Israeli Tax Ramifications on Cross-Border Transactions
In today’s global economy, cross-border transactions are commonplace – but they also bring with them a web of complex tax implications. Whether you're structuring a merger, acquiring foreign assets, granting equity to international employees, or repatriating profits, tax exposure can significantly influence deal viability, cost-efficiency, and long-term compliance.
At our firm, we guide Israeli and international clients through the intricacies of Israeli tax law as it intersects with cross-border commercial activity.
Navigating the Israeli Tax Regime in International Contexts
Israel imposes taxation based on both residency and source of income. Israeli residents are taxed on their worldwide income, while non-residents are generally taxed only on Israeli-source income. However, the classification of income source, particularly in cross-border contexts, is not always straightforward. It may depend on the location of IP, the place of service performance, the situs of shares, or the jurisdiction of contract enforcement.
We assist clients in analyzing transaction components – whether tangible or intangible – to determine whether and how Israeli tax rules apply.
Key Issues in Cross-Border Transactions
1. Withholding Tax on Payments to Foreign Entities
Israeli law imposes withholding tax on outbound payments such as royalties, interest, dividends, and certain service fees. The rate is typically 25%-30%, but may be reduced under applicable double tax treaties (DTTs) Israel has signed with over 60 countries, including the U.S., U.K., Germany, and India.
We support clients in obtaining reduced withholding certificates, structuring payment flows, and complying with reporting obligations.
2. Capital Gains Tax on Sale of Israeli Assets by Foreign Parties
A foreign entity selling shares in an Israeli company – or assets located in Israel – may be subject to Israeli capital gains tax, even if the seller is not otherwise tax-resident in Israel. In many cases, the transaction may be exempt under a DTT, subject to specific conditions.
We conduct treaty analyses and assist with pre-ruling applications to the Israel Tax Authority (ITA), where appropriate.
3. Transfer Pricing and Intercompany Arrangements
Cross-border group structures require rigorous transfer pricing compliance under Section 85A of the Israeli Income Tax Ordinance and accompanying regulations.
We help clients establish defensible pricing mechanisms for intercompany services, IP licensing, and cost-sharing arrangements, and support in documentation and audits.
4. Reorganizations and M&A Structures
Cross-border mergers, acquisitions, and asset transfers must take into account potential tax exposures at both corporate and shareholder levels. This includes capital gains, VAT, withholding obligations, and step-up opportunities.
We evaluate the comparative efficiency of share purchases, asset purchases, licensing arrangements, and post-closing restructurings, often in collaboration with international counsel to harmonize global tax consequences.
5. VAT and Importation Rules
Importation of goods or services may trigger Israeli VAT at a current rate of 18%, even if the supplier is non-resident. Where services are provided from abroad to an Israeli recipient, reverse charge rules may apply.
We advise clients on VAT registration, compliance, and structuring inbound and outbound service flows.
6. Permanent Establishment (PE) Risk
Engaging in ongoing or significant business activity in Israel may inadvertently create a permanent establishment, exposing foreign entities to Israeli corporate tax. Factors such as having dependent agents, physical presence, or material decision-making in Israel are relevant.
We conduct PE risk assessments and design activity structures that mitigate exposure.
Pre-Rulings and Advance Tax Planning
The Israeli tax authority offers the option of obtaining pre-rulings to clarify tax positions in advance of significant transactions. These rulings are especially useful in M&A deals, IP transfers, and hybrid arrangements involving financing, licensing, or restructuring.
Our firm regularly represents clients before the ITA’s ruling committee and advises on effective tax strategies aligned with commercial objectives.
Cross-Border Transactions Require Cross-Border Thinking
Cross-border activity cannot be effectively planned in a single jurisdictional silo. We collaborate closely with accountants, international tax counsel, and transfer pricing advisors to ensure every legal and commercial element of your transaction is optimized for efficiency, compliance, and certainty.
Whether you are an Israeli company expanding abroad, or a foreign investor entering the Israeli market, we offer strategic, practical and proactive tax advice to support your transaction – from initial structuring through to post-deal implementation.