expenses, and similar expenses determined by relevant regulations.

Hi-tech Tax Incentives

In July 2023, a law aimed at bolstering Israel’s hi-tech industry was enacted, with the aim of granting Israeli high-tech companies and their investors various tax incentives. The benefits under said law include:

• granting a tax credit for individual investors (or a group of individuals) of up to 33% of the investment amount;
• allowing investment rollover for individual investors upon a capital gains tax event deriving from the sale of shares in certain qualified technology companies, if the individual invests in shares of another qualified company;
• recognition of an Israeli company’s investment in shares in a technology company as a deductible expense for tax purposes over a period of five years;
• an exemption for interest earned by non-Israeli financial institution from loans made to certain mature Israeli technology companies; and
• an extension of a temporary legislation allowing – in certain circumstances – the recognition of an investment in shares in listed technology companies as a loss and relaxing some of the conditions established thereunder.

Each of these benefits is subject to detailed eligibility rules and conditions.

The law was enacted as a temporary order and is valid until 31 December 2026. In the discussion in Israel’s Parliament (the Knesset), it was noted that if the law achieves its goals, its validity is expected to be extended beyond this period.

Reclassification of Simple Agreements for Future Equity as Equity Investments

Moreover, the ITA recently published guidance concerning the classification of simple agreements for future equity (SAFEs) as an equity investment, as opposed to a debt instrument for tax purposes, the conditions required for said classification. This guidance is particularly important given the current economic reality, where the use of SAFEs as an instrument for raising capital has become very common, both for start-up companies in their early stages as well as more established companies.

Companies deemed “preferred enterprises” are entitled to reduced corporate tax rates with regard to their “preferred income” generated by a “preferred enterprise” within Israel. Depending upon their location, the tax rate for preferred enterprises is 7.5% or 16% (as of 2024). Dividends distributed from certain preferred income are subject to 20% tax, in accordance with the Law of Encouragement of Capital Investments of 1959 (the “Encouragement Law”).

More significant corporate tax reductions apply to large manufacturing companies, as profits of such companies are subject to 5% or 8% corporate income tax (depending upon the location of their manufacturing facilities). Large manufacturing companies may also be eligible for grants of up to 20% if certain conditions are met.

In addition, “technology enterprises” that meet certain conditions are entitled to preferable corporate income tax rates ‒ ranging from 6% to 12% ‒ on their preferred income. Subject to meeting certain conditions (eg, a minimum 90% holding threshold), dividend distributions to foreign-resident companies are subject to a 4% tax rate.

Assets and buildings used to produce certain preferred income are entitled to accelerated depreciation. During the first five years of operation, the company may depreciate its assets at:

• 200% of the regular rate of depreciation with regard to equipment; and
• 400% of the regular rate for buildings (with an annual upper limit of 20% of the value of the buildings).

Losses incurred from a trade or business may be used to offset any other income or gain recognised by the company in the same tax year, including interest, dividends and capital gains. Capital losses may only be offset against capital gains. Specific limitations apply to foreign-source losses. Net operating losses of a company may be carried forward indefinitely, although they may not be carried back. The balance of any unutilised losses in the same tax year may be carried forward indefinitely to be offset against business income and against capital gains from a business; however, this balance cannot be offset against income from any other source.

Carry-forward losses generally survive ownership change. Nonetheless, Israeli courts have ruled that ‒ in certain circumstances ‒ when a transaction is carried out for the sole purpose of utilising the carry-forward losses, such losses will not be recognised against the income of the company following the change of control. This is based on the anti-avoidance provision of Section 86 of the Ordinance.

Generally, sums paid on interest or linkage differentials are deductible, provided that the capital was used for the production of the income. In certain cases, such as the receipt of income with special tax rates or tax-exempt status, the expenses used to obtain such income must be deducted – either proportionately or according to other methods ‒ against preferred income. Thus, in certain circumstances, holding companies may be required to deduct interest payments against exempted or special-rate income and therefore do not fully benefit from this deduction.

In general, Israeli law does not allow for consolidated tax grouping. However, Israeli-resident “industrial” companies (ie, companies that receive 90% or more of their revenues from an industrial entity involved in manufacturing activity) or a holding company of industrial companies may consolidate tax returns and file a single, consolidated tax return in respect of themselves and their subsidiaries if the industrial companies included in the consolidated group are part of a single manufacturing process or assembly line.

