What is Israel’s multilateral instrument tax policy? - opinion

Not all Israel’s tax treaties were modified by the MLI, for example the USA didn’t sign up to it.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)

How do you quickly tighten up 3,000 tax treaties in the world? The OECD came up with a super treaty called the Multilateral Instrument (“MLI”). Israel is an OECD member and signatory of the MLI, which the Knesset ratified on July 16, 2018.

On January 17, 2022, the Israel Tax Authority (ITA) published a 96 page Circular (01/2022) telling us what Israel signed up to. This is important for multinational groups, large and small.

About the MLI

Each MLI article contains a number of alternative choices. Around 100 countries have signed up to the MLI saying which alternatives they chose. When two countries with a bilateral tax treaty sign up to the MLI and select the same alternative, the tax treaty between them is modified accordingly.

The aim of the MLI is to help implement the OECD’s measures against base erosion and profit shifting (BEPS), i.e. shifting profits offshore and other tax tricks.

Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)
Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)

The above Tax Circular spells out which MLI alternative options Israel chose. Below is a brief summary.

Spoiler: not all Israel’s tax treaties were modified by the MLI, for example the USA didn’t sign up to it.

Transparent entities or arrangements

This refers to entities which are not themselves taxed, their members are taxed instead, e.g. partnerships, Israeli family companies, etc. Israel chose under the MLI to allow treaty benefits to the extent their income is taxed as income of a resident of that country.

Dual resident entities

Where a “person other than an individual” (company, trust, etc) is dual resident under national tax laws (e.g. incorporated in country A, managed in Country B), Israel won’t apply the old test of place of effective management as a “tie breaker”. Instead, under the MLI, the competent tax authorities shall endeavor to agree where the entity resides having regard to the place of effective management, incorporation and any other relevant factors. If such agreement is not reached by the tax authorities (quite possible), that entity cannot claim any treaty relief. In particular, Israel may look at, among other things where: the board meets, the CEO operates, senior management conduct day-to-day management, the headquarters is, place of governing law, where the books are kept, or whether treaty abuse is possible.

Permanent establishment (PE)

A PE is generally a fixed place of business (branch) of a Company from Country A which is taxable in Country B. Or is it?


Construction or installation projects, or connected supervisory or consultancy activities are usually a PE if they exceed a certain period, e.g. a year. To counter income splitting, Israel chose that closely related companies in the same country be taken into account.

Certain activities of a fixed place of business may not trigger a PE under many tax treaties. Under the MLI, Israel chose their overall character must be merely auxiliary or preparatory. This will not be the case if the activity is central to the business, a core function, substantial or fulfills a principal purpose of the entity, e.g. a large warehouse with a substantial number of employees used to ship inventory to customers. This catches much e-commerce but not a spare parts warehouse if no maintenance or repairs are done there.

To counter income splitting, Israel chose that complementary functions by closely related companies in the same country be taken into account.

Israel chose to treat “commissionaire” arrangements as a PE where a person habitually plays the principal role leading to the conclusion of contracts routinely without material modification by the foreign enterprise. This catches online contracts.

Israel also chose to treat closely related sales subsidiaries acting exclusively or almost exclusively for a foreign enterprise as a PE not an independent agent

“Closely related” means over control of one over the other or common control, especially if there is beneficial interest of more than 50%, or more than 50% of the aggregate vote and value of a company.

Transfer pricing

Under the MLI, Israel adopted the position that where one country makes a market-based transfer pricing adjustment to profits, the other country concerned must make a corresponding adjustment. The competent authorities may consult each other “if necessary.”

Dividends and real estate

Under the MLI, Israel chose that to get a lower withholding tax rate, any ownership conditions must be met for 365 days up to the dividend payment date. To claim a treaty capital gains tax exemption, under 50% of the value of shares should be derived from real estate throughout the preceding 365 days.

Competent authority proceedings

These must be initiated in the country of residence.

As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com