Corporate Tax 2021

Last Updated March 15, 2021

Israel

Law and Practice

Authors



Herzog Fox & Neeman is one of Israel's premier law firms, with a reputation as a market leader, through its involvement in major developments that shaped the Israeli economy. Its teams have experience in cross-border and domestic matters, which enables it to address clients’ legal needs across all industries. Herzog Fox & Neeman has one of the largest and most broadly experienced and diversified tax departments in Israel. The department is comprised of approximately 45 fee earners (including 16 partners) and provides an exceptionally wide range of services; ranging from corporate tax, indirect tax and transfer pricing to tax litigation and disputes with the Israel Tax Authority, private clients, investment funds and more. The Tax Department has a hugely diversified client-base, comprised of multinational companies that operate in Israel (such as Facebook, Google, Microsoft and Salesforce), investment funds, ultra high net worth individuals, Israeli companies (such as the Israel Electric Corporation and Mellanox Technologies Ltd) as well as non-profit organisations.

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 (for partnerships, please see below). 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 separate entities from their owners. The Israeli corporate tax regime is based on two-tier taxation: first, at the company level and second, 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 (please see below).

Transparent entities commonly used 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 respect 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, and venture capital and hedge funds.

In a general partnership, each partner is liable for all the partnership's liabilities, as opposed to a limited partnership, in which 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 the limited partnership.

Additional entities, which are not subject to two-tier taxation and are treated as transparent for Israeli tax purposes, include house property companies, which are minority companies (controlled by five or fewer persons, which meet several other conditions) whose assets and business are holding buildings. 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 and will not be subject to two-tier taxation.

A company is considered resident of Israel for tax purposes if it is either incorporated in Israel or incorporated abroad, but it is 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, that is, where the business decisions of the company are made. The location of the board of directors meetings is an important, though not a 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 the 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 having been 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 2021 is 23%. Permanent establishments 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 rather are taxed based on the pro rata rights of the partners to the partnership income. Thus, individuals may be taxed up to a 50% marginal tax rate (which includes a 3% surtax that is applicable to individuals with annual income over a certain threshold), and companies in accordance with the said corporate tax rate.

Israeli companies' income is taxed on a worldwide basis, while foreign companies are only subject to Israeli tax with respect 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 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, such as overseas travel expenses, vehicle expenses and similar expenses determined by relevant regulations.

In order to encourage start-up investments, Israeli tax law allows the deduction of up to ILS5 million invested in the shares of a company, immediately, or over a three-year period, by an individual or a partnership, provided certain conditions are met. This law was applicable until the end of 2019 and has not yet been extended. The authors anticipate it will be extended, subject to certain modifications, as part of the budget approval following the upcoming elections, with retrospective applicability to capture the 2021 tax year as well.

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 locations, the tax rate for preferred enterprises is 7.5% or 16%, as of 2021. 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).

In addition, "technology enterprises" that meet certain conditions are entitled to preferable corporate income tax rates on their preferred income, ranging from 6% to 12%. Subject to meeting certain conditions, including meeting 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.

Large manufacturing companies may also be eligible for grants of up to 20%, if certain conditions are met.

Most recently, Income Tax Regulations (Accelerated Depreciation during the Coronavirus Period) (Temporary Provision), 5780-2020 were finalised. These regulations aim to induce economic activity in Israel during the coronavirus crisis, although they are not limited to businesses that suffered losses, and benefits thereunder are available to any business that satisfies the conditions in said regulations.

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, but cannot be offset against income from any other source.

Carry-forward losses generally survive ownership change, although 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, discussed further below.

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 (companies that receive 90% or more of their revenues from an industrial entity involved in a 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 (that are also industrial companies), 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, according to the corporate income tax rate (23% as of 2021) upon the sale of shares of other companies. However, in the event that the company whose shares were sold is a non-publicly traded company, or is a public company in which the selling company is a substantive shareholder (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, while the gain attributed to 2006 onwards is tax exempt.

Foreign companies are generally exempt from capital gains tax upon sale of shares in Israel. See below for elaboration.

Incorporated businesses are subject to regular capital gains tax upon taxable transactions. In certain transactions, value added tax (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 upon certain transactions that involve purchase of real estate.

