New Transfer Pricing Documentation Rules Reach Israel

New Transfer Pricing Documentation Rules Reach Israel

Tax regulations have been issued which considerably expand the transfer pricing reporting requirements in Israel for multinational groups with entities in Israel and global revenues over NIS 150 million (Income Tax Regulations (Determining Market Conditions)(Amendment) 2022, KT 10339, September 22, 2022). This follows the enactment of amendment 261 to the Income Tax Ordinance on July 7, 2022.

Transfer pricing is a knotty subject for many multinational groups and many tax authorities. The goal is to ensure that intercompany transactions are done on an arm’s length basis, i.e. applying market prices and terms, no shenanigans. In Israel, transfer pricing studies are already required by law, so is an arm’s length declaration (Form 1385).

Main changes:

Transfer pricing studies must now be filed within 30 days after any request from the ITA, instead of 60 days previously.

But Israel was late introducing more recent OECD documentary requirements for a Local File, an international Master File and a Country by Country (CbC) report.

Local File:

Israeli Tax Form 1385 was recently expanded administratively into an OECD Local File to require a listing of every intercompany transaction with Israeli entities, including: description, amount, pricing method, level of profitability and whether any safe harbor contained in Tax Circular 12/2018 was applied.

Amendment 261 requires an Israeli member of an international group to file a form declaring this.

Master File:

If group revenues exceeded NIS 150 million  in the preceding year, an Israeli entity must add to its transfer pricing study a report corresponding to the OECD Master File covering various macro aspects of the group including the following.

First, an organization chart showing the location of all group entities.

Second, a business description including: main drivers of growth, supply chain of the 5 biggest products or services and any more over 5% of group revenues, intercompany service agreements, intercompany pricing policy, main geographical markets, value creation by each entity and ownership changes.

Third, an intangible asset (IP) description, including: development and exploitation policy, location of main plants and R&D management, main IP assets and the entities owning them, main intercompany agreements listing, intercompany pricing policy and main IP transfers within the group that year.

Fourth, an intercompany financial activities description within and outside the group, including: financial service providers and their location and intercompany pricing policy,

Fifth, the groups’ financial and accounting positions, including all consolidated financial statements for the year, and summaries of every tax ruling in Israel or abroad regarding the allocation of revenues between countries.

CbC  Report:

An Israeli resident ultimate parent company with revenues over NIS 3.4 billion must file an electronic form regarding overseas activities within one year after the year-end. This apparently refers to the OECD Country by country (CbC) reports for groups with revenues over EUR 750m, providing mainly numerical international data in a spreadsheet. This is so the ITA can see where profit is being booked and whether that’s where the personnel really are.


Amendment 261 generally applies to tax returns for 2022 onwards but Israeli ultimate parent entities with revenues over NIS 3.4 bn must file CbC reports for 2021 by March 31, 2023.

Other rules may be issued by the Israeli Tax Authority (ITA) Director and will take effect when he decides – we await details.


If a multinational group files the reports, documents or data as required under the regulations, the burden of proof now falls on the ITA if it wishes to determine anything different from what the intercompany parties agreed (ITO Section 85B(c)).

This is an improvement. Until now, the ITA vaguely argued in a Circular that a transfer pricing study can be ignored if it doesn’t expressly rule out the profit split method of transfer pricing

Will there be a bureaucratic burden on multinational groups? This remains to be seen. It is to be hoped that OECD master and local file information prepared for other countries may be used for Israeli tax purposes too.

What about groups with annual revenues below NIS 150 million? It seems they will still have to file form 1385 (Local File data) and have transfer pricing studies ready at 30 days’ notice. Some other countries have a minimum revenue threshold for transfer pricing studies, there is none in Israel.


Many countries, including the US, EU and Israel (sometimes) now impose sales tax or VAT if you sell to consumers in their country, sometimes income tax too. This will enormously complicate transfer pricing studies in our view. Specialist advice is recommended.

Next steps:

Contact [email protected]m for more information on the above.

(c) Leon Harris 8.11.22

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