Tel Aviv
Welcome to Tel Aviv... ͵羺 businesses can aim for a lower corporate tax rate by getting a preferred partner status. But at some point, ͵羺 and Israel will forge a double-taxation avoidance pact - the question is how soon. Image Credit: Agency

Dubai: The deals are being signed, takeover bids made, and funds starting to flow in and out – but how soon will the ͵羺 and Israel enter a double-taxation avoidance treaty? Because how soon this is done will matter for those businesses wanting a direct presence in a new market.

Typically, such treaties – which essentially removes the chances of a business or an individual getting taxed on the same income in both countries – take time to come into being. There are long-winded negotiations to go through before signatures get put to paper.

But this time, the chances are that the processes will be speeded up. “There is a big difference in applying a double-taxation avoidance with a country that is in a normal relationship with the ͵羺 and a country that had no relationship at all and is now building that, said Samuel Shay, Chairman Israel – ͵羺 Business Forum. “Because of that, as part of the peace agreement, the great expectation from the [upcoming] trade agreement is that it will expedite laws for free and smooth business transactions between the countries.

“Most likely, double-taxation avoidance will be a high priority since this combines a peace agreement as well as all settle other issues between these nations.”

Shay’s got a point – because the foundation will be built on the Abraham Accords, all individual pacts concerning co-operation on taxes, various individual sectors will be brought forward rather than pushed to a later date.

Alliance is gathering pace

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Starting the deal flow... The first commercial flight from Israel lands in Abu Dhabi on August 31. And it has already set off a flurry of business-to-business MoUs. Image Credit: AFP

Business-to-business deals are also being cut, but Prism Advance Solutions’ offer to take on troubled Finablr – along with a promise that Prism will settle all of its debts – has to be the most significant. The deal, if met with approval by Finablr’s board as well as ͵羺 authorities will set an early marker for what is to come in terms of fast-track business investment decisions.

“As the world continues to evolve into the digital era, there appears to be more need for double-taxation agreements to ensure fair taxing rights and the avoidance of double taxation on transactions and corporate revenues,” said Joanne Clarke, Tax Director at Pinsent Masons M. E., the law firm.

“We see this visibly as countries sign up to the BEPS (Base Erosion and Profit Shifting) initiatives, including the MLI (multilateral instrument). As a result of the MLI, we have seen many double-taxation agreements updated and aligned with BEPS.

“[This would] inevitably should result in more consistent and fairer approach to taxing cross-border transactions and businesses who trade internationally. We have also seen many new DTAs, including the ͵羺 and Saudi Arabia, which was the first of its kind between GCC states.” (The BEPS scheme Clarke is referring to how countries are co-operating to cut down on tax avoidance strategies that exploit differences in tax rates between countries.)

Got quite a few

The ͵羺 as of now has 117 double–taxation treaties, and the one with Saudi Arabia was the latest and went into effect January 1, 2020. So, it’s a given that there will be such a pact on taxation with Israel – but for all stakeholders, it’s about bringing it forward.

But sources are advising caution against taking it up before all the elements of the main accord are not in place. “Israel would be ready to make immediate progress – however, negotiating, agreeing and signing a tax treaty can be a long process,” said Ofir Bar-Noy of Emirates Israel Investment Group.

“Having said that, we think that in order to do business together, we don’t need to wait for the double tax treaty. There are other ways to minimize the taxes when the two countries are working together, including using ‘transfer pricing’ methodology to make sure that most of the profits stays in the ͵羺 with 0 per cent tax and only a smaller part of it is taxed in Israel.”

Corporate rates in the ͵羺
At present, the ͵羺 does not have a federal Corporate Income Tax regime. There are emirate-level CIT regimes. Where applicable, these are limited to taxing certain companies in the oil and gas industry (up to a rate of 55 per cent) and branches of foreign banks (20 per cent).

*The ͵羺 free zones have also frequently offered businesses CIT exemptions, at times for up to 15 years, for establishing with their free zone authority.
- Pinsent Masons

On the higher side

Israel’s corporate tax rates are split into multiple slabs – a ͵羺 business wanting to set up there can aim for a lower payout by trying to be a ‘preferred enterprise’.

Then, it can apply for a reduced tax rate of 16 per cent, 12 per cent or even 7.5 per cent as opposed to the base rate of 23 per cent. “͵羺 citizens and companies can form Israeli corporations and be shareholders (including 100 per cent shareholders) of them,” said Bar-Noy. “Some corporations may qualify for, and benefit, from certain tax incentives depending on certain conditions.

“For example, under the Law for Encouragement of Capital Investments, a corporation can qualify as a preferred enterprise.”

Easy on profit gains
The majority of businesses operating within the ͵羺 (mainland or free zone) do not incur CIT on their profits or gains. This is a significantly different picture to the majority of countries across the globe where CIT is often imposed on nearly all industry sectors.
As an example, the OECD average statutory CIT rate across a sample of 109 countries for 2020 was 20.6 per cent, with only 12 of these countries having no CIT regime or a statutory rate of 0 per cent, which includes the ͵羺.
- Pinsent Masons

Aim for these tax breaks

To pay corporate tax lower than 23 per cent, a ͵羺 business operating in Israel can do the following:

• Being involved in exports outside of Israel. Or at least 25 per cent of its revenue should go as sales outside of Israel;

• A corporation that is in the technological space. Companies would have to show that they have the required investments and R&D; and

• Being located in certain areas.

Haifa Port
DP World and its Israeli partner are in contention for the privatisation bid at Haifa Port. Image Credit: Agency