Israel charges VAT on transactions in Israel and on the importation of goods into Israel, the standard rate of which is currently 17%. A transaction that is a sale of goods is deemed to have taken place in Israel if, in the case of a tangible asset, it was delivered in Israel or exported to Israel, and if, in the case of an intangible asset, the seller is an Israeli resident. 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 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, such as 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 responses set forth below apply.

The Israeli corporate tax regime is based on two-tier taxation:

  • tax at the company level – the corporate tax rate in 2021 is 23%, and;
  • tax at the shareholder level, upon dividend distribution – the dividend tax rate for shareholders is generally 25%, which rate is increased to 30% for shareholders who hold 10% or more of any of the company's means of control ("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 2021). Moreover, an additional 3% surtax will apply to any taxable income of an individual that is above ILS651,600.

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, domestic law subjects the income of closely held companies, which stems from the personal exertion income of a Substantive Shareholder, to the marginal income tax rate, provided that several conditions are met. In addition, as discussed further below, in certain circumstances, a portion of the accumulated profits may be deemed notionally distributed.

As mentioned above, subject to meeting certain conditions, closely held companies are taxed on the income that stems from the personal exertion income of a Substantive Shareholder at marginal income tax rates.

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 to its shareholders a dividend of at least 50% of its profits in a tax year, until 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 such 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.

Generally, individuals are subject to 25% tax upon receipt of a dividend, increased 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 ILS651,600.

Generally, individuals are subject to 25% tax upon receipt of a dividend, increased 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 ILS651,600.

In the absence of an applicable income tax treaty, the following particular 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 2021).

Interest paid to non-resident corporations is generally subject to withholding tax at the corporate income tax rate level (23% in 2021) 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, while 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; and 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 over 50 double tax treaties to which Israel is party and that are in force in Israel. Israel generally follows the Organisation for Economic Co-operation and Development (OECD) Model Convention, with the exception of a number of treaties (such as Norway and Sweden) signed in the 1960s and the 1970s, before the OECD model was widely accepted. Israel signed the 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 of 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 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, 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 principal.

In an international transaction where, due to special relationships between the parties, less profit is derived in Israel as compared to the price or conditions been 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 local affiliate of a non-Israeli entity is not specifically required to prepare an annual transfer pricing study; however, the tax-assessing officer has the authority to demand a transfer pricing study within a 60-day period. Moreover, taxpayers are obligated to describe the terms of any international transaction with a related party in its annual tax return.

This is an issue that the ITA has been examining. Many audits have been carried out recently by the ITA with respect to limited risk distribution arrangements.

In general, Israel's local transfer pricing rules follow the relevant OECD standards.

International transfer pricing disputes are not very often resolved through double tax treaties or mutual agreement procedures (MAPs), as most transfer pricing disputes are resolved through settlements with the ITA, with relatively few that reach litigation or resolution through the MAP process. The ITA is generally open to participating in the MAP process.

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 research and development (R&D) services to its parent company under a cost-plus arrangement. The Supreme Court ruled that given the price of the services the Israeli company provided to its parent company was higher than the amount reported to the ITA, this created an intercompany debt of the parent company to the Israeli company equal to the additional amount that should have been paid and reported. Due 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, while 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%, reduced to 25% if the Israeli subsidiary is listed on the Tel Aviv Stock Exchange (TASE). Such 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 case, 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 permanent establishment of such non-Israeli resident in Israel, from investments in certain real estate funds or from 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 permanent establishment of such non-Israeli resident in Israel, that the stock was not purchased from a related party or restricted due to certain tax-free reorganisations, and that the principal value of the stock does not derive from real property, any asset attached to real property, or the right to benefit from real property situated in Israel, in any form, or 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 respect to corporate capital gains taxes on 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 directly or indirectly, in assets located in Israel, including shares of an Israeli subsidiary (subject to certain additional conditions).

As mentioned above, the tax exemption generally applies if the acquisition was made by a non-Israeli resident after 1 January 2009, as opposed to an acquisition made before 1 January 2009, which is 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 under 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, compared to similar international transactions, or carry out a profit split 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.

There is no specific standard applied. 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, the loan is not linked to any index and does not carry interest or yield, the loan must not be repaid prior to 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, in general, local companies are taxed on their worldwide income at the corporate income tax rate (23% in 2021), as opposed to non-Israeli companies, which are only subject to Israeli tax with respect to their Israeli-sourced income.