In the event that an industrial holding company has subsidiaries engaged in different assembly lines, it may consolidate its return only with regard to the company or companies with a single assembly line in which it has the largest capital investment.

Local companies are subject to capital gains tax, in accordance with the corporate income tax rate (23% as of 2024), upon the sale of shares in other companies. However, if the shares sold were in a non-publicly traded company ‒ or a public company in which the selling company is a so-called substantive shareholder (ie, holds at least 10% of any of the means of control of such company) and has accumulated profits available for distribution ‒ the portion of the selling company’s gain attributed to the years prior to 2006 is subject to 10% tax, whereas the gain attributed to 2006 onwards is tax exempt.

Foreign companies are generally exempt from capital gains tax upon the sale of shares in Israel. See 5.3 Capital Gains of Non-residents for elaboration.

Incorporated businesses are subject to regular capital gains tax upon taxable transactions. In certain transactions, VAT may be imposed (as detailed in 2.9 Incorporated Businesses and Notable Taxes). In addition, there is no stamp duty in Israel and transfer tax only applies to certain transactions that involve the purchase of real estate.

Israel charges VAT – the standard rate of which is currently 17% – on transactions in Israel and on the importation of goods into Israel. A transaction (ie, a sale of goods) is deemed to have taken place in Israel if:

• it was delivered in Israel or exported to Israel (in the case of a tangible asset); and
• the seller is an Israeli resident (in the case of an intangible asset).

Certain transactions are subject to a zero-rate tax (mainly exports of goods and services) or exempt (such as certain financial services and specific real estate transactions). Financial institutions are subject to profit tax and a tax on paid salaries (salary tax) ‒ both at a rate of 17%, subject to certain adjustments. Businesses are entitled to recover input VAT costs in connection with goods or services used by them to create their taxable (including at a zero rate) supply.

Israel imposes customs duties on certain imported goods and sales tax on certain imported and domestic goods. Israel also imposes several duties (eg, trade levies and dumping levies) in accordance with the Trade Levy Law.

It is difficult to ascertain how most closely held businesses operate in practice. However, in the event that they do incorporate, the terms set forth in 3.4 Sales of Shares by Individuals in Closely Held Corporations apply.

As mentioned in 1.1 Corporate Structures and Tax Treatment, the Israeli corporate tax regime is based on two-tier taxation:

• tax at the company level – the corporate tax rate in 2024 is 23%; and
• tax at the shareholder level, upon dividend distribution – the dividend tax rate for shareholders is generally 25%, which increases to 30% for shareholders who are substantive shareholders at the time of the distribution or at any time during the 12-month period preceding the distribution.

The highest applicable marginal tax rate on ordinary income is 47% (in 2024). Moreover, an additional 3% surtax will apply to any taxable income of an individual that is above ILS721,560.

Although dividend income is subject to a lower tax rate than ordinary income, when taken together with the corporate income tax rate, the total tax paid can be almost equal to the highest marginal tax rate applicable to ordinary income.

Nevertheless, an anti-avoidance provision under domestic law subjects the income of a closely held company generated from activities of its substantive shareholder to marginal income tax rates applicable to individuals – provided that several conditions are met. In addition, a portion of the accumulated profits may be deemed notionally distributed in certain circumstances. Please see 3.3 Accumulated Earnings for Investment Purposes for further discussion.

As mentioned in 3.2 Individual Rates and Corporate Rates, subject to meeting certain conditions, closely held companies are taxed at marginal income tax rates applicable to individuals, if the income generated is attributable to the activities of their substantive shareholders.

In addition, under certain circumstances, the ITA may deem accumulated profits of a closely held company as distributed to its shareholders if the following conditions are met:

• the closely held company accumulates profits that exceed ILS5 million;
• it has not distributed a dividend of at least 50% of its profits in a tax year to its shareholders before the end of the five-year period following such tax year;
• the distribution of the dividend does not damage or negatively impact the company; and
• the lack of distribution results in tax avoidance or tax reduction.

The ITA may exercise authority and deem up to 50% of such accumulated profits distributed as a dividend (subtracting actual dividends paid), provided that the accumulated profits of the company do not fall below ILS3 million.

