Foreign Companies in Israel: Corporate Tax Liability

A company that is not an Israeli tax resident may still have Israeli tax obligations in relation to Israeli-source income or activity. The analysis distinguishes between selling to Israeli customers and conducting income-producing activity in Israel.

Where a tax treaty exists between Israel and the company's country of residence, an additional layer of analysis applies — generally under the concept of a Permanent Establishment (PE).

Most of Israel's tax treaties follow the OECD model and define a PE as a fixed place of business through which the enterprise carries on its business, wholly or in part. Examples include an office, branch, workshop, or a construction site of a specified duration.

Treaties exclude certain activities from the PE definition, such as a warehouse used solely for storage or an office used for auxiliary functions. Classification depends on the specific facts and the actual scope of activity, not solely on the formal designation.

Even without a physical office, a foreign company may be considered to have a PE in Israel where it has a 'dependent agent' in Israel — a person who acts on behalf of the company and habitually exercises authority to conclude contracts on its behalf, or plays a principal role in closing transactions.

This is particularly relevant to foreign technology companies that engage sales personnel in Israel under a subcontractor or representative arrangement. Even where the engagement is formally structured as 'marketing services only', the actual role may justify classification as a dependent agent.

With the growth of the digital economy, foreign companies sell services and content to Israeli customers without any physical presence. Authorities in many jurisdictions are examining new taxation mechanisms — Digital Services Tax, OECD Pillar One rules, and sourcing rules.

Israeli Tax Authority guidance addresses the Israeli income-tax and VAT considerations that may arise when a foreign company conducts digital activity involving Israeli customers or operations.

The analysis may include the functions performed in Israel, the involvement of local personnel or related entities, the manner in which services are offered to Israeli customers and the extent of the company’s business activity in Israel.

Whether the activity creates a permanent establishment, Israeli-source taxable income or VAT registration and reporting obligations depends on the facts, Israeli law and the relevant tax treaty where applicable.

A permanent establishment may trigger Israeli registration, tax-return and reporting obligations, depending on the legal structure, activity and applicable requirements.

Transactions and profit attribution between the foreign company and the permanent establishment may require transfer-pricing analysis on an arm’s-length basis.

Double taxation may arise if the same income is taxed in Israel and in the company’s country of residence; treaty relief and foreign tax credits depend on the applicable rules.

The planned operating structure — direct office, Israeli subsidiary, subcontractor, independent agent, or an Israeli employee.

The scope of sales and service activity in Israel, and who effectively makes business decisions.

The relevant treaty between Israel and the country of incorporation, and structuring activity around its PE rules.

Foreign companies operating in Israel today face a complex regulatory environment. A review before activity commences may help identify accounting, tax, reporting and permanent-establishment issues and compare possible operating structures. The appropriate treatment depends on the facts, applicable law and relevant treaty.

Nimrodi & Co. assists foreign companies entering the Israeli market with accounting and tax analysis of proposed structures, transfer-pricing matters and ongoing Israeli reporting.