On September 5, 2018, the Israeli Tax Authorities (“ITA”) published a number of circulars addressing Transfer Pricing (“TP”) issues: circulars 11/2018 and 12/2018 addressing distribution transactions and low value-added services (and adding safe harbors), respectively and Circular 13/2018, entitled: “Low-Interest Loans.”
In Circular 13/2018, the Israeli Tax Authorities attempt to clarify various sections of Israeli tax legislation, including 3(I), 3(J), 85A, 164 and 185. Section 85A, the section addressing all cross-border intercompany transactions, including those of a financial nature, applies only to international transactions. The circular, therefore offers a safe harbor for domestic loans among Israeli parties (not cross-border).
Assuming certain criteria, (i.e. the loan is not linked to any index; the currency of the loan is of the country of residence of the borrower or in the US Dollar or the Euro; the loan bears no interest or any yield; the loan cannot be repaid before the end of the five-year period from its date of issuance and that the repayment of the loan was deferred to other liabilities and only earlier for the distribution of assets to shareholders in liquidation) the circular also repeats that capital notes or subordinated loans as defined in Section 85A(6) of the Income Tax Ordinance are viewed for Israeli tax purposes as investments and not loans, and therefore not subject to the laws of Section 85A. It should be noted, however, that in the event that the terms of the capital note change or is repaid early, the said note would be viewed as a loan from its first day of issuance.
If the taxpayer claims that a capital note does meet the criteria for such found in Section 85A(6), a new declaration form should be completed, the 1485 Form, which stipulates the required data pertaining to such. This declaration form is in addition to the 1385 Form, which addresses all other forms of intercompany transactions.
Finally, a list of the average Bank of Israel interest rates are listed as a ‘default’ reference with respect to domestic transactions (i.e. not subject to Section 85A) for the years 2012-2017.
For brief summaries of circulars 11/2018 and 12/2018 please see: https://mnetax.com/new-israeli-transfer-pricing-circulars-address-distribution-transactions-add-safe-harbors-29358.
–Jacky Houlie, LL.M, is founder and Managing Partner at JH & Co. Law Office. He can be reached at jacky@jh-law.co.il or phone: +972-52-851-2569.
–Shlomo Hubscher is a partner at JH Consulting Ltd. He can be reached at shlomo@jhconsulting.co.il or phone: +972-52-600-6804.