Tax savings on dividend in Israel
German companies that have a business activity in Israel can benefit from some tax benefits for their business activity in Israel. According to several tax benefits arising from Israeli tax laws combined with basic principles of international taxation, as is customary in the OECD taxation guidelines and the treaties between Germany and Israel, German companies that have a business activity or considering starting a business activity in Israel can enjoy tax benefits.
In case your company has already significant business activity in Israel or decides to develop a substantial activity or carry out a long-term project. The most common question and the first one to arise will usually be, which legal structure to incorporate? This issue could have a significant impact on the taxes you will pay in Israel, so it is advisable to consult with a German-Israeli tax expert for that matter.
Two main questions will need to be examined;
- Is your activity fits into the definition of “permanent establishment”?
- Is your business is subject to VAT payment in Israel?
There are several tax optional plans, which can be implemented for specific transactions and, it is worth checking these routes and try to avoid the payment of VAT and corporate income tax in Israel. However, if your activity reaches a permanent establishment, then these taxes are most likely to apply.
Keep in mind the importance of choosing the right model of registration and\or association in Israel in a way that will have a good impact on tax savings.
Usually, as a German company, you’ll have two options for registration and association in Israel:
- Establishing a company in Israel
- Establishing a branch in Israel
In both cases, you can do business fully and actively in Israel, like any other Israeli company. You will be required to register with the Israeli Companies Register, and you will receive a number represented in the tax and VAT authorities.
For any of these two options of registration, as an Israeli company or a branch, there are advantages and disadvantages. However, we will focus primarily on the significance of a branch in Israel over a company, which is the tax savings.
When you establish a branch in Israel, the central legal entity is the “head office” of the parent company located in Germany, and the activity in Israel defined as a branch activity. The significance of this interpretation to the tax authorities is that when you want to transfer accrued earnings at the branch to the main headquarters located in Germany, moving those earnings not considered a dividend transfer, since it is the same legal entity. As a result of this interpretation is that there is no dividend tax and an average reduction of 5% and up to 30% tax rate, which not paid to the Israeli tax authority.
In other words, any accumulated profit, after paying local taxes, can be transfer directly to Germany.
Our tax experts will be happy to assist you already in the initial stage of planning your German-Israel activity to recommend the best business structure for your business and your company to succeed in business and, at the same time, save the tax in Israel.
Mr. Ofir Angel, CPA
Managing-Partner, Allwira & Angel
International Taxation and Business Development