Israeli Tax Alerts | Practical Interpretations | 2008-2020

126 We are of the opinion that prior to the discussion whether a permanent establishment exists (followed by attribution of incomes to it), Israeli domestic law and the question of whether there is business activity / provision of service occurring in Israel should be discussed. To the extent that it is determined that there is no activity that is being held geographically in Israel, then there is no taxation right in Israel, even if the definition of a permanent establishment is changed in the OECD treaty model commentaries - following the BEPS project report dealing with such aspects of the digital economy. In the last case, to the extent that Israel asks to implement the said interpretation, this should be done by a legislative amendment , particularly when there is variance between services / products provided to Israeli customers using digital means and such services and products provided in other ways. Also, the ITA should be aware that the new approach set forth above may be implemented the other way round: An Israeli entrepreneur may set up an enterprise through a foreign company that is run by a team of employees in Israel and that is based on Web activity, platform and infrastructure, for customers outside of Israel only - and argue that the Company has an “economic presence” outside of Israel meaning that the income of the enterprise is not taxable in Israel. (September 2016) Issues in attributing income of a foreign company to Israel On October 2016 taxation ruling 6631/16 was published, dealing with determining the existence of a permanent establishment for a foreign company and attributing income to Israel. Facts and details: A foreign company that is not a resident of a treaty country (“ the Company ”) deals among other things in providing international money transfer services, for the purpose of which the Company has engaged with a non-related foreign clearing company, resident of a treaty country (“ the Clearing Company ”), as well as currency service providers serving as subcontractors around the world. In conducting their regular business, the above provide money transfer services, in effect constituting “end points” the final customer reaches when interested in transferring money from one end point to another. The Company conducts an elaborate operation of activity in connection with the clearing services which includes conducting business vis-a-vis the clearing company, operating supporting IT systems and a customer service system, and making decisions pertaining to the end points and other various actions. All of the aforementioned actions are performed outside of Israel by the Company’s foreign employees.