Guiding multinationals through the complex process of setting up in Israel.
When setting up operations within the State of Israel, multinational companies face a number of issues, some of which are relevant to all of their cross-border activities, whilst others are unique to the Israeli context.
This environment creates challenges for multinationals, particularly when the global company has a rigorous set of internal procedures, and needs to strictly align to its internal policies and practices.
Mazars - Israel has extensive experience handling these issues and is therefore able to guide multinationals through this complex and often bureaucratic process.
- Permanent Establishment: A multinational will need to initially determine whether its local operations constitute a permanent establishment (PE). The outcome of such an analysis will, in turn, give rise to income and value-added tax liability consequences.
- Legal Structure: Once operations are determined to constitute a PE, the multinational will need to decide whether to operate as a separate legal entity or as a local branch of the foreign entity. In general, a branch does not have a distinct legal personality from its owner, and as such the issues of legal liability will differ greatly compared to a subsidiary.
- Israel imposes VAT on the supply of goods and services. Multinationals may have to face a number of VAT-related complex issues, including:
- Ensuring compliance with all aspects of the VAT Code and guidelines including levying output VAT where applicable, and claiming only valid input VAT credits
- Ensuring VAT returns are appropriately submitted on time
- Complying with the VAT authorities’ requirements for VAT submissions
- Where the multinational operates through a local branch, or where the subsidiary does not have a local resident director, a fiscal VAT representative is required:
- this representative is responsible for ensuring that the local entity is fully VAT compliant and that all VAT matters are managed professionally and in a timely fashion.
- Our Company acts as VAT representative for several global companies and, has extensive knowledge of the legal requirements for such representation.
- The tax implications of choosing a particular structure may prove significant and require an in-depth analysis at the decision-making stage. In particular, the taxation and withholding taxes on dividends may differ significantly based on the legal vehicle chosen.
- Should the multinational’s activities constitute a PE, the local PE will usually be required to register for 3 main categories of taxes:
- Corporate income tax
- Withholding taxes
- Withholding Taxes: Israel enforces a rigorous withholding tax regime, placing the onus of tax collection on the party making the payment. A detailed understanding of these rules is critical when operating a business locally.
- In general, payments to foreign entities generally entail a withholding tax unless a general exemption applies or specific approval is obtained from the tax authorities.
- Social Benefits and Payroll
- Israel has a complex and highly nuanced social benefits regime. Aspects of the system include pension, severance pay, recuperation and national insurance regulations that are unique to Israel.
- In addition, the multinational may often have foreign expert employees working in Israel. To comply with local payroll tax requirements, these employees often work on a ‘shadow payroll’ basis.
- Foreign experts working in Israel also have their own requirements for visa, as well as certain benefits available to them for a specified period of time. These benefits can be significant and require understanding.
- Further issues affecting foreign expert employees include an analysis of double tax agreements, the authority for levying tax, and determination of tax credits.
- Locally Compliant Books of Account: It is also critical to understand what constitutes locally compliant records and tax invoicing as set out by Israeli legislation.
- Integration: An important factor to tackle when dealing with the local entity of a global organisation is to determine the integration of the local accounts into the parent entity’s accounts.
- Factors to consider in this process include the direction of information flow, the extent of monthly reconciliation required, and the responsibility for monthly analysis and reconciliation.
- Audit: Companies in Israel are required to have an annual audit, comprising both a tax and a financial statement audit.