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© Privileged & Confidential - Shenhav & Co., Law Offices Tax Considerations for Israeli Companies Operating in Germany DR. AYAL SHENHAV, ADV. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 2 Background - The Israeli Tax System The Israeli tax system was amended in the Tax Reform of 2003, and a residency based tax regime was adopted. Income of Israeli residents which is derived from sources outside of Israel, is taxable in Israel. Dividends from non-Israeli companies are subject to the following tax rates: March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 3 Tax Rates of Dividends from Non-Israeli Companies: Tax RateDividend Recipient 25%Individual 30% An Individual who is a Substantial Shareholder* 25%Israeli Company Pass Through to PartnersPartnership * Substantial Shareholder – a shareholder whose holdings exceeds 10% of any of the companys means of control. The Israeli Tax System March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 4 Case Study IsraTech is an Israeli company which develops new security software for mobile phones. What are the tax considerations in the following scenarios: 1.IsraTech allows downloading of its Software, in Germany, through its website. 2.IsraTech open an office in Frankfurt. The office provides services and information to German customers. 3.In addition to Scenario 2 above, the German office employs a Marketing Director. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 5 Case Study (Cont.) 4.The German office sells the Software to corporate clients. 5.A German subsidiary wholly owned by IsraTech is formed and sells to German customers. 6.IsraTech give an exclusive license to GermanCom, to distribute and sell IsraTechs Software in Germany. GermanCom pays Isratech an annual fee of 1,000,000 Euro per year, and 5 Euro for each mobile phone in which the Software is used. 7.Isratech sells its German subsidiary to GermanCom. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 6 Scenario 1 IsraTech allows the Downloading of its Software, in Germany, through its website. Analysis: The profits of an Israeli company that does businesses in Germany are not subject to German tax unless, the Israeli company carries business in Germany through a "Permanent Establishment" situated in Germany. Selling into Germany is therefore not taxable by Germany. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 7 Scenario 2 The German Office Provides Support Services and Information to German Customers. Analysis: A PE includes, among other things: A place of management. A branch. An office. A factory. A person acting in Germany on behalf of an enterprise of Israeli company. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 8 Scenario 2 (Cont.) If IsraTech carries on business in Germany through a PE, tax may be imposed in Germany on the profits of IsraTech, but only on so much of them as are attributable to the PE. IsraTech shall not be deemed to have a PE in Germany merely because it carries on business in Germany through a broker, general commission, agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 9 Scenario 2 (Cont.) Actions which are preparatory and auxiliary do not constitute a PE even if they take place in a fixed place of business. The term permanent establishment is not be deemed to include: –The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise. –The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery. –The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 10 Scenario 2 (Cont.) -The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise. -The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. -The maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 11 Scenario 3 The German Office Employs a Marketing Director. Analysis: Can the activity of the German Marketing Director be classified as preparatory or auxiliary? What are the profits that should be attributable to the German Marketing activity? Which company owns the marketing know-how? March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 12 Scenario 4 In addition to Marketing, The Office is allowed to sell the Software to Corporate Clients. Analysis: What are the profits that should be attributable to the German Marketing and Distribution activity? March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 13 Scenario 5 A German Subsidiary wholly owned by IsraTech. Analysis The overall corporate tax rate in Germany, is 29.55%. The overall income tax rate for corporations includes corporate income tax at a rate of 15%, Solidarity Surcharge at a rate of 0.825% (5.5% of the corporate income tax), and local trade tax. The local trade tax generally varies between 7% and 17.15%. Dividends payable by a German company to an Israeli company are subject to a 25% withholding tax in Germany. Need to verify in each case if German tax (for example trade tax) is creditable against Israeli tax. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 14 Scenario 5 (Cont.) Example: RESULTSTEP 100 Income in the German subsidiary (30) German corporate tax (30%)* 70 Dividend for distribution (17.5) Tax withholding in Germany (25%) 0 Israeli corporate taxation (25%)** 52.5 Net to Israeli Company 47.5 Total Tax to Israeli Company * As aforesaid,the corporate tax rate in Germany, is 29.55%. ** No Israel tax payable due to credit of German Tax. March 19 th, 2013
Reducing German Tax Burden As can be inferred total corporate and dividend tax in Germany is higher than the Israeli Corporate Tax. Reducing German tax is possible in a variety of ways: –Operating through a branch and not a subsidiary. –Financing the subsidiary through a shareholder loan (reduces dividend tax and corporate income due to interest deductions). –Inter company agreement (and commensurate transfer pricing allocation) favoring Israel (such as cost plus operations in Germany). –Charging management fees by the Israeli Company to the German Company. –Operating through a company in a third country (for example Cyprus, Netherlands). © Privileged & Confidential - Shenhav & Co., Law Offices 15March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 16 Scenario 6 IsraTech Provides an Exclusive License to GermanCom, to Distribute and sell IsraTechs Software in Germany. GermanCom pays Isratech annual fees of 1,000,000 Euro per year, and 5 Euro for each Mobile Phone on which the Software is used. Anaylsis: -Is the payment a royalty? Is it purchase of software? -Royalties to IsraTech shall be taxable in Germany at the rate of 5% (additional tax in Israel). -When IsraTech has a PE in Germany the proceeds may be attributable to the PE. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 17 Scenario7 Isratech sell its German subsidiary to GermanCom. Example: RESULTSTEP 100 Capital gain (0) *German Capital Gains Tax (25) Israel Corporate Tax (25%) 75 Dividend for distribution 25% Total tax to Israeli Company 75% Net to Israeli Company *Under the Germany – Israel tax treaty, Germany does not tax capital gains of Israeli residents. ** It may be possible to reduce the tax through additional structure (e.g Dutch Company). March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 18 Conclusions Germany is an economic powerhouse, has a large local market and can be the Gateway to Europe. However, careful tax planning is required to avoid excessive taxation, reporting and more. March 19 th, 2013
© Privileged & Confidential - Shenhav & Co., Law Offices 19 THANK YOU March 19 th, 2013 Dr. Ayal Shenhav Shenhav & Co., Law Offices Tel: 972-3-611-760 email@example.com www.shenhavlaw.co.il
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