As mentioned in 3.2 Individual Rates and Corporate Rates, individuals are generally subject to 25% tax upon receipt of a dividend. This increases to 30% if they are substantive shareholders at the time of the distribution or at any time during the 12-month period preceding the distribution. An additional 3% surtax applies on the income portion exceeding ILS721,560.

See 3.4 Sales of Shares by Individuals in Closely Held Companies.

In the absence of an applicable income tax treaty, the following withholding taxes apply to payments to non-Israeli residents.

In general, payments made to non-Israeli individuals are subject to 25% withholding tax and non-Israeli corporations are subject to withholding tax pursuant to the corporate income tax rate (23% in 2024).

Interest paid to non-resident corporations is typically subject to withholding tax at the corporate income tax rate level (23% in 2024) and up to 47% in the event of a payment to an individual who is a substantive shareholder. Certain interest payments to non-resident investors are generally exempt from withholding tax, such as interest on certain traded government bonds and interest on certain deposits by a non-Israeli resident – provided the non-Israeli resident does not conduct business, or practise a profession, in Israel.

Dividends distributed to non-substantive shareholders are subject to 25% withholding tax, whereas dividends to substantive shareholders (at the time of the distribution or at any time during the 12-month period preceding the distribution) are subject to 30% tax. However, if the Israeli-resident company distributing the dividend is a publicly traded company ‒ and its shares are held by a registration company ‒ then 25% withholding tax will also apply to substantive shareholders. In the case of a dividend distribution by a preferred enterprise, a reduced rate of withholding tax of 20% applies. In the case of a dividend distributed by a technology enterprise, a reduced rate of withholding tax of 4% may apply under certain circumstances.

There are no particular areas of interest with regard to collection of taxes through withholding that the ITA is focused on. As noted earlier, all outbound payments are generally subject to withholding (by default), unless the ITA issues a withholding certificate allowing withholding at a different rate ‒ for example, a lower rate under an applicable income tax treaty. As such, the ITA scrutinises these cross-border payments prior to issuing a withholding certificate. 

There are more than 50 double tax treaties to which Israel is party and that are in force in Israel. Israel generally follows the OECD Model Tax Convention on Income and on Capital (the “OECD Model”), with the exception of a number of treaties (with, for example, Norway and Sweden) signed in the 1960s and the 1970s before the OECD Model was widely accepted. Israel signed the OECD Multilateral Instrument (MLI) in June 2017.

An ITA circular describes the phenomenon of “treaty shopping” and lists several methods with which this issue may be confronted, such as:

• examining the residency of the entity, based on the rules determined in the relevant treaty;
• limitation on benefits provisions that allow the contracting states unilaterally or jointly to revoke or disallow benefits in cases whereby the entity attempts to secure tax benefits unlawfully or if the activity is deemed to be an abuse of the treaty;
• beneficial owner provisions, which determine that only the ultimate beneficiary may be the recipient of treaty benefits;
• interpretation of the treaty based on the Vienna Convention on the Law of Treaties, which calls ‒ among other things ‒ for treaties to be interpreted in good faith; and
• use of domestic anti-avoidance legislation such as Section 86 of the Ordinance.

Foreign corporations that conduct business activity in Israel must operate in accordance with accepted transfer pricing standards and, in particular, the arm’s-length principle.

In an international transaction where ‒ owing to special relationships between the parties – less profit is derived in Israel when compared with the price or conditions between unrelated parties, the transaction must be reported according to the market conditions and will be taxed accordingly.

Regulations published in 2006 specify certain methods to determine fair market value. The preferred method is to compare the price of the transaction with the price of a similar international transaction between unrelated parties. If this method cannot be implemented, the taxpayer must use one of the methods stipulated in the regulations. If neither of the methods indicated in the regulations can be used, the taxpayer is permitted to use any other suitable method of comparison.

The tax-assessing officer has the authority to demand that a transfer pricing study be presented within a 30-day period.

This is an issue that the ITA has been examining. Many audits have been conducted recently by the ITA in respect of limited risk distribution arrangements.

The ITA has published two circulars concerning transfer pricing. The first circular distinguishes between activities that would be deemed consistent with a full-risk distributor, a limited-risk distributor and a marketing entity, then specifies the transfer pricing method that would be the most appropriate in each case (according to the ITA). The second circular provides applicable safe harbours for such types of transactions (ie, distribution, marketing and low-value-adding services). For distribution activities, the circular stipulates a safe harbour of a 3% to 4% operating margin for entities characterised as low-risk distributors. See 9.10 Transfer Pricing Changes for more information on these circulars.

