How does Israel determine whether a foreign company has a “permanent establishment” that creates local tax liability?

Section 4A of the Income Tax Ordinance (New Version) 5721-1961 defines a permanent establishment in terms closely mirroring Article 5 of the OECD Model Tax Convention. A fixed-place PE is created by an office, factory, warehouse, building site lasting over 12 months, or any other fixed location through which business is regularly conducted. An agent-based PE arises where a person acting in Israel on behalf of the foreign company has and habitually exercises authority to conclude contracts in the name of that company — and that person is not an independent agent acting in the ordinary course of their own business. The Israel Tax Authority (Rashut HaMesim) applies a substance-over-form approach: a foreign company that holds board meetings in Israel, employs staff who negotiate and sign contracts there, or has its key management functions exercised from Israel may be found to have a PE even without a formal lease or registered branch. The treaty framework governing these rules for foreign company investors is analyzed in Double Taxation Treaties in Israel: A Complete Guide for Foreign Nationals.

The PE question has grown more complex since remote work became widespread. A senior employee working from Israel who regularly concludes sales agreements or signs contracts on behalf of a foreign employer may unwittingly create a PE, exposing the foreign company to Israeli corporate tax registration and filing obligations. The Israel Tax Authority has actively investigated multinational technology companies on this basis and has issued PE assessments in several cases. Foreign companies placing senior staff in Israel on a long-term basis should obtain a written Israeli tax opinion before the assignment begins. Under most of Israel's bilateral tax treaties, the treaty's PE article takes precedence over domestic law and may set different thresholds — for example, most treaties require a building site to operate for 12 months before creating a PE, which is more favorable than domestic law's general test. Treaty relief requires the foreign company to be tax resident in the treaty partner country, and proof of that residency is usually required by the ITA before treaty benefits are recognized.

From the full guide: Double Taxation Treaties in Israel: A Complete Guide for Foreign Nationals

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