As noted above, foreign income 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 2021). However, tax credits are available in such cases.

The Israeli local company may claim foreign taxes paid with respect to the distribution as credit pursuant to one of the following methods:

  • direct credit, where the Israeli company may claim credits with respect to foreign withholding taxes paid on the dividend distribution, in which case, the dividend distribution will be subject to a 23% rate in Israel (as of 2021); and
  • indirect credit, where the Israeli company may claim credits with respect 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 (also 23% as of 2021).

In general, in order for non-Israeli subsidiaries to use intangibles developed by local companies, the intangibles must be either sold to such subsidiaries or the local company may license the intangibles to non-local subsidiaries, providing them with rights to use the intangibles in return for proper consideration. All the above is 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 is 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, not listed on an exchange (or, if listed, less than 30% of the interests of which have been offered to the public), not including 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 over 50% of the interests in the foreign company, or over 40% of the interests in the foreign company and together with the holdings of related parties hold over 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 above, a company is deemed to be a resident of Israel if it was incorporated in Israel, or if it was incorporated abroad and is managed and controlled in Israel.

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 whereby 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 on the sale of shares in non-local affiliates according to the regular corporate income tax rate (23% in 2021).

The Ordinance includes a general anti-avoidance provision in Section 86, according to which, a tax-assessing officer may ignore transactions that are deemed to be artificial or fictitious, or if 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.

Generally, tax audits are carried out randomly and not all taxpayers and tax returns are examined.

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

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. The circular extends to the VAT registration obligation of non-Israeli companies active in the Israeli market and, in addition, provides new, broader interpretations with regard to the definitions of a permanent establishment conducted through dependent agents and fixed places of business.

Following BEPS Action 5, which addresses harmful tax practices and consistent with the OECD’s so-called nexus approach relating to preferential tax regimes for intellectual property, the Israeli government recently enacted legislation granting preferential tax rates to technology and hi-tech companies with respect to income derived from intellectual property development activities carried out in Israel. The new legislation determines a new IP regime in Israel by granting preferential tax rates to technology and hi-tech companies developing their intellectual property 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 BEPS Project.

Proposed legislation to implement the BEPS Action 13 recommendation regarding transfer pricing documentation (including a "country-by-country" report and master and local filings) has already been published. The proposed legislation enacts a new reporting regime for taxpayers of a multinational entity that has engaged in an international transaction. In this regard, the taxpayer may be required to provide the ITA with the complete documentation regarding the international transaction, including documents regarding the method used for the price calculation, as well as forms and information regarding the multinational enterprise itself.

In addition, the ITA has recently established a committee for a reform in the Israeli international tax regime. This committee is expected to recommend many changes in light of the BEPS recommendations. The authors expect the committee's recommendations to be enacted into law during 2021.

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, which will indicate the ITA’s position. In addition, discussions with Israel’s treaty partners are anticipated, and the OECD’s recommendations implemented. Israel is also a signatory to, and has ratified, the MLI.

International tax has significant media exposure and hence a high public profile in Israel, especially with respect 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 intellectual property developed in Israel. This law was revised in accordance with BEPS Action 5. In this regard, 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, in order for it not to be considered a harmful tax regime.

As part of the Encouragement Law, Israel grants extensive tax benefits to Israeli manufacturers. In certain cases, this contradicts BEPS Action 5 and the nexus approach, which limits the ability to grant benefits where the intellectual property has not been developed in Israel.

Israel has not yet implemented these changes and there is no draft legislation proposing implementation. However, as stated above, the Israeli government is committed to implementing the BEPS recommendations and, as such, the authors expect the legislation to be published in the near future.

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, ratified almost 15 years ago. The main features of the Israeli regime are very similar to the BEPS recommendations regarding 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 with respect to granting treaty benefits, and 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 (though one exists in the Israel–US treaty). However, there is a court ruling determining 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 respect to the DTC limitation. Accordingly, the authors do not expect significant impact on inbound or outbound investors.

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

The first circular provides guidance, which is 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 first begin by reviewing the contractual arrangements, followed by examining 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 with respect to 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, having an operating profitability of net cost plus margin of 5%;
  • marketing services, having an operating profitability of net cost plus margin between 10% and 12%; and
  • low-risk distribution services, having an operating profitability of sales as turnover of between 3% and 4%.