Israel’s local transfer pricing rules generally follow the relevant OECD standards, albeit with certain deviations. See 4.7 International Transfer Pricing Disputes for a discussion on recent changes that were adopted to the transfer pricing rules.

The ITA has been more aggressive in recent years when it comes to transfer pricing audits, including requiring taxpayers to change the transfer pricing method (such as increasing cost-plus and return-on-sale margins), as well as focusing on arguments about transfers of functions, assets and risks as part of a business restructuring.

A taxpayer may request a mutual agreement procedure (MAP) if it believes that it is – or is likely to be – subject to taxation inconsistent with a double tax treaty. International transfer pricing disputes are rarely resolved through double tax treaties or MAPs, as most transfer pricing disputes are resolved through settlements with the ITA. Relatively few reach litigation or resolution through the MAP process. The ITA is generally open, however, to participating in the MAP process.

A recent circular published by the ITA in 2023 (which replaces a 2001 ITA circular) provides updated guidance on MAPs and generally follows the principles adopted in Action 14 of the OECD BEPS project. The circular discusses the different types of MAPs and how to initiate MAPs, while expanding the documentation needed for this purpose. The circular lists cases which are suitable for a MAP such as disputes relating to permanent establishments, dual residency, allocation of income and foreign tax credits. The circular elaborates on the timing for filing MAPs and situations where the MAP relates to tax years for which the statute of limitations period has expired.

When a transfer pricing claim is settled, the ITA usually argues for a correlating adjustment. This adjustment may be in the form of a deemed dividend or interest on a loan. Israeli courts have generally approved this position in their decisions.

In a 2018 Supreme Court case, an Israeli company provided R&D services to its parent company under a cost-plus arrangement. Given that the price of the services the Israeli company provided to its parent company was higher than the amount reported to the ITA, the Supreme Court ruled that this created an intercompany debt to the Israeli company on the part of the parent company that was equal to the additional amount that should have been paid and reported. Owing to this debt, the parent company should have been charged with interest and therefore the Israeli company had a corresponding deemed interest income inclusion, which is subject to tax in Israel.

A branch of a non-Israeli entity is taxed in Israel on the profits the branch derives from its Israeli activities, whereas a local subsidiary is generally taxed on its worldwide income. The corporate income tax rate in Israel is 23% and thus the taxable profits of the branch allocable to Israel are subject to such tax.

Generally, there is no branch profits tax in Israel and profits may be distributed by the branch to the overseas headquarters without an additional layer of tax.

For dividends paid by an Israeli subsidiary to overseas shareholders, the withholding tax rate is generally 30%; however, it is reduced to 25% if the Israeli subsidiary is listed on the Tel Aviv Stock Exchange (TASE). These rates may be reduced further under an applicable double tax treaty. It is possible to mitigate the tax impact of such distributions by a subsidiary if the profits are distributed only when the subsidiary is liquidated. In such cases, the capital gains derived from the liquidation ‒ as well as the distribution of the profits – are tax exempt in Israel. On the other hand, the sale of a branch by a non-local corporation is subject to capital gains tax in Israel.

Capital gains of non-Israeli residents on the sale of stock in public companies traded on the TASE are generally tax exempt, provided that the capital gains do not stem from:

• a PE of such non-Israeli resident in Israel;
• investments in certain real estate funds; or
• the sale of certain short-term bonds or loans.

Capital gains of non-Israeli residents on the sale of stock in private companies acquired on or after 1 January 2009 are also generally tax exempt, provided that:

• they did not arise from a PE of such non-Israeli resident in Israel;
• the stock was not purchased from a related party or restricted owing to certain tax-free reorganisations; and
• the principal value of the stock does not derive from:
1. real property (or any asset attached to real property);
2. the right to benefit from real property situated in Israel (in any form); or
3. rights to use natural resources.

The exemption on capital gains on the sale of stock of private companies also applies upon the sale of the shares of a non-local holding company that owns the stock of a local company (either directly or indirectly).

