IsraelIsrael

Legal ReferenceSection 85A of the Income Tax Ordinance (New Version), 5721- 1961

Legal ReferenceSection 6 of the Income Tax Regulations (Determination of Market Conditions), 5767- 2006

According to section 6 of the Income Tax Regulations (Determination of Market Conditions), 5767-2006: "A market conditions study that was conducted before the publication of these regulations will be regarded as a market conditions study that was conducted in accordance with these regulations, this for two years from the date of their publication, provided that it was conducted in accordance with the accepted guidelines published by the OECD or its member countries." The regulations were published on November 2006. There is no other reference in the domestic legislation to the TPG. However, the TPG can be regarded as one of the interpretation aids.

Legal ReferenceSection 85A(b) of the Income Tax Ordinance (New Version), 5721- 1961; Section 76(d) of the Income Tax Ordinance (New Version), 5721- 1961; Section 88 of the Income Tax Ordinance (New Version), 5721- 1961

According to Section 85A(b) of the Income Tax Ordinance (New Version): “Special relationships” – including relationships between a person and his relative, as well as control of one party to a transaction over the other, or control of one person over the parties to the transaction, directly or indirectly, alone or together with another; “Control” – a holding, directly or indirectly, of 50% or more in one of the means of control, at least one day during the tax year; “Relative” – as defined in Paragraph 76(d); “Means of control” and “Together with another” – as defined in Paragraph 88. Section 76(d) of the Income Tax Ordinance (New Version): "Relative"- spouse, brother, sister, parent, parent's parent, descendant, the spouse's descendants and the spouse of any of these. Section 88 of the Income Tax Ordinance (New Version): “Means of control” – in a body of persons – each of the following: (1) the right to profits; (2) the right to appoint a Director or General Manager of the company, or holders of similar positions in other bodies of persons; (3) the right to vote at the company's General Meetings, or in the corresponding body of another body of persons; (4) the right to a share of the balance of assets after debts have been paid at liquidation; (5) the right to instruct the holder of one of the rights said in paragraphs (1) to (4) how to exercise that right; all whether by virtue of shares, rights to shares or other rights, or in any other manner, including through voting or trusteeship agreements. “Together with another”- Together with his relative, and also together with a person who is not his relative, if they regularly – directly or indirectly – cooperate by agreement on matters substantive to the body of persons.

Legal ReferenceSection 2(a) in the Income Tax Regulations (Determination of Market Conditions), 5767- 2006

Yes. The definition of "others" in the section 2(3) of the Income Tax Regulations (Determination of Market Conditions), 5767-2006 is as follows: "Should it not be possible to use a price comparison method or one of the methods detailed in sub-paragraph (2) – another method that is the most suitable in the circumstances, which compares the international transaction with a similar transaction"

• CUP (provided)
• Resale Price (provided)
• Cost Plus (provided)
• TNMM (provided)
• Profit Split (provided)
• Other (provided)

Legal ReferenceSection 2(a) of the Income Tax Regulations (Determination of Market Conditions), 5767- 2006; Section 1 of the Income Tax Regulations (Determination of Market Conditions), 5767- 2006

Hierarchy of methods and Most appropriate method. For the purpose of determining whether an international transaction that has been conducted is a transaction in market conditions, a market conditions study will be conducted in which an international transaction will be compared with similar transactions of the tested party, in accordance with one of the methods detailed below: (1) A method that compares between the price determined in the international transaction and the price determined in a similar transaction (in these regulations – the compared price method); (2) Should it not be possible to use the price comparison method – in accordance with one of the following comparison methods that is the most suitable in the circumstances: (a) A method that compares the profitability margin between the international transaction and the similar transaction; (b) A method that compares the international transaction with the similar transaction, in accordance with the accepted distribution of profit and loss between parties in joint activity, taking into account the contribution of each party to the transaction, including the party’s exposure to risks and rights to the assets connected with the transaction; (3) Should it not be possible to use a price comparison method or one of the methods detailed in sub-paragraph (2) – another method that is the most suitable in the circumstances, which compares the international transaction with a similar transaction.

For controlled transactions involving commodities, the guidance contained in paragraphs 2.18-2.22 of the TPG is followed. Israel’s domestic legislation or regulations do not contain a special treatment for commodity transaction and tend to rely on the OECD TPG.

Legal ReferenceThe Income Tax Regulations (Determination of Market Conditions), 5767-2006

Legal ReferenceSection 2(b) and 2(c) of the Income Tax Regulations (Determination of Market Conditions), 5767-2006; Section 2(c) of the Income Tax Regulations (Determination of Market Conditions), 5767- 2006

An international transaction will be regarded as a transaction at market conditions if as a result of its comparison in accordance with the comparison methods for similar transactions, the result obtained does not exceed the inter-quarterly range obtained in the comparison with similar transactions. Should however the comparison method be the price comparison method and adjustments were not made for cancelling out the effect of the difference on the comparability criteria, the transaction will be regarded as a transaction at market conditions if the price does not exceed the value range in similar transactions. Should it not be possible to regard an international transaction as a transaction at market conditions as said above, the transaction price will be reported according to the value located in the 50th centile in the value range.

Legal ReferenceThe Income Tax Regulations (Determination of Market Conditions), 5767-2006

The definition of Similar transaction: Any one of these, providing that, if no identical comparability criteria existed, adjustments were made in a manner whereby the impact of the difference between the comparability criteria of the results is canceled out: (1) A transaction between the tested party and a party that does not have special relationships with that party, in which the comparability criteria are identical, in their entirety or most of them, to the comparability criteria in an international transaction; (2) If there was no transaction as said in sub-paragraph (1) – a transaction between parties among which special relationships do not exist, in which the comparability criteria are identical or similar, all or most of them, to the comparability criteria in a transaction made by the tested party;

Israel’s domestic legislation or regulations do not contain specific guidance on transactions involving intangibles and tend to rely on the OECD TPG.

