Israel

Executive Summary

General Requirements

• Transfer pricing in Israel is primarily regulated under Section 85A of the Israeli Tax Ordinance and the associated Determination of Market Conditions Regulations, which mandate that international transactions between parties with special relationships occur at arm’s length.
• A special relationship is established if one party holds a direct or indirect interest of 50% or more in the other for at least one day during the tax year.
• Although the statutory framework focus is on cross-border dealings, the Israel Tax Authority (ITA) also enforces arm’s length standards for domestic transactions, particularly those involving entities receiving special tax benefits.
• The domestic framework incorporates OECD Transfer Pricing Guidelines as a significant source of interpretation for local regulations.

Documentation Requirements

• Israel mandates a three-tiered documentation approach consisting of a Local File, a Master File, and a Country-by-Country (CbC) Report.
• Taxpayers must submit Form 1385 with their annual tax return, which functions as a signed affidavit declaring that all international transactions were conducted at arm’s length.
• Documentation must be finalized by the time the annual tax return is filed to be considered contemporaneous, though it is only submitted to the authorities within 30 days of a formal request.
• Entities with specific financial arrangements must also file Form 1485 for intercompany capital notes and Form 1585 for group data related to CbC requirements.

Results of Non-Compliance

• Taxable income determined to be at least 50% higher than reported income during an audit triggers a general penalty of 15%, which can escalate to 30% in certain cases.
• Submitting Form 1385 as a personal affidavit that is subsequently found to be erroneous or incomplete can lead to potential criminal liability for the signing officer.
• The ITA is authorized to impose secondary adjustments, such as reclassifying undocumented price differences as deemed dividend distributions or loans.
• Failure to provide a complete transfer pricing study upon request prevents the burden of proof from shifting to the ITA, allowing the assessor to issue adjustments based on “personal experience and estimations”.

Country Specific Information

• Audit activity is exceptionally high for high-tech start-ups, R&D centers, and entities undergoing business restructurings or intellectual property migrations.
• Safe harbor provisions allow marketing services to use a markup on total costs of 10% to 12% and low-risk distributors to target an operating margin of 3% to 4% without performing a full benchmarking exercise.
• If results fall outside the arm’s length range, the ITA typically mandates an adjustment to the median value, unless the CUP method is used without adjustments.
• Recent Supreme Court rulings have expanded ITA authority, allowing a local subsidiary to be served on behalf of its foreