Your Taxes: Tips you need to know about exporting
Companies export for one reason only: to make a profit, net of all taxes.
Isreli currency. Photo: Reuters
Companies export for one reason only: to make a profit, net of all taxes. The
following article highlights a few ways in which taxes can be minimized and the
profits of Israeli exporters and foreign exporters to Israel can be optimized.
The advice is applicable to exporters delivering products physically, over the
Internet or providing services.
Israel has free-trade
agreements (FTAs) with a number of countries, including the European Union, the
United States, the European Free Trade Association (EFTA), Canada, Mexico,
Mercosur (Argentina, Brazil, Paraguay and Uruguay) and Turkey, but none with
South Africa or Australia.
The Israel-EU FTA
The Israel-EU free-trade
agreement (also known as an Association Agreement) should reduce or eliminate
customs duties originating in the EU for delivery to Israel and vice
Briefly, the goods should qualify under the agreement if they
undergo processing that result in the finished product having a different
customs product code from all the imported raw materials, at the four digit
product-code level. The processing should also meet the requirements set out in
Annex 2 of Protocol 4 of the Agreement. It is advisable to consult your customs
agent for more details in theory and in practice.
The Israel-US FTA
Israel-US FTA generally applies to any article if: (a) that article is wholly
the growth, product or manufacture of a party, or is a new or different article
of commerce that has been grown, produced or manufactured in one of the two
countries; (b) that article is imported directly from one country into the
other; and (c) the sum of: (i) the cost or value of the materials produced in
the exporting party, plus (ii) the direct costs of processing operations
performed in the exporting country is not less than 35 percent of the appraised
value of the article at the time it enters into the other country.
FTAs have similar but not identical ‘‘source rules” for qualifying
Never underestimate VAT. The standard rate of VAT in Israel
is 16%, rising to 17% on September 1, and is even higher in some other
countries; for example, 20% in the UK. Remember these rates are on your sales
price, not just on profits! VAT on imported goods is normally collected by the
Each country has complex rules to catch the VAT due
in the area of services and e-commerce.
For Israeli and other non-EU
exporters who supply services to EU business customers (B2B, or business to
business), most services will be treated as supplied where the business customer
is established (i.e., an EU country) and the business customer will itself
account for VAT under a reverse charge (selfbilling) mechanism.
case of B2C (business to consumer), the Israeli/non-EU supplier should account
for any EU VAT due. In the case of electronically supplied services to EU
consumers, the Israeli/non-EU supplier may opt to use a special
Subject to certain conditions, the special scheme offers Israeli
and other non-EU businesses the option of registering electronically in a single
EU member state of their choice.
They can then account for VAT on their
sales of electronically supplied services to all EU consumers on a single
quarterly electronic VAT declaration that provides details of VAT due in each
member state. This is submitted with payment to the tax administration in the
member state of registration, which then distributes the VAT to the member
states where the services are consumed.
You cannot recover VAT on
purchases using the special scheme.
However, you may reclaim any VAT that
you have paid on goods and services used for the purpose of your taxable
activities falling under the special scheme from the member state where that VAT
was paid, under the terms of the EU 13th Directive. (For more details see the
UK‘s HMRC Notice 741A among others.) In the case of non-Israeli service
suppliers, they should, in theory, account for Israeli VAT on services supplied
to Israeli residents.
In practice, enforcement is weak if the service
supplier doesn’t do business in Israel. If it does do business in Israel, it
should register for Israeli VAT purposes and appoint an Israeli resident fiscal
representative within 30 days.
follows an evolutionary process. For a novice exporter it may be sufficient to
make a sale from their own country and to ship the product to a distributor
abroad. The distributor should know the local market conditions best. The
exporter will not have to pay corporation tax in the other country if it can
avoid having a “permanent establishment” (PE) as defined in the relevant tax
Israel has tax treaties with 50 other countries, including the
US, Canada, South Africa, most EU countries, but none with Australia.
practice, a PE generally means a ‘‘fixed place of business” (a branch) or a
“dependent agent” (agent with few other customers and/or concludes sales on
behalf of the exporter). In the case of electronic commerce, the OECD indicates
that a smart server that does deals, and not only gives out your address, is a
Where a PE exists, corporate income tax is due on profits
attributable to the PE. The standard rates of corporate income tax (company tax)
are 25% in Israel, 35% federal income tax in the US (plus state and city taxes
where applicable), 20%- 24% in the UK and so forth.
must appoint an Israeli resident fiscal representative, who can be the same as
their VAT representative.
In practice, exporters often move on from
distributors to setting up their own dedicated subsidiary company. Israeli
exporters often use a US subsidiary to sell across North America and a UK
subsidiary to sell into EU markets. Currently Israel is waiting patiently (and
hopefully) for non-Israeli exporters to use Israel as a hub into other Mideast
Most global trade is conducted via
multinational groups. This is because a local subsidiary can sell products to
the local market better than the foreign exporter. Israel and most other
countries have detailed rules requiring multinational group members to transact
with each other on arm’s length terms. This is meant to prevent tax planning but
usually has the opposite effect.
Companies are often
surprised to find that tax is withheld at source from cross-border payments
relating to items such as dividends, interest, royalties, software license
payments, franchise fees, capital gains and so forth. The banks in Israel are
obliged to withhold 25% from outbound payments unless advance written clearance
is obtained from the Israel Tax Authority; e.g., pursuant to a tax
The US-Israel tax treaty specifies the following withholding tax
• Dividends: 12.5%/15%/25%
• Interest: 17.5% or regular tax on the
• Royalties: 10%/15%
• Capital-gains tax: regular rates in most
cases, except share sales by investors with under 10% of the investee company’s
The UK-Israel tax treaty specifies the following
withholding tax rates:
• Dividends and interest: 15%
• Royalties: 0% or
• Capital gains: 0%, except for real-estate deals.
remarks Exporting requires a detailed knowledge of local tax rates and other
rules. After you have this information you will be able to plan your corporate
structure and business model accordingly.
As always, consult experienced
tax advisers in each country at an early stage in specific
Leon Harris is an Israeli certified public accountant
and tax specialist at Harris Consulting & Tax Ltd.