Israeli Subsidiary or Branch: Key Tax Considerations

When an international group plans ongoing activity in Israel, two common structures are an Israeli subsidiary and an Israeli branch. Other arrangements may also be relevant, depending on the activity and circumstances.

Each option has implications across multiple areas: corporate income tax and withholding on dividends, legal liability, regulatory requirements, reporting structure, transfer pricing, and local reputation considerations.

A separate legal entity with limited liability — Israeli claims are directed to the local entity rather than to the foreign parent.

A familiar and well-understood structure from an Israeli tax authority perspective, with standard annual reporting as a private company.

Ability to hire employees and raise capital in Israel under a local entity — often significant for technology companies.

Clarity on dividend taxation — an applicable tax treaty typically defines the withholding tax rate on dividends paid to the foreign parent.

Operations through an Israeli subsidiary may be subject to two levels of taxation: tax at the company level on taxable income and withholding tax when dividends are distributed to the parent company.

The applicable rates depend on Israeli law, the relevant tax treaty where applicable, the status of the recipient and the conditions governing the distribution.

Requirements for equity capital, formal governance (board of directors, meetings), and audited annual financial statements.

A branch is not a separate legal entity — it represents the foreign company's activity in Israel, registered as a foreign corporation with the Israeli Companies Registrar.

Advantages: no withholding tax on the transfer of profits back to the head office (there is no legal 'dividend'), some operational simplicity, and, in certain cases, easier setup or wind-down of activity.

Possible disadvantages include direct exposure of the foreign company to liabilities of the Israeli branch, Israeli reporting on income attributed to the branch, and transfer-pricing analysis of dealings between the branch and head office.

A meaningful tax comparison between an Israeli subsidiary and a branch requires more than applying the corporate tax rate.

The analysis may include the taxable income attributable to the Israeli activity, deductible expenses, intercompany payments, transfer pricing, withholding tax, the applicable tax treaty, foreign-tax-credit considerations and the treatment in the parent company’s jurisdiction.

The comparison should therefore be based on the planned structure and the relevant facts rather than on a general numerical example.

The precise outcome depends on the relevant tax treaty, the parent's status in its home jurisdiction, and the availability of foreign tax credits in the country of residence. Accurate quantification requires a case-specific analysis, including the source country's tax rules.

Industry regulation — in certain sectors (banking, insurance, aviation), formal requirements apply to the type of legal entity permitted.

Local market presence — an Israeli subsidiary may provide a clearer local identity for customers, suppliers and employees.

Employee incentive plans — the structure and tax treatment of options for Israeli employees should be reviewed under Section 102 and the applicable plan arrangements.

Exit from the market — the legal, tax, employment and reporting steps for winding down a subsidiary or branch depend on the structure and circumstances.

There is no single correct structure for every foreign company. The decision depends on tax considerations, legal exposure, hiring plans, contracts, expected duration and the company’s objectives in Israel.

Nimrodi & Co. can assist with the Israeli accounting and tax analysis of possible operating structures and with the preparation of information for registrations and ongoing reporting. Entity formation and legal structuring should be reviewed and implemented with qualified legal advisers. Contact the firm to discuss the activity and the possible engagement scope.