Taxation of E-commerce: Israeli Tax Authority Issues New Circular

The ITA published a new circular which provides guidelines for the taxation of foreign corporate entities operating in Israel via the internet. These guidelines are based on the BEPS (Base Erosion Profit Shifting) project of the G20 and the OECD.

According to the circular, corporate entities that operate an online business without having any physical presence in Israel could still be considered as having a permanent establishment or conducting business activity in Israel, if they have a significant digital or economic presence in Israel.

The circular sets certain characteristics to determine the existence of such digital or economic presence by the foreign corporate entity, of which we note, inter alia, the following:

• a significant number of transactions or agreements are conducted with Israeli residents;
• the services provided are consumed online by many customers in Israel;
• the online service is tailored for Israeli customers or users (e.g., use of Hebrew, style, charging customers in Israeli currency, processing Israeli credit cards etc.).
• a high level of use of the website by Israeli users;
• a tight link between the consideration paid to the foreign corporate entity and the level of use by the Israeli users.

In addition, according to the circular, a foreign entity that has a significant economic presence in Israel will be required to register with the Israeli VAT authorities and be subject to reporting and VAT payment obligations in Israel.

In light of this development, any foreign entity that has any online business activity vis-à-vis the Israeli market or with Israelis, should review carefully its structure and activities, so as to examine whether this circular creates any tax exposure, and if so, define what steps should be taken to eliminate, or at least mitigate, such exposure.