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turnover. Alternatively, a company may be required to make ten monthly payments
beginning in the second month of its tax year, each payment being a fixed percentage
of the previous year’s tax assessment.
Penalties are imposed on overdue advance payments and on delays in the submission
of tax returns. The balance of any taxes due is payable from the beginning of the
following tax year and is linked to the CPI; it bears interest of 4% until paid.
Tax audit process
A tax return, once filed, constitutes a self-assessment that remains open to review
by the ITA for three years from the end of the tax year in which the tax return is filed
(within four years after the end of the said tax year with the Commissioner’s approval).
If no return is filed and a tax officer believes a taxpayer owes tax, the tax officer may
issue a ‘best judgement’ assessment without time limit.
Statute of limitations
The statute of limitation period for corporate tax is three years from the end of the
tax year in which the relevant tax return is filed. The Commissioner of the ITA has the
authority to extend this period to four years.
Topics of focus for tax authorities
Some key tax issues that the ITA has focused on recently include:
• Transfer pricing.
• Treaty shopping to reduce WHT and capital gains tax.
• WHT on payments to overseas service providers and for payments in regard to
software.
Corporate residence
The following are considered to be resident in Israel:
• A company incorporated in Israel.
• A company whose business is managed and controlled from Israel.
In the absence of a definition of the term ‘management and control’ either in Israeli
legislation or a direct discussion of this term by the Israeli courts, it may be difficult to
determine whether a company that is incorporated outside of Israel shall be viewed
as managed and controlled from Israel. This is a complex subject that needs to be
addressed on a case-by-case basis. When an entity is both an Israeli tax resident and
a resident of a foreign jurisdiction that is party to an income tax treaty with Israel, most
treaties provide a tiebreaker test in the determination of an entity’s tax residency.
Permanent establishment (PE)
Foreign resident entities might be exempt from corporate tax to the extent that its
activities do not constitute a PE under the tax treaty applicable between Israel and
the foreign resident’s country of residency.
Whether a non-resident has a taxable presence under Israeli domestic tax law is far
less clear than the definition of PE under a relevant tax treaty. There is no detailed
legislation or Israeli court decisions that directly address this issue. In general, where
there is no tax treaty protection, a non-resident is subject to tax on income accrued or
derived in Israel, which is a taxation threshold lower than the PE criterion.
Income determination
In general, the annual results (i.e. the excess of income over expenses or vice versa) of