On April 11, 2016, the Israeli tax authority published new guidelines for the taxation of foreign corporate entities operating in Israel via the internet. The guidelines are focused on corporate tax, although they briefly deal with the issue of VAT registration as well; consequently, they review matters such as permanent establishment, dependent agent, the place in which the business activity is conducted etc. Most of the guidelines do not provide anything new in this respect, but contain a straightforward implementation of these terms to corporate entities that, while operating various forms of online businesses, have some kind of terrestrial presence in Israel. Such implementation, as set by the guidelines, is relatively similar to the application of these terms to any foreign entity with presence in Israel.
The real revolution created by these guidelines is in respect of corporate entities that operate an online business without having any physical presence in Israel. The guidelines state that such businesses may still be considered as having a permanent establishment in Israel, if they are considered to have a significant digital presence in Israel. According to the guidelines, such digital presence shall be determined by the following characteristics:
- a significant number of agreements for the provision of digital services was entered into via the internet with Israeli residents;
- the services provided by the foreign corporate entity are consumed online by many customers in Israel;
- the foreign corporate entity provides an online service that is tailored for Israeli customers or users (e.g., use of Hebrew, style, charging customers in Israeli currency, processing Israeli credit cards etc.).
Alternatively, where the use of the term “permanent establishment” is irrelevant, due to the absence of a tax treaty, the guidelines examine whether a foreign corporate entity that provides services via the internet with no physical presence in Israel would nevertheless be considered as conducting business activity in Israel. This would be the case if this corporate entity has a significant economic presence in Israel which can be determined according to the following characteristics:
- the foreign corporate entity provides its customers with online services, such as advertising, publishing, support etc.;
- the foreign corporate entity performs a significant number of transactions with Israeli residents via the internet;
- the foreign corporate entity provides an online service that is tailored for Israeli customers or users (e.g., use of Hebrew, ads, style, charging in Israeli currency, processing Israeli credit cards etc.);
- the services provided by the foreign corporate entity are consumed via the internet by many customers in Israel;
- there is a high level of use of the website by Israeli users;
- there is a tight link between the consideration paid to the foreign corporate entity and the level of use of the Israeli users.
It is still too early to determine how these guidelines will be implemented, as they offer a significant change to the Israeli tax authority’s position regarding the income generated from business activity performed via the internet. Indeed, the guidelines themselves note that where it is sought to tax a foreign corporate entity based on its digital or economic presence, the international tax unit as well as the legal advisor’s office of the tax authority need to be consulted; such provision is a clear indication of the novelty of these concepts in Israel.
Regardless, in light of these major developments, any foreign entity that has any online business activity with Israel or with Israelis, should review carefully its structure and activities, so as to examine whether these guidelines create any tax exposure, and if so, define what steps should be taken to eliminate, or at least mitigate, such exposure. It is highly recommended that such review shall be performed as soon as possible, in light of the potential detrimental tax consequences.