Tax savings by the transaction structure
German companies that have or consider the option of doing business in Israel have the option to enjoy several options for significant tax saving, Israel if they plan the structure of the transaction in time. Under the Double Taxation Treaty between Germany and Israel.
After the decision has been made and you took some steps, set the legal structure of your business activity in Israel, as we explained in our previous article, “Tax savings on dividend in Israel”, and got the determination as a permanent establishment in Israel. You may apply and plan a transaction structure, which is designed for tax savings.
The combination of the Germany-Israel tax avoidance treaty, and the local law, allows German companies to review the definitions and wording of their contracts with their clients and business partners in Israel.
A tax planning that can lower the corporate tax rate, which stands at 23% in 2020 (and has changed several times over the past decade, averaging about 25%), would be a business advantage.
If despite the tax planning (which allows you to avoid paying dividend tax) you’ve been forced to pay the dividend tax as a German company in Israel, then the maximum charge that you will owe under the Tax Convention will be between 5% and 10% within the defined terms. However, a dividend paid after you already paid the corporate tax, which means that the total charge can reach over 30% tax. Yet, there are cheaper ways to get the money out of Israel and back to Germany.
You should consider the alternatives, key focal points for tax savings:
Loan and Interest Income: This option allows you to save and pay a total tax payment of up to a minimum of 5%. This by setting a transaction in which part of the profit goes through a route of loan and interest income. In such cases, the income payment is on the interest.
Royalty Transaction: In this option, the tax rate that can be reached are of up to a minimum of 0%. The Royalty transaction is one of the most useful existing definitions for transactions. Yet, it does require a proper understanding of the Israeli judicial system of criteria and interpretation to set it up correctly and formally in terms of the legal-tax perspective.
Capital-Generating Transactions (non-real estate-related): In this option, the tax rate that can be reached are of up to a minimum of 0% depends on the correct definition of the transaction following the correct use of the provisions of the law. On the other hand, the tax on capital gains owed in Israel can reach from 25% to 30%. This reduction may be significant in percentage terms, and on a large scale of the capital gain transaction, it might be considerable and should be reviewed in advance before the deal made.
Our recommendation to you is to consult and pre-planning if possible.
Mr. Ofir Angel, CPA
Managing-Partner, Allwira & Angel
International Taxation and Business Development