The circular mentions that the margins will be revised from time to time.

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

As noted above, the ITA has published a circular that is focused 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 the VAT liability of internet services companies. The circular generally provides new, broader interpretations of the definitions of a permanent establishment conducted through dependent agents and fixed places of business, and 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 above, the ITA has published a circular that takes a somewhat aggressive position. For treaty-partner countries, the circular expands the interpretation of a permanent establishment (PE) through a “fixed place of business” or a “dependent agent” in such tax treaties in 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, and 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 – when conducted with assistance from, or through, a place of business in Israel may create a PE. 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 respect to creating a PE through a “dependent agent”, the circular adopts the “principal role” approach, pursuant to which, increased involvement of the agent in Israel in negotiations on behalf of, and decisions that bind, a non-Israeli company reinforce the conclusion that the dependent agent will be treated as a PE of such company. Under 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' 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 (namely, 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 that consume the services provided by such company, and the services over the internet have been adapted to suit Israeli customers, such as a website in Hebrew, using local currency and local credit card clearance.

There is no specific legislation that addresses taxation of offshore intellectual property. Payments to non-Israeli corporate owners of intellectual property by Israeli residents for use or licence rights of such intellectual property are generally subject to withholding at the corporate income tax rate (23% in 2021), unless otherwise reduced by a double tax treaty. 

Herzog Fox & Neeman

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4 Weizmann Street
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6423904
Israel

+972 3 692 2035

+972 3 696 6464

linzen@herzoglaw.co.il www.herzoglaw.co.il
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Authors



Raveh Haber & Co. is the only boutique law firm in Israel specialising in private equity and taxation. The legal team of the firm's tax department has an exceptional reputation and extensive experience, developed over years of practice both in Israel and in the USA. The firm's tax department specialises in a wide array of local and international tax matters: provision of tax advice to investment funds, their managers and portfolio companies; complex tax solutions for high net worth families with both Israeli and foreign members; income tax and VAT matters; diverse procedures before the Israel Tax Authority; tax assessment procedures; litigation; obtaining different types of rulings; and providing professional guidance and assistance in drafting and submitting tax reports and disclosures. Among the department’s clients are private individuals, leading directors and entrepreneurs, private equity and investment firms, hedge funds, hi-tech companies from both Israel and abroad, public and major private companies, and different types of financial institutions.

Redemption of Shares – Income Tax Implications

In recent years, the income tax aspects of redemption of shares in Israel pursuant to the Israeli Income Tax Ordinance [New Version] 5721-1961 (the "Ordinance") were examined by the Israeli courts and were referred to by the Israel Tax Authority (ITA) in several official publications. This chapter will review the different references to the income tax aspects of redemption of shares, including the tax implications for the remaining shareholders in a company following the shares redemption.

Redemption of shares under the Israeli Companies Law

The Israeli Companies Law 5759-1999 (the "Companies Law") provides that a company may distribute its earnings and profits. Distribution is defined in the Companies Law as the grant of cash or an undertaking to grant cash, directly or indirectly, as well as a purchase of shares. A purchase includes the purchase or the granting of funding for a purchase, directly or indirectly, by a company or by its subsidiary, or by any other corporate body controlled by it, of its shares.

In contrast to the Companies Law, the Ordinance does not define the term “dividend” or does not directly refer to a redemption of shares.

Redemption of shares – the ITA's position

In 2001, the ITA published Income Tax Circular 10/01, titled "The Effects of the New Israeli Companies Law on Tax Laws" ("Circular 10/01"). With respect to the shareholders whose shares are being purchased by the company, the ITA held, in Circular 10/01, that in the case of a pro rata redemption, the redemption of shares would be considered as a dividend distribution to the redeemed shareholders. However, in the case of a non-pro rata redemption, the redemption of shares would be considered to be a sale of shares by the redeemed shareholders. However, Circular 10/01 did not include any discussion regarding shareholders whose shares were not redeemed. The same approach in regard to the redemption of shares was included in a tax circular that was published concerning the redemption of shares by a real estate property company pursuant to the Israeli Real Estate Tax Law (Tax Circular 9/2003).

