Doing Business in Israel
Doing business in Israel usually creates a PE for Israeli tax purposes.
There is a requirement to register for (i) corporate tax, (ii) WHT and (iii) VAT with the appropriate tax authorities.
We will be happy to assist in the registration process and to provide you with an overview of the Israeli tax registration requirements.
Furthermore, there shall also be a requirement to file an annual Israeli corporate tax return for the branch or local subsidiary with the ITA (Israel Tax authority) and to pay Israeli corporate tax on the taxable income generated from the project.
This corporate tax return would be based on the audited financial statements of the branch or local subsidiary with certain tax adjustments required.
An external auditor is required to be engaged, in accordance with the provisions of the Israeli Tax Ordinance (ITO), as the tax return must also be independently audited.
Israeli Companies Law also requires that independent public accountants audit the annual financial statements of all companies.
The PE shall be required to maintain and retain bookkeeping and accounting records and original source documentation in Israel.
Both Israeli incorporated companies and foreign companies that have a branch presence in Israel are subject to Israeli corporate tax. The current corporate tax rate is 25%.
Generally, where regular commercial operations are undertaken, an advantage of having a branch in Israel is that there is no branch tax on remittances of regular profits abroad.
By contrast, dividends that an Israeli subsidiary remits to its parent company would be subject to Israeli taxes.
Starting a Business in Israel – Withholding Tax Aspects
Under Israeli domestic tax law, a 25% withholding tax (WHT) on payments of Israeli source income is generally deducted by an Israeli paying bank from all income remittances abroad, unless a tax certificate is obtained from the ITA authorizing withholding-exempt remittances or a reduced rate.
Where the payment is for services, the bank will usually require that it be provided with instructions from the ITA or from an authorized payer on how to deal with the withholding on the payment. Where the payments being made are against an invoice and importation documents for the sale of equipment or goods, generally the local banks will allow payment to be made without asking for ITA approval.
In order not to have 25% withheld from the gross remittances, a formal request for a treaty exemption needs to be submitted to the ITA setting out the basis for the tax relief pursuant to a relevant tax treaty. The application is filed by means of an application (Form A114) that must be fully documented with copies of the relevant contract and the invoices which explain the nature of the consideration being paid.
The ITA would examine the application and accompanying documents and there may be several questions and clarifications. This process can occur over an extended period and a ruling on the application request is usually not immediately forthcoming.
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