Branch Triggers Israeli Permanent Establishment

ITA Tax Resolution 6953/16 ITA Tax Resolution 6953/16 was formulated on the grounds that a public company which is a tax resident of a foreign jurisdiction ("Public Parent") specializes in the sale of reinsurance products to insurance companies. The Public Parent has a wholly owned private company ("the Company") which is a tax resident of the same foreign jurisdiction. The Company also operates as a reinsurer across various global jurisdictions including the State of Israel.

The Company's operations with its customers is mostly conducted in foreign

jurisdictions through branch operations in those countries, where the foreign branch activities include, inter-alia, negotiations, proposals and sales, partial underwriting support services, actuarial services, etc.

The Company operates in Israel through a branch overseen by a senior employee who is on the board of directors of the Company, and by two local Israeli workers. The director's approximate 40 accumulated annual days in the State of Israel was viewed by the ITA as an extensive presence.

The Tax Resolution determines that the Israeli branch activities constitute a

permanent establishment in the State of Israel on the premise that key decisions and profit deriving activities are both within the capacity of the branch and are executed by the branch, thus, rendering profits attributed to those activities taxable under Israeli law.

In order to determine the allocation of profits attributed to the Israeli branch's activities, the Tax Resolution concludes that the most appropriate transfer pricing methodology under Israeli Income Tax Regulation - (Determination of Market Terms) - 2006, was in fact the profit split.

ITA Tax Resolution 6953/16 may be accessed through the following link (Hebrew).

Consequences of the Action

First and foremost... the profit split

Prior to establishing its local operations, had the Company attained competant international tax planning advice, it would have organized the operations of the

Israeli branch as an Israeli tax paying corporation. The Company would have

prepared a transfer pricing planning study and would have pursued filing annual controlled transaction disclosure forms mandated by regulation. Had that been the course of action, the adoption of the profit split as the "most appropriate" transfer pricing method would likely have been avoided. Proper implementation of the international tax structure would have contributed to the acceptance on the part of the authorities of both jurisdictions of an alternative more tax favorable transfer pricing methodology.

By definition, the practice of transfer pricing is the coordination of tax outcomes in more than one jursidiction by efficiently navigating the unique regulatory

frameworks at hand.

Concerning the adjustment...

Until such time that the Company is able to attain an equivalent off-set adjustment to pre-tax profit in it's foreign tax jurisdiction, the result is temporary double taxation. Differentiations between the tax regimes may lead to an overall materially different tax bill. Luckily, the Company is a resident of a foreign tax jurisdiction which has a bilateral double taxation treaty with the State of Israel. This at least affords the legal basis for the Company to persue the time consuming, expensive and administrative burden of mutual agreement proceedings between the two tax jurisdictions.

Double taxation avoidance is by no means an unjustified tax position, however, should the foreign tax jurisdiction disagree with the proposed adjustment, and/or a statute of limitations mismatch between the jurisdictions not permit an adjustment to closed years, the outcome would invariably result in permanent double taxation.

Jordan Stotland | CPA (Isr)

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