1. Israel-Germany Tax Treaty for the Avoidance of Double Taxation

Fiscal relations between the countries are regulated by the tax treaty, which aims to prevent double taxation and encourage mutual investment:

• Allocation of Taxing Rights: The treaty establishes mechanisms to reduce withholding taxes on dividends, interest, and royalties. It governs which country holds the right to tax capital gains and business income.
• Determination of Residency: Establishing rules for defining the fiscal residency of companies and individuals to prevent double taxation on both sides.

2. Permanent Establishment (PE)

A central issue in the operations of foreign companies:

• Exposure to Local Taxation: Activities of a German company in Israel (or conversely, an Israeli company in Germany) that rise to the level of a “Permanent Establishment” – such as a fixed place of business, a prolonged construction or assembly site, or the continuous provision of services – require registration, reporting, and payment of local corporate tax on profits attributable to those activities.
• Invoicing and Tax Imposition: Issuing an invoice from abroad does not, in itself, exempt a company from PE exposure or withholding tax obligations.

3. Corporate Structure and Business Activity

The structure of the transaction and the legal entity directly impact the tax burden and regulatory exposure:

• Branch vs. Subsidiary (GmbH / UG): Choosing between opening a branch of a foreign company and establishing a local subsidiary affects withholding tax rates upon profit distribution (dividends), as well as the legal and tax liability of the parent company.
• Structuring Transactions: Properly defining transactions involving equipment sales, technology licensing, and installation or maintenance services allows for optimizing tax liabilities and utilizing treaty-based exemptions.

4. VAT & Fiscal Representation

• Local VAT Liability: Foreign companies selling goods, services, or digital products to customers in the other country must examine local VAT liability and “Reverse Charge” mechanisms.
• Fiscal Representative: Registering a local fiscal representative allows foreign companies to operate and report to tax and VAT authorities in an orderly manner without establishing a full legal entity.

5. Incentives, High-Tech, and Foreign Investment

• Tax Incentives for Investors and High-Tech Companies: Israel offers preferred tax regimes (such as the Law for the Encouragement of Capital Investments, Preferred Technology Enterprise status), which attract investors and companies from Germany.
• Intellectual Property (IP) and Transfer Pricing: Allocating profits from intangible assets and research and development (R&D) activities must comply with Transfer Pricing rules and OECD guidelines.

6. Individual Taxation and Relocation

• Returning Residents and New Immigrants: Utilizing tax benefits granted in Israel to new immigrants and returning residents (reporting and tax exemptions on foreign-sourced income for a limited period).
• Voluntary Disclosure: Regulating retroactive reporting and tax liabilities for individuals holding assets or bank accounts abroad.