On 11 January 2018, following the below-mentioned Tel Aviv District Court rulings, the ITA published Income Tax Circular 2/2018, titled "Share Redemption Pursuant to the Companies Law" ("Circular 2/2018"). In Circular 2/2018, the ITA changed its position, and stated that the consideration to be paid to shareholders to purchase the redeemed shares should be considered as a dividend distribution to the non-redeemed shareholders, regardless of whether the redemption of shares is pro rata or non-pro rata. This position of the ITA was based on the premise that the increase in the ownership of the remaining shareholders in the company should be considered a taxable event comparable to a dividend. In regard to the taxable event deemed to occur in a non-pro rata share redemption, Circular 2/2018 provides two approaches. Pursuant to each of such approaches, the ITA's position was that a deemed dividend is attributed to the non-redeeming shareholders.

It should be noted that the ITA's position in Circular 2/2018 adopted the same logic of Reportable Position No 42/2017. Also, the ITA has published tax decisions that adopted the position of Circular 2/2018 (see Tax Decision 0699/18).

Prior court rulings

During 2014, the Tel Aviv District Court ruled in the cases of Baranowski (Tax Appeal 21268-06-11) and Bar Nir (Tax Appeal 1100-06). Both cases were heard by the same judge. It should be noted that in both cases the relevant tax assessment office claimed that the redemption of shares was an "artificial transaction" pursuant to Section 86 of the Ordinance, because the redemption of shares did not serve the interests of the company but only the interests of the remaining shareholders of the company. The ITA relied on the Tel Aviv District Court rulings in Circular 2/2018. However, the Haifa District Court further held in the case of Beit Hossen Ltd. that not every redemption of shares is an "artificial transaction".

The case of Beit Hossen

On 1 November 2020, the Haifa District Court ruled in the case of Beit Hossen Ltd. (Tax Appeal 71455-12-18+54505-04-19) and accepted the taxpayer’s appeal and rejected the previously published position of the ITA regarding certain income tax aspects of redemption of shares in Israel pursuant to the Ordinance. In the case of Beit Hossen Ltd., the Haifa District Court accepted the taxpayer's appeal and did not accept the ITA’s position as was published in Circular 2/2018, and held that a non-pro rata redemption of shares in a company should be considered as capital gain income to the redeeming shareholders and should not be considered as a deemed dividend to the remaining shareholders.

The Haifa District Court based its ruling on the following legal general tax principles.

The realisation principle; ie, that a taxpayer should be subject to tax only upon the realisation of a gain with respect to his or her property. In the event that a gain is not yet realised, a taxpayer should not be subject to tax, other than in exceptional cases as may be determined by the legislature. The Haifa District Court held that in the case of a redemption of shares, no realisation event has occurred with respect to the non-redeemed shareholders.

The enrichment principle; ie, that a taxpayer should generally be subject to tax when his personal wealth has increased and was also realised. In that regard, the Haifa District Court held that although the ownership percentage of non-redeemed shareholders in the company was increased due to the redemption of shares, the non-redeemed shareholders were not enriched. The Court explained that, in fact, the actual economic value of the shares was not increased due to the funds expended to purchase the shares from the redeeming shareholder.

Redemption of shares as a transaction with an economic purpose. The Haifa District Court also held that a share redemption may also serve the interests of the company; for example, in the event that a disagreement between the shareholders has a negative influence on the company's operations. Thus, not every redemption of shares is an "artificial transaction" pursuant to Section 86 of the Ordinance.

The ITA appealed the ruling of the Haifa District Court to the Israeli Supreme Court (Civil Appeal 9308/20). The Supreme Court has not yet ruled in this appeal. However, pursuant to the Haifa District Court ruling, a transaction of non-pro rata redemption of shares that was made for the interests of the company should not be considered as a taxable event (ie, deemed dividend distribution) by the non-redeemed shareholders.

Investment Funds

The Ordinance does not provide any special rules regarding investment funds  – such as venture capital (VC) or private equity funds – and such investment funds operate in Israel pursuant to tax rulings that are issued to them by the ITA pursuant to Section 16A of the Ordinance. Such tax rulings, subject to their terms, provide certain benefits and tax reliefs to foreign investors investing in funds.

