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Israel Preparing Digital Services Tax Modelled Off Pending French Proposal

Robert Sledz  

· 5 minute read

Robert Sledz  

· 5 minute read

On April 28, 2019, Israel’s Globes newspaper said in an article that the Israeli Tax Authority (ITA) and Ministry of Finance are preparing draft legislation that would introduce a digital services tax modelled off the French proposal (Project Law No. 1737 of March 6, 2019), with a 3-5% rate on gross income (i.e. turnover). The ITA plans to introduce the proposal once a new Finance Minister is appointed.

According to the Globes article, the proposed digital tax would be in response to digital companies not being cooperative with the ITA, regarding application of Circular No. 4/2016 of April 11, 2016.


Circular No. 4/2016 sets out the ITA’s position on the attribution of income to a permanent establishment (PE) in Israel from the supply of digital services. The circular adopts the concept of a significant economic presence for PE purposes. While the circular does not constitute Israeli law, it reflects the ITA’s interpretation of PE issues under Israeli tax law.

Significant Digital Presence

Circular No. 4/2016 allows the ITA to find that a foreign supplier has a significant digital presence in Israel based on the following factors:

  • The foreign supplier has a significant number of contracts for online services with Israeli customers.
  • The foreign supplier’s online services are highly used by Israeli customers.
  • The foreign supplier’s website has been adapted for use by Israeli customers.
  • There is a high volume of web traffic between Israel and the foreign supplier’s website/services.
  • Other factors.

The ITA is authorized to seek information from foreign digital suppliers and related Israeli companies to determine whether any of the above factors are met.

Attribution of Foreign Profits to Israeli PE

For treaty residents, Circular No. 4/2016 states that the attribution of profits of a foreign company to a PE in Israel should be done at arm’s-length using the ‘functionally separate entity approach,’ based on the nature of the functions performed by the PE, the assets used, and the risks assumed.

For non-treaty residents, Circular No. 4/2016 states that profits are attributed by identifying the functions, assets, and risks of the Israeli activities.

VAT Implications

Circular No. 4/2016 requires foreign suppliers of digital services to Israeli customers to register in Israel for VAT purposes (Section 60(a) of the Israeli VAT Law), if one of the following are met:

  • The activity of the foreign company for income tax purposes constitutes a PE.
  • The foreign company has a branch or employees in Israel, a rented office in Israel, or an affiliate in Israel.
  • The company business activity has, or is assisted by, a representative in Israel or by an Israeli affiliate.
  • The company has significant economic activity in Israel, which is a facts-and-circumstances preliminary review by the Professional Division of the Israeli Customs and VAT Department.


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