Certain treaties provide partial or full relief with regard to corporate capital gains taxes for non-Israeli residents, subject to satisfying certain conditions.

In general, pursuant to the provisions of the Ordinance, a non-Israeli resident company is exempt from tax on capital gains generated from the sale of securities of an Israeli resident company or the sale of a right in a non-Israeli resident company ‒ the main value of which are rights (either direct or indirect) to assets located in Israel, including shares in an Israeli subsidiary (subject to certain additional conditions).

As mentioned in 5.3 Capital Gains of Non-residents, a tax exemption generally applies if the acquisition was made by a non-Israeli resident after 1 January 2009. Acquisitions made before 1 January 2009 are generally subject to capital gains tax in Israel (although certain other domestic law exemptions may still be applicable).

The taxable profits of a local branch of a non-Israeli company are generally calculated by reference to the income and deductions attributable to the branch, based on the assumption it operates as an independent business unit and in accordance with transfer pricing rules. The income tax regulations stipulate that if the transaction cannot be compared to a similar transaction, the value of the transaction should be determined based on the profit rate of the transaction in comparison with similar international transactions; otherwise, a profit split should be carried out based on the contributions and risks of each party to the transaction. If none of the above-mentioned methods are applicable, then the most appropriate method must be applied on a case-by-case basis.

The Ordinance, however, does not include specific rules regarding the taxation of a branch or the allocation of income and expenses to a branch in Israel.

No specific standard applies to allowing a deduction for payments by local affiliates for management and administrative expenses incurred by a non-local affiliate. The deduction must be carried out in accordance with the fair market value of such services.

Israel does not impose thin-capitalisation rules and therefore it is theoretically possible to finance a company with 100% debt. However, this type of debt arrangement is subject to transfer pricing rules and must bear interest in accordance with fair market interest rates.

In addition, it is possible to provide an interest-free capital note ‒ provided the recipient of the loan is controlled by the provider of the loan, is not linked to any index and does not carry interest or yield. The loan must not be repaid prior to the expiry of a five-year period and its repayment must be subordinate to all other obligations of the company.

The foreign income of local companies is subject to corporate income tax, as local companies are generally taxed on their worldwide income at the corporate income tax rate (23% in 2024). Non-Israeli companies, however, are only subject to Israeli tax with regard to their Israeli-sourced income.

As noted in 6.1 Foreign Income of Local Corporations, the foreign income of local companies is subject to taxation at the regular corporate income tax rates.

Dividends from foreign subsidiaries of local companies are subject to regular corporate income tax rates (23% in 2024). However, tax credits are available in such cases.

The Israeli local company may claim foreign taxes paid in relation to the distribution as either:

• direct credit – where the Israeli company may claim credits with regard to foreign withholding taxes paid on the dividend distribution (in which case, the dividend distribution will be subject to regular corporate income tax rate in Israel); or
• indirect credit – where the Israeli company may claim credits with regard to its allocable share of the foreign taxes paid by the distributing company on its foreign-source income and the foreign withholding taxes paid on the dividend distribution (in which case, the dividend distribution will be subject to the regular corporate income tax rate in Israel).

In order for non-Israeli subsidiaries to use intangibles developed by local companies, the intangibles must typically be sold to such subsidiaries. Alternatively, the local company may license the intangibles to non-local subsidiaries, providing them with rights to use the intangibles in return for proper consideration. Both scenarios are subject to compliance with transfer pricing rules.

Non-local subsidiaries may be subject to controlled foreign corporation (CFC) rules, provided that they meet several conditions.

A controlling shareholder of the CFC must be an Israeli resident (individual or corporation) that owns 10% or more of any of the means of control of the CFC. The controlling shareholder’s proportionate amount of the CFC’s passive income is deemed a dividend distribution to the controlling shareholder.

A CFC is a foreign company that is a non-Israeli tax resident and is not listed on an exchange (or, if listed, less than 30% of its interests have been offered to the public ‒ not including listed shares held by controlling shareholders). In addition, most of the company’s income must stem from passive sources and such passive income is subject to a 15% or less tax rate in the foreign jurisdiction. Moreover, the foreign company must be controlled by Israeli residents (ie, Israeli residents hold more than 50% of the interests in the foreign company or more than 40% of the interests in the foreign company and together with the holdings of related parties hold more than 50%, or if an Israeli resident has veto power over major company decisions).

