Tax benefits for construction projects in Israel
German companies who are coming for short-term construction, installation, or assembly project transactions in Israel can enjoy attractive and reachable solutions, based on the German-Israeli “Double Taxation Treaty”, and its interpretation of the OECD definition of “permanent establishment”, terminology and rules alongside with the Israeli’s local law, by planning a tailored tax plan.
An essential tax planning for short-term infrastructure projects (no more than 12 months) allows companies to avoid the tax payment on the income and profits derive in Israel. To execute and achieve a successful implementation of such tax planning requires examination of several factors and preparation in advance to meet with the tax authority’s requirements in Israel.
The project duration: One of the most significant factors is the duration of the project, the length of the project. When it comes to Israeli and global ruling, there are some possible interpretations regarding the time defined as “preparation time” and the “end time” of the project, unlike the actions being done “on the ground” in the project area. These two parameters are not absolute and many times are not taking place on Israeli soil and therefore are open for ruling interpretation.
The warranty period: An issue that might be arises is the warranty period on the product or service. Before and after signing a contract, it is essential to consider and plan the subjects related to the warranty period, such as; the duration of the warranty, the actions required under warranty, its relation to the deal rule, the manner of payment for the warranty and some other issues.
“Related services”: The definition of the project is significant, and some projects are falling under the category of “related services.” In recent years many companies have come to us with borderline plans, which requires interpretation and pre-assessments to generate the mentioned above tax savings. Other than that, many companies provide “related services” for infrastructure projects in Israel, and the question “how far” we can define ancillary services for an infrastructure project.
In this kind of unclear situation, our tax experts will provide your company with the detailed options to support the tax planning, or will contact the tax authorities for you through a pre-ruling process to obtain certainty about tax planning.
The outcome of that tax plan can reduce the tax rate in an average reduction of a 5% to 30% tax rate, as a result of the cancellation of the dividend tax for the Israeli tax authority. The meaning is that any accumulated profit, after local taxes, can be transfer directly to Germany.
Mr. Ofir Angel, CPA
Managing-Partner, Allwira & Angel
International Taxation and Business Development