Background

Pursuant to the capital gains sourcing rule in Section 89 of the Ordinance, a foreign resident is generally subject to tax in Israel on capital gains from a sale of securities in an Israeli company. The Israeli government has recognised the significant weight of tax considerations in the decision of foreign investors as to whether to invest in Israel, and the ITA started to issue tax rulings under Section 16A of the Ordinance in the early 1990s to incentivise foreign investors and investment into the then young hi-tech industry.

Section 16A of the Ordinance generally authorises the Israeli Minister of Finance to refund taxes to foreign investors if the tax paid in Israel is not creditable in the investor’s home jurisdiction. These tax rulings were initially issued with respect to VC funds and provided reduced tax rates to foreign investors, with a full exemption from Israeli tax to foreign investors that were tax exempt in their home jurisdiction. In 2005, the first tax ruling was issued to a private equity fund, which granted a tax exemption for capital gains, but not for interest and dividends.

It should be noted that in 2003, as part of a reform of the tax system, a new subsection was added to Section 97 of the Ordinance providing for an exemption from capital gains tax for foreign investors in R&D companies. However, this exemption was replaced in 2009 with a provision exempting foreign investors in Israel from tax under Section 97 of the Ordinance, unless their gain is "attributable to a permanent establishment". While tax rulings granted to investment funds have always required the funds to agree that their local presence in Israel constituted a permanent establishment, the tax exemption from capital gains regarding the sale of securities of Israeli companies was still provided to foreign investors in a fund.

The 2018 income tax circulars

In recent years, the ITA has published income tax circulars on these matters (Income Tax Circulars 24/01 and 14/04). However, following a review of its policy, on 14 March 2018, the ITA issued two official income tax circulars regarding the terms for the issuance of tax rulings to VC and private equity funds (Income Tax Circulars 9/2018 and 10/2018) (the "Circulars"). The purpose of the Circulars was to provide the terms and conditions for an investment fund to apply for and receive a tax ruling and to outline the tax arrangement that will apply to any such tax ruling. The Circulars provide a number of terms and conditions for the issuance of a tax ruling to a fund, including with respect to the minimum number of investors in a fund and the diversity of the investor base, minimum capital commitments, and the number, type of and minimum investments to be made by a fund. In particular, the following two conditions were added in the Circulars.

Diversification of foreign investors

Pursuant to the Circulars, a fund is required to have at least ten unrelated investors, of whom none are connected to the general partner of the fund. However, the Circulars added a new requirement for obtaining a ruling, under which, at least 30% of the commitments to the fund must be made by foreign investors. In the past, if the percentage of Israeli investors exceeded 70% of the fund, certain tax consequences would apply regarding the tax rate applicable to carried interest income received by the general partner in a fund. Currently, the ITA will not issue a tax ruling if this condition regarding foreign investors in a fund has not been met. It is not clear why this is required, as a ruling would apply only to foreign investors and the tax rate applicable to the Israeli investors' general partner should be irrelevant. Also, this assumption is unrealistic and disproportionate, as raising 30% of commitments from foreign investors in a fund with total capital commitments of USD100 million is not the same as raising said rate in a fund of USD400 million.

The type of investments

The Circulars mandate certain rules regarding the focus of a fund’s investments in order to receive a ruling and providing a tax exemption to foreign investors in a fund. The Circulars provide that certain minimum amounts and a percentage of commitments of the VC or private equity funds should be invested in "Qualified Investments" (for a VC fund, the term "VC Investment" includes a reference to "Qualified Investments"). A Qualified Investment is defined as an investment in an Israeli company or Israeli-related company whose business is in various types of activities (such as water, energy, production, transporting, media and communication, software, or medicine), which owns its own intellectual property. Also, a fund's total investment in a single company cannot exceed 25% of the fund's total commitments.

In this regard, the Circulars provide a new rule that a foreign investor is exempt from tax on the capital gain of the fund from Qualified Investments (in the case of private equity funds) and VC Investments (in the case of VC funds). In other words, if a fund does not invest in specific activities, a foreign investor will not be exempt from tax from capital gain. It is not clear why, as a policy matter, the ITA would differentiate between these types of investments rather than encouraging funds to invest in all sectors in the Israeli economy. It is also not clear if the ITA has the authority to create this distinction in a publication without the imprimatur of the legislature.

