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60 The US-Israel Legal Review 2019
ISRAEL: TAX
as a Preferred Technology Enterprise, such as
meeting a certain threshold of R&D expenses and
total income of the company.
Participation Exemption:
A participation exemption
(i.e., exemption on capital gains, dividends,
security’s yields and interest and linkage
differentials from financial institutions) applies to
an Israeli holding company, if it holds shares in a
foreign company and the following conditions are
met: (i) the company was incorporated, controlled
and managed from Israel; (ii) the company was not
defined as a public company, financial institution,
family company or transparent company; (iii)
the company did not undergo a structural change
or merger; (iv) the original cost of the foreign
subsidiary’s shares, in addition to the loan balance
it lent to its foreign subsidiary, amounts to no less
than NIS 50million, and 75%or more of the original
cost of all its assets; (v) the company did not have
business income ; and (vi) the company chose to be
an Israeli holding company, by all of its shareholders
within 90 days after its incorporation.
Exemption from Capital Gains in relation to Israeli
Companies’ shares:
Capital gains are generally
taxed in Israel at a corporate tax rate of 23%.
Notwithstanding, non-resident corporations are
exempt from taxation on capital gains deriving
from the sale of shares of an Israeli company traded
on a stock exchange (unless the capital gains derive
from their permanent establishment in Israel). Such
exemption may also be given to the non-resident
corporation in relation to the sale of non-traded
shares (subject to certain conditions). Please note,
however, that the aforementioned exemptions shall
not be granted in relation to the shares of a company,
whose assets mostly derive from real estate rights
in Israel, the right to exploit natural resources in
Israel, etc. Moreover, non-Israeli corporations will
not be entitled to the foregoing exemption if Israeli
residents: (i) have a controlling interest of more
than 25% in such non-Israeli corporation or (ii)
are the beneficiaries of, or are entitled to, 25% or
more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.
TRANSFER PRICING RULES
Pursuant to section 85A of the ITO, all cross-
border transactions carried out between related
parties should be conducted at arm’s length,
which represents the fair market conditions. In
order to support the arm’s length price, a transfer
pricing study is required by Israeli tax law, and if
requested by the ITA it should be submitted as
part of the reporting requirements. Generally, the
preferred pricing method in Israel for determining
whether the terms of an examined cross-border
transaction meet the arm’s length principal is the
comparable uncontrolled price (
“CUP”
). If the CUP
Method is not applicable then the comparability
analysis should be conducted in accordance with
one of the following methods: (a) a profitability
margin method (TNMM/CPM); or (b) the Profit
Split Method (PSM) (or loss) between the parties; if
these methods are not applicable, another suitable
method should be applied.
TheIsraelTaxAuthority(the“
ITA
”)RecentPublications:
In the past year the ITA has published three circulars
that set out its approachon cross-border transactions
involving distribution, marketing and sales and its
position on the transfer pricing aspects following a
business restructuring. As per the earlier circulars,
the ITA stipulates the analysis to be performed in
order to identify an activity and a suitable transfer
pricing method thereof; the analysis focuses on
the entity’s functions, assets and risks (
“FAR”
). As
an example, the circular states that the price for
distribution activity with low risks (
“LRD”
) should
bederived fromits sales (asopposed tocosts); further
to this conclusion, the most appropriate method will
be equivalent to the TNMM(transactional netmargin
method) as set out in the OECD Transfer Pricing
In the past year, the Israel Tax
Authority has published four
circulars that set out its approach
on cross-border transactions.