The Israeli Tax Authority published on 2 April 2015, a draft circular concerning the taxation of foreign companies providing digital services in Israel through the Internet, such as advertising and website promotion. The draft circular by the Israeli Tax Authority, aims to simplify the taxation of income that arises from the provision of various digital services by foreign companies, such as Google and Facebook, to Israeli residents. The following is a summary of the main provisions in the draft circular by the Israeli Tax Authority.
As explained below, the draft circular by the Israeli Tax Authority provides that under certain conditions, some of the foreign companies whose business constitutes a "permanent establishment" according to Israeli tax treaties, may be subject to income tax. In addition, those foreign companies that have significant business in Israel will be required to register with the Israeli VAT authority as authorized dealers, and their transactions is likely to be liable to VAT payments.
The draft circular by the Israeli Tax Authority suggests, regarding foreign companies providing digital services to residence of Israel, that a "permanent establishment", defined in tax treaties as a permanent place of business at the disposal of the enterprise, or when the enterprise's business in Israel is conducted through an agent with the power to sign contracts in the name of the enterprise, may be established in Israel, as follows:
A - The foreign company providing digital services to residence of Israel maintains an operation in Israel;
B - The foreign company providing digital services to residence of Israel directly connects with those clients to (1) provide services or (2) connect them with customers in Israeli by, for example, providing a Hebrew language internet website operated for Israelis;
C - Representatives of the foreign company in Israel are involved in identifying Israeli customers and/or gathering information;
D - The foreign company providing services to Israelis has provided authority to an Israeli representative to engage in transactions locally which are binding on the foreign company.
E - In the case that an employee is providing services in Israel on behalf of a foreign company, that employee may potentially constitute a permanent establishment of the foreign company in Israel.
A foreign corporation that provides digital services to Israelis and maintains substantial business activity in Israel is likely to be required to register with the Israeli Tax Authority for VAT purposes, and its business with Israeli may be liable to VAT. For example, a foreign company that operates a website providing advertising or intermediary services to Israeli aimed at the Israeli market will be required to register for VAT, and its income from Israeli customers may be subject to VAT payments.