Now it's final: foreign Internet companies that conduct substantial business activity in Israel will pay taxes in Israel under certain conditions. This represents a taxation revolution that will have a dramatic impact on the activity of giant companies such as Google, Facebook and Amazon, and in the end will probably make products they sell to Israeli consumers via the Internet dearer.
This morning, the Israel Tax Authority published a circular explaining in what circumstances the revenue of a foreign corporation from services provided via the Internet to Israeli residents will be regarded as liable to tax in Israel.
Under existing taxation legislation, revenue of a foreign corporation from provision of services to Israeli residents is liable to tax if it was produced in Israel. If the foreign corporation is a resident of a country with which Israel has a tax treaty preventing double taxation, it will be liable to tax on its activity in Israel only if that activity amounts to a "permanent establishment". A permanent establishment is defined in the taxation treaties as a fixed physical place of business used by the enterprise, or, where the enterprise's business in Israel is conducted through an agent, a situation in which the agent has authority to enter into contracts in the name of the enterprise.
The Israel Tax Authority says that in the light of the changes in the way business is carried out and the switch from a traditional economy to a digital economy, a permanent establishment can exist in Israel when the foreign corporation's fixed place of business in Israel is primarily on the Internet and certain other conditions are fulfilled, such as that representatives of the foreign corporation are engaged in finding customers in Israel, gathering information and conducting customer relations for the corporation, and that the service provided by the foreign corporation on the Internet is adapted to Israeli customers (language, style, currency and so on ).
As far as VAT is concerned, the circular states that a foreign corporation that carries out substantial business in Israel must register for VAT as an approved enterprise and its transactions are liable to VAT. So for example a foreign corporation that operates an Internet site providing advertising or brokerage services to Israeli customers aimed at Israeli consumers and that is assisted by an Israeli representative that conducts business on its behalf will have to register for VAT and its revenue from Israeli customers will be liable to VAT.
In addition, the Israel Tax Authority is currently promoting a bill that states that a foreign resident who provides a digital service or operates an online store through which a digital service is provided to an Israeli resident that is not a business or a financial institution conducting transactions in the course of business or a non-profit organization, that foreign resident will be registered in a special register and will pay VAT on its transactions.
The question of taxation of foreign Internet companies has been under discussion at the Israel Tax Authority for some time, and it was also the subject of a petition to the High Court of Justice against the minister of finance, the director of the Authority, Google, and Facebook calling for an end to the "exemption" from VAT for such companies. In March 2014, the court dismissed the petition on the grounds that the minister of finance and the Authority declared that they were formulating new taxation rules that would apply to these companies. The changes are in line with similar changes that have taken place in taxation rules in Europe, particularly in the UK, where VAT has been imposed on digital services since the beginning of this year.
Published by Globes [online], Israel business news - www.globes-online.com - on April 11, 2016
© Copyright of Globes Publisher Itonut (1983) Ltd. 2016