The Israeli Tax authority has issued a Tax Ruling on International services dealing with taxing a foreign company on profits from clients in Israel (Israeli Tax Ruling 6631/16). According to the Israeli Tax Ruling on International services, a multinational company based in a jurisdiction that has no tax treaty with Israel should pay Israeli taxes on its Israel-related earnings from international services.
According to the Israeli Tax Ruling on International services, company X is a company resident in a country that has no tax treaty with Israel. Company X provides international cargo, logistic warehousing and international transfers of money.
Company Y is a global settlements company (unrelated) that provides settlements and money transfer services in various countries including Israel pursuant to a representation agreement.
According to the Israeli Tax Ruling on International services, in order to provide its services, company X uses subcontractors in Israel, approved currency dealers that are unrelated to companies X and Y, to act as points of sales. These points of sales are a platform for providing service and enabling codes for withdrawing cash deposited at another endpoint in Israel or abroad.
Furthermore, company X provides various services from outside Israel relating to money transfers, including transacting with company Y, setting up and running computer operations outside Israel dedicated to money transfers, client services via call centers outside Israel approved by company Y.
For its operation, company X set up an Israeli subsidiary to deal with Israeli regulatory requirements, employ compliance officers, collect Israeli market data, distribute publicity materials, etc.
According to the Israeli Tax Ruling on International services the clients bring their cash to the points of sales. Then the cash is forwards on (after commission), to company X. Then, company X forwards the cash (after commission) directly to company Y for settlement and commission.
Applying the OECD “base erosion and profit shifting” (BEPS) the Israeli Tax Authority decided that since company Y generates revenues from international money transfers by means of its Israeli subsidiary and the points of sale in Israel for Israeli clients, company X is deemed to generate revenues in Israel. The Israeli tax should to be calculated on a pro rata basis: this means global profit related to Israeli activity multiplied by expenses incurred in Israel, divided by global expenses related to Israel. Furthermore, the collection of the tax will be by tax withheld by customers or by company X paying monthly tax installments. Likewise, company X should file annual tax returns reporting the above.
To sum up, the Israel Tax Authority ruled that a multinational company based in a jurisdiction that has no tax treaty with Israel must pay Israeli taxes on its Israel-related earnings from international money transfer services.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion