All questions

Tax residence and fiscal domicile

i Corporate residence

A company is considered a resident of Israel if it was incorporated in Israel, or, if it was incorporated abroad, if it is managed and controlled in Israel. The management and control test is based on a similar test under the tax laws of the UK. Pursuant to guidance published by the Israeli Tax Authority (ITA), a company is managed and controlled in the place where the business strategy of the company is determined. For that purpose, it should be considered where, as a factual matter, the principal substantive business decisions of the company are made. While the place where the board of directors holds its meetings is an important factor, it is not determinative, especially in a case where the board authorises another organ of the company to manage the company. In a 2012 Supreme Court case, which is the main case that deals with the issue of management and control, the managers of a foreign company acted as an artificial platform for conducting the business of the Israeli company and were not involved, in a substantive sense, in the foreign company's business management, the foreign company was regarded as having been managed and controlled from Israel (see the further discussion below).

ii Branch or permanent establishment

The taxable profits of a local branch of a foreign company are generally calculated by reference to the income and deductions attributable to the branch under the assumption it operates as an independent business unit and in accordance with transfer pricing rules. The Ordinance, however, does not include specific rules regarding the taxation of a branch or the allocation of income and expenses to a branch in Israel. In addition, there is no branch profits tax in Israel. In some relatively rare cases, however, the profits of a non-resident company that qualifies as a foreign investment company, derived from its Israeli enterprise may be subject to a 15 per cent tax rate in addition to the corporate tax that applies to such profits. The 15 per cent tax may be deferred if it is demonstrated that such profits remain in Israel and are used for the purpose of the company's business in Israel. In any event, this 15 per cent tax is relevant only to certain enterprises that were already in existence prior to 2011.

It should be noted that the ITA has recently published a circular regarding the taxation of non-Israeli corporations' activities in Israel through the internet. Under this circular, the ITA expresses its opinion that certain activities made through the internet may be sufficient to give rise to a permanent establishment in Israel, both for corporate tax and VAT purposes.