Israel’s domestic legislation or regulations do not contain specific guidance on intra-group services and tend to rely on the OECD TPG.

Legal ReferenceCircular 12/2018: transfer pricing – profitability rates and range for certain transactions

Section 3.1 in Circular 12/2018 is based on paragraph D of Chapter VII of the OECD TPG.

Legal ReferenceSection 85A(f) of the Income Tax Ordinance (New Version), 5721- 1961; Circular 13/2018; Form 1485

There is special consideration for loans or capital note subject to several conditions such as: 1. The loan recipient is a company under the control of the lender; 2. The loan is not index-linked and does not bear any interest or return; 3. The loan is not repayable before the end of a period of five years from the date of its grant; 4. The repayment of the loan is deferred to other liabilities and prior only to the distribution of assets to the shareholders in liquidation; In those situations, the taxpayer is not required to report an interest raising income from those loans. In addition, there is special consideration to changes in the currency exchange rate. Further, Israel would tend to rely on the OECD guidance on financial transactions.

CCAs are dealt with as part of the "other method" definition in the regulation: "Should it not be possible to use a price comparison method or one of the methods detailed in sub-paragraph (2) – another method that is the most suitable in the circumstances, which compares the international transaction with a similar transaction"

Legal ReferenceSection 85A(c) of the Income Tax Ordinance (New Version), 5721- 1961; Section 85B of the Income Tax Ordnance (New Version), 5721- 1961; Section 85C of the Income Tax Ordnance (New Version), 5721- 1961; Section 5 of the Income Tax Regulations (Determination of Market Conditions), 5767- 2006

The legislation requires the taxpayer to prepare transfer pricing documentation including a market conditions study.

• Master file consistent with Annex I to Chapter V of the TPG (selected)
• Local file consistent with Annex II to Chapter V of the TPG (not selected)
• Country-by-country report consistent with Annex III to Chapter V of the TPG (selected)
• Specific transfer pricing returns (separate or annexed to the tax return) (not selected)
• Other (specify) (selected)

Legal ReferenceSection 85A(c) of the Income Tax Ordinance (New Version), 5721- 1961; Section 85B of the Income Tax Ordnance (New Version), 5721- 1961; Section 5 of the Income Tax Regulations (Determination of Market Conditions), 5767- 2006; Form 1385; Form 1485

The annual tax report requires a statement on whether international transactions (according to section 85A of the Income Tax Ordinance) were conducted. If so, forms (1385 and, if required, 1485) are filed together with the annual tax report and describe the international transaction. A separate form should be filed for each transaction. The market conditions study should be submitted to the assessing officer at the assessing officer’s request within 30 days. The languages that the documentation should be submitted are Hebrew and/or English. Taxpayers are required to submit a Master File only if the group has a consolidated MNE group revenue of 150 million New Israeli Shekel (NIS) (approx. EUR 43 million as of October 2022) or more. Israeli’s Country-by-Country Reporting requirements are consistent with BEPS Action 13 and apply to MNE groups with consolidated revenue of NIS 3.4 billion (approx. EUR 750 million as of 1 January 2015) or more.

Legal ReferenceSection 4 of Income Tax Regulations (Determination of Market Conditions), 5767- 2006; Circular 3/2008: Audit, Transfer Pricing

"A one-time transaction" legislation provides an exemption from some of the transfer pricing documentation obligations – there is no need to perform a comparability analysis. In briefly, a one-time transaction an international transaction (as defined in the regulations) that the taxpayer does not usually carry out transactions of the same kind with someone with whom he has a special relationship. The uniqueness of the transaction will be expressed with very low frequency and its low volume per se and in relation to other transactions of the taxpayer. For example, a one-time transaction that does not exceed 10% of the taxpayer's total income (turnover) in the same field (business, financing, etc.') from parties with whom he has no special relationship and a transaction that does not exceed NIS 4 000 000 (approx. EUR 1 140 000 as of October 2022) will be considered a one-time transaction.

Legal ReferenceSection 85A(d) the Income Tax Ordinance (New Version), 5721- 1961; Israel’s MAP Profile

For further information, please refer to Israel’s MAP Profile.

• Rulings (selected)
• Enhanced engagement programs (not selected)
• Advance Pricing Agreements (APA) (selected)
• Unilateral APAs (selected)
• Bilateral APAs. (selected)
• Multilateral APAs (selected)
• Mutual Agreement Procedures (selected)
• Other (please specify) (not selected)

Legal ReferenceCircular 12/2018 : transfer pricing – profitability rates and range for certain transactions

In briefly, in case of distribution transaction, when the distributor is Low Risk Limited, without intangible ownership, the market price should be between 3%-4% based on OM index. In case of marketing transaction when the tested party without intangible ownership the market price should be between 10%-12% based on NCP index.

Year-end adjustments are allowed prior to submitting the income tax report.

In cases where the transaction has not been reported according to arm's length conditions set in the Income Tax Ordinance and the regulations, the difference between the price set between the related parties and the arm's length price (assuming the funds in the amount of the difference are not transferred) should be classified as a loan and/or a distribution of dividends according to the circumstances of the matter.

Legal ReferenceCircular 3/2008; Circular 11/2018; Circular 1/2020; Circular 15/2018

Circular number 3/2008 - guidelines about transfer pricing in Israel. Circular 11/2018: determination of the appropriate TP method for activities related to distribution, marketing and sales of multinational group within the local market. Circular 1/2020 deals with transfer pricing burden of proof. Circular 15/2018 deals with transfer pricing aspect of business restructurings base on Chapter IX in OECD TPG.

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