Recently, the ITA has begun drafting a tax amendment to the Ordinance in regard to the tax regime to be applied to investment funds. The authors hope that any such future tax regime will reduce the importance of raising foreign capital and the nature of the fund’s specific investment activity in the decision of whether to raise funds from non-Israeli investors.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting

On 7 June 2017, Israel, together with the delegates of 75 additional countries and jurisdictions, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also referred to as the Multilateral Instrument (MLI). The MLI was designed with the intention of swiftly implementing a series of tax treaty measures, updating international tax rules and reducing the opportunity for tax avoidance by multinational enterprises, and was signed pursuant to the recommendations of Article 15 of the Organisation for Economic Co-operation and Development’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

The MLI includes measures that may assist with issues such as the abuse of tax treaties, the tax treatment of disregarded entities, the tax residency of entities, permanent establishment-related issues and transfer pricing regarding cross-border transactions. Israel ratified the MLI on 13 September 2018, and the MLI entered into force in Israel as of 1 January 2019. As of 11 February 2021, the list of parties to the MLI consists of 95 countries and jurisdictions.

Application of a Zero VAT Rate under Section 30(a)(5) of the Value Added Tax Law

Israeli value added tax - general

Value added tax (VAT) is generally imposed at a rate of 17% on the sale of goods and provision of services under the Israeli Value Added Tax Law 5736-1975 (the "VAT Law") and the applicable regulations. However, there are a few exceptions that enable local businesses to qualify for a zero VAT rate under certain circumstances, including the provision of services to foreign residents. Section 30(a)(5) of the VAT Law provides that the provision of services by an Israeli service provider to a foreign resident will be taxed at a zero VAT rate (except for certain excluded services, as specified in the relevant regulations). However, Section 30(a)(5) of the VAT Law should not apply if the provision of services is in regard to an Israeli asset or is to an Israeli resident. This exception is relevant to global corporations with an Israeli subsidiary or office that provides services to a foreign related entity, as it might be regarded as providing services to an Israeli resident.

It should be noted that the application of this section was challenged by the VAT Authority in a number of court cases. It should also be noted that following the Supreme Court ruling in the case of Casuto (Civil Appeal 41/96, dated 18 March 1999), under which a zero VAT rate was applied, even though there was a secondary Israeli beneficiary to the provision of services, the Israeli legislature amended the section in 2002. Based on this amendment, Israeli courts held that Section 30(a)(5) will not apply even if a secondary Israeli beneficiary also benefits from the provision of services.

Rothschild Group ruling

In the past two years, Israeli courts have issued rulings on the application of Section 30(a)(5) of the VAT Law, including the Tel Aviv District Court in the case of Rothschild (Tax Appeal 9136-04-18) on 26 November 2019. The question before the Tel Aviv District Court was the application of a zero VAT rate to certain marketing services provided by an Israeli subsidiary to the Rothschild Group abroad. The Israeli subsidiary was an Israeli resident company that provided marketing services on behalf of the Rothschild Group funds to Israeli institutional investors, as well as marketing services for private banking services to Israeli individuals. The Israeli subsidiary claimed that it provided services to the Rothschild Group funds abroad and if any services were provided to Israeli residents, such services were negligible or auxiliary to the actual services provided to the foreign company. Note that the Israeli subsidiary did not provide any investment management services.

The Tel Aviv District Court rejected the arguments of the Israeli subsidiary and held that the services provided to Israeli residents were not negligible or auxiliary from the point of view of the Israeli clients. In practice, the Tel Aviv District Court found that tasks performed by the Israeli subsidiary for Israeli clients of the foreign Rothschild Group had a substantial value, with an independent and separate economic value that rose to the level of the actual provision of services to Israeli clients. Thus, following an examination of the intercompany agreements between the Israeli subsidiary and the foreign Rothschild Group, including the profit-sharing profit mechanism, the Tel Aviv District Court held that the services provided by the Israeli subsidiary were intended to fulfil the interests of the Rothschild Group abroad and the direct and actual interests of the Israeli clients. Therefore, a zero VAT rate should not be applied to the consideration received by the Israeli subsidiary.