On the other hand, non-local branches of local corporations are deemed to be Israeli tax residents and are therefore subject to corporate income tax on their worldwide income, whether from Israel or abroad. However, tax credits may be available in such cases.

As mentioned in 1.3 Determining Residence of Incorporated Businesses, non-local subsidiaries of Israeli resident companies are subject to a management and control test – according to which, a company is managed and controlled in the place where the business strategy of the company is determined (ie, where the principal and substantive business decisions of the company are made). The location of the board of directors’ meetings is important, although not determinative, especially in a case where the board authorises a different organ of the company to manage the company.

Israeli case law determines a foreign company to be managed and controlled from Israel where the managers of the foreign company are not substantially involved in the foreign company’s business management and merely act as an artificial platform for conducting the business of the Israeli company.

Local companies are taxed on gain upon the sale of shares in non-local affiliates according to the regular corporate income tax rate (23% in 2024).

The Ordinance includes a general anti-avoidance provision in Section 86 ‒ according to which, a tax-assessing officer may ignore transactions if:

• they are deemed to be artificial or fictitious; or
• one of the main motivations of such a transaction is tax avoidance.

In addition, the “substance over form” doctrine is a generally accepted principle of local case law.

Tax audits tend to be carried out randomly and, as such, not all taxpayers and tax returns are examined.

In addition, the assessing officer may audit a company’s tax return within four years ‒ and, in certain circumstances, within five years ‒ of the end of tax year in which a tax return was filed. The officer’s assessment may be appealed to another officer within the same local office. The decision of the second officer may be appealed to the district court. The decision of the district court may, in turn, be appealed to the Supreme Court.

Israel has already begun to implement certain BEPS recommendations and the authors expect this process to continue gradually. So far, implementation has mostly occurred through changes in the interpretation of existing law and tax treaties, rather than through changes in legislation.

The Digital Economy

In 2016, following BEPS Action 1 (which focuses on the digital economy), the ITA published a circular addressing the taxation of income applicable to non-Israeli internet companies selling goods or providing services to the Israeli market through the internet, as well as the VAT liability of internet services companies. See 9.12 Taxation of Digital Economy Businesses and 9.13 Digital Taxation for further details.

IP Taxation

Following BEPS Action 5 (which addresses harmful tax practices), and consistent with the OECD’s so-called nexus approach to preferential tax regimes for intellectual property (IP), the Israeli government recently enacted legislation granting preferential tax rates to technology and hi-tech companies with regard to income derived from IP development activities carried out in Israel. In order to be entitled to these preferential rates, the new legislation sets out certain complex conditions to ensure that the benefits are only provided when the IP is actually developed in Israel. These tax benefits are part of a significant reform under the Encouragement Law, in light of the recommendations of the OECD/G20 BEPS Project.

Master File and Country-by-Country Report

In September 2022, changes to the Ordinance and the applicable transfer pricing regulations were adopted by the Knesset. The concepts of “master file” and “country-by-country report” were introduced, and the transfer pricing reporting obligations were updated. A master file was set at ILS150 million (roughly EUR41 million). This requirement applies to an Israeli parent company and, under certain conditions, an Israeli subsidiary (even if the parent company’s jurisdiction does not require a master file).

The items required to be reported within the master file generally follow the OECD template ‒ albeit with some adjustments that widen the reporting scope for Israeli companies, such as providing:

• the group’s organisational charts (including geographic location of employees); and
• descriptions of the group’s service agreements, shareholder changes ,and the supply chain surrounding the group’s five largest revenue-generating products or services.

Both the master file and the local file must be submitted within 30 days of request by the ITA. 

ITA Reform Committee

The ITA established a committee for a reform of the Israeli international tax regime, which has recently submitted its recommendations to the Director of the ITA. These include many significant and far-reaching changes in respect of various provisions relating to international taxation in Israel ‒ for example, provisions that relate to individual residency, CFCs, foreign tax credits, reporting obligations and hybrid mismatches. The declared purpose of establishing such a committee is to:

• deal with enforcement difficulties and lack of information;
• close tax loopholes; and
• reduce the risk of money laundering.

Owing to the fact that this committee acted in co-operation with professional associations and consulted with other professional bodies, the authors expect many of the committee’s recommendations to ultimately be enacted into law. However, given that a new government was recently formed, the timing on this issue is unclear.

The ITA has indicated that it intends to follow and implement the OECD’s recommendations in the BEPS reports and, accordingly, the authors expect to see amendments to domestic legislation, the enactment of regulations, and the publication of guidance papers by the ITA that will indicate the ITA’s position. In addition, discussions with Israel’s treaty partners are anticipated and the OECD’s recommendations are expected to be implemented. Israel is also a signatory to ‒ and has ratified – the MLI.

Israel is among 138 countries that have agreed to adopt the two-pillar solution introduced by the OECD/G20 Inclusive Framework on BEPS in order to address the challenges arising from the digitalisation of the economy. The minimum tax rate for the purposes of the so-called Income Inclusion Rule and the Undertaxed Payment Rule is 15%. This minimum tax may have a significant impact on multinational enterprises with Israeli subsidiaries and on Israeli groups that are subject to lower tax rates under the Encouragement Law with regard to their “preferred enterprise” (in certain locations), “preferred technology enterprise” or “special preferred technology enterprise”.

International tax has significant media exposure and hence a high public profile in Israel ‒ especially with regard to the taxation of non-Israeli internet companies, which has given rise to public protest. The protesters claim that these non-Israeli internet companies do not pay sufficient tax on their activity in Israel. The authors expect that the media focus on this issue, together with the high public profile, will increase Israel’s motivation to implement the BEPS recommendations. 

Although the government is trying to encourage investments in the Israeli economy, the authors expect the competitive tax policy to be restricted as a result of the BEPS recommendations, which will surpass other considerations.

An example of this can be seen in the recently enacted amendments to the Encouragement Law, which provides for preferential tax rates to be granted to technology and hi-tech companies, but only with respect to income derived from IP developed in Israel (see 9.1 Recommended Changes). This law was revised in accordance with BEPS Action 5. In this respect, the Israeli regulations have adopted the principle proposed in the BEPS rules (the “nexus approach”) for calculating the qualifying income and the benefitted capital gain, so as to avoid being considered a harmful tax regime.

As part of the Encouragement Law, Israel grants extensive tax benefits to Israeli manufacturers. In certain cases, this contradicts the aforementioned nexus approach (see 9.4 Competitive Tax Policy Objective), which limits the ability to grant benefits where the IP has not been developed in Israel. There is no state aid or other similar constraints.

Among the various recommendations by the committee for reforming the Israeli international tax regime noted in 9.1 Recommended Changes is the adoption of BEPS Action 2. In principle, this is a denial of a deduction or imputation of income in cases where taxpayers make hybrid arrangements for the purpose of reducing their tax liability in Israel. The provisions of BEPS Action 2 are almost fully adopted and will apply to any transfer specified in the recommendations that, in aggregate, exceeds ILS500,000 per year.

These are extremely complicated and complex instructions. By way of an example, the recommendations deny an expense deduction in Israel when – as a result of a hybrid instrument – no income was included in the payee’s country of residency. If the recipient is an Israeli resident and the payor’s country has not implemented this recommendation, income should be attributed to the Israeli resident in Israel in the amount of the expenditure allowed in the foreign country. As such, in the event that an Israeli-resident company received a loan from a foreign company and the foreign company classifies the loan as capital (ie, the interest expenses were claimed in Israel yet the foreign company classified the payment as an exempt dividend), the recommendations state that the Israel would deny the deduction of expenditure by the Israeli company.

Israel has a territorial tax regime (combined with a personal tax regime). However, there are no interest-deductibility restrictions or thin-capitalisation rules. The authors are not aware of any intention on the part of the ITA to enact such rules.

Israel has a very sophisticated CFC regime (see 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules), which was ratified almost 15 years ago. The main features of the Israeli regime are very similar to the BEPS recommendations concerning the CFC rules. Accordingly, the authors do not expect any significant change to the Israeli CFC regime as a result of the BEPS legislation.

Israel maintains a conservative approach when it comes to granting treaty benefits. Such benefits are granted subject to the existence of substance in the treaty country.

There are limitation on benefits clauses only in a minority of the Israeli treaties (although one exists in the Israel–US treaty). However, a court ruling determined that Israel is entitled to implement anti-avoidance doctrines from its domestic legislation when interpreting tax treaty provisions ‒ for example, the establishment of a foreign company in a treaty country may be considered artificial where the purpose is to avoid the payment of tax. In addition, Israel has ratified the MLI.

Israel complies with – and encompasses most of – the BEPS proposals with regard to the double tax convention limitation. Accordingly, the authors do not expect a significant impact on inbound or outbound investors.

In 2018, the ITA published two circulars concerning transfer pricing.

The first circular provides guidance – based on the OECD transfer pricing guidelines – for identifying and analysing intercompany activity and the most appropriate transfer pricing method for determining the activity’s part in the global business activity. In accordance with the BEPS recommendation, the circular suggests that the analysis should begin by reviewing the contractual arrangements and then examine the parties’ conduct in order to ascertain if it is consistent with the contractual arrangements.

The second circular, also based on the OECD transfer pricing guidelines, presents the ITA’s position regarding a number of transactions, while reducing the burden of the documentation and reporting requirements by way of the safe harbour principle. The circular sets a safe harbour for the following transactions:

• low value-adding services (an operating profitability of net cost-plus margin of 5%);
• marketing services (an operating profitability of net cost-plus margin between 10% and 12%); and
• low-risk distribution services (an operating profitability of sales turnover between 3% and 4%).

The circular mentions that the margins will be revised from time to time. See 9.1 Recommended Changes for a discussion of recent changes to the transfer pricing rules.

The authors believe that the BEPS proposal for transparency and country-by-country reporting will improve enforcement and that, overall, the proposal is proportionate – given that it only applies to large entities and will not impose unreasonable compliance costs on small entities. As noted earlier, there is proposed legislation in Israel to implement this recommendation.

As noted in 9.1 Recommended Changes, the ITA has published a circular that focuses on the taxation of income by non-Israeli internet companies selling goods or providing services to the Israeli market through the internet, as well as on the VAT liability of internet services companies. The circular generally provides new, broader interpretations of the definitions of a PE conducted through dependent agents and fixed places of business (see 9.13 Digital Taxation for further details). It also expands the VAT registration obligation of non-Israeli companies active in the Israeli market.

Israel has not yet enacted laws addressing digital economy taxation rights. As noted in 9.12 Taxation of Digital Economy Businesses, the ITA has published a circular that takes a somewhat aggressive position. For treaty-partner countries, the circular extends the interpretation of a PE conducted through a “fixed place of business” or a “dependent agent” in such tax treaties to the context of the digital economy.

For a fixed place of business PE, the circular states that a PE may exist even where there is no internet server located in Israel. It also notes that certain activities of representatives and employees of an Israeli affiliate of a non-resident company in Israel – such as identifying potential clients, marketing activities and client relationship management – may create a PE when conducted with assistance from (or through) a place of business in Israel. In effect, the ITA’s position is equivalent to attributing the activities of an Israeli affiliate of a multinational group to a non-Israeli affiliate within the group.

With regard to creating a PE through a dependent agent, the circular adopts the “principal role” approach. As such, increased involvement of the agent in Israel in negotiations on behalf of ‒ and decisions that bind ‒ a non-Israeli company reinforces the conclusion that the dependent agent will be treated as a PE of such company. According to this approach, if employees of an Israeli affiliate of a multinational group perform substantive activities that lead to binding contracts, a PE in Israel may be established (by essentially deeming such employees as dependent agents of a non-Israeli affiliate within the multinational group).

For companies that are resident in non-treaty jurisdictions, the circular notes that the ITA will acquire taxing rights over a non-Israeli taxpayer based on domestic law principles – specifically, business activity conducted in Israel, which generally requires a lower threshold than the PE treaty standard. One of the examples that the circular cites as meeting this standard is the existence of “significant digital presence” (even without a physical presence) in Israel. Indications of the existence of a digital presence in Israel include:

• a significant number of contracts signed with Israeli residents via the internet;
• a significant number of customers in Israel who consume the services provided by such company; and
• internet services that have been adapted to suit Israeli customers (eg, a website in Hebrew that uses local currency and local credit card clearance).

There is no specific legislation that addresses the taxation of offshore IP. Payments by Israeli residents to non-Israeli corporate owners of IP for the use or licence rights of said IP are generally subject to withholding at the corporate income tax rate (23% as of 2024), unless otherwise reduced by a double tax treaty.