I.S.P Financial Management ruling

On 30 March 2020, the Lod District Court also ruled on the applicability of a zero VAT rate in the case of I.S.P Financial Management Ltd. (Tax Appeal 15195-04-18). The appellant, an Israeli company and indirect subsidiary of the I.S.P group, had only two clients, both Swiss subsidiaries of the I.S.P group. One Swiss subsidiary (the "Swiss Subsidiary") represented and provided marketing services to foreign fund managers such as UBS and Pictet, including regarding Israeli institutional investors, via the appellant. The appellant was entitled to compensation based on a cost-plus basis. The appellant provided services by an Israeli company, which was wholly owned by an Israeli resident and was prominent in the market (the "Representative"). The Representative’s compensation was based on 20% of the Swiss Subsidiary’s income from the Israeli investors' investments in the foreign funds. Neither the appellant nor the Representative had the authority or a licence to provide investment services to Israeli clients.

The Lod District Court examined the services that were provided and ruled that the services were not negligible or auxiliary to the services provided to the foreign funds managers and had actual separate value. It was mentioned that the appellant (via the Representative) did not only create an initial relationship between the foreign fund managers and the Israeli investors, but also had, and maintained, a significant and ongoing relationship, which included assisting Israeli investors in accessing and presenting information.

It should also be emphasised that the Lod District Court mentioned that the impression was that the Representative has a significant role in establishing and maintaining the relationship between Israeli institutional clients and the foreign fund managers. It was a personal activity, based on the trust of Israeli investors, and carried out systematically.

Therefore, the Lod District Court held that the appellant's services also met the needs of Israeli institutional clients, and a zero VAT rate should not apply to the consideration received by the appellant.

Applause App Quality Inc. ruling

Moreover, on 7 September 2020, the Lod District Court opined further on the issue in the case of Applause (Tax Appeal 15802-02-18). The appellant was an Israeli wholly owned subsidiary of Applause App Quality Inc., a foreign company and the owner of a digital platform for testing software for applications and websites. As mentioned above, a zero VAT rate should not apply if the provision of services is also provided to an Israeli resident or in relation to an Israeli asset. An exception to this rule is in a case in which the service includes the value of the goods that are imported into Israel, if certain conditions are met. In the case of Applause, the appellant provided marketing and sales services as well as support services in relation to the digital platform, in connection with the parent company’s Israeli clients. The main legal question in the case was if said exception applies if the consideration for the service is part of the value of imported services or if it only applies regarding imported goods.

The Lod District Court ruled that, as the legislation is silent on this question, Section 30(a)(5) of the VAT Law should be interpreted as extending the application of the exception to imported services.

Raveh Haber & Co. Advocates

11 Menachem Begin Rd. (Rogovin Tidhar Tower, 16th floor)
Ramat Gan
Israel

+972 3 717 3010

+972 3 717 3011

sfrenkel@rhlawyers.co.il www.rhlawyers.co.il
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Law and Practice

Authors



Herzog Fox & Neeman is one of Israel's premier law firms, with a reputation as a market leader, through its involvement in major developments that shaped the Israeli economy. Its teams have experience in cross-border and domestic matters, which enables it to address clients’ legal needs across all industries. Herzog Fox & Neeman has one of the largest and most broadly experienced and diversified tax departments in Israel. The department is comprised of approximately 45 fee earners (including 16 partners) and provides an exceptionally wide range of services; ranging from corporate tax, indirect tax and transfer pricing to tax litigation and disputes with the Israel Tax Authority, private clients, investment funds and more. The Tax Department has a hugely diversified client-base, comprised of multinational companies that operate in Israel (such as Facebook, Google, Microsoft and Salesforce), investment funds, ultra high net worth individuals, Israeli companies (such as the Israel Electric Corporation and Mellanox Technologies Ltd) as well as non-profit organisations.

Trends and Development

Authors



Raveh Haber & Co. is the only boutique law firm in Israel specialising in private equity and taxation. The legal team of the firm's tax department has an exceptional reputation and extensive experience, developed over years of practice both in Israel and in the USA. The firm's tax department specialises in a wide array of local and international tax matters: provision of tax advice to investment funds, their managers and portfolio companies; complex tax solutions for high net worth families with both Israeli and foreign members; income tax and VAT matters; diverse procedures before the Israel Tax Authority; tax assessment procedures; litigation; obtaining different types of rulings; and providing professional guidance and assistance in drafting and submitting tax reports and disclosures. Among the department’s clients are private individuals, leading directors and entrepreneurs, private equity and investment firms, hedge funds, hi-tech companies from both Israel and abroad, public and major private companies, and different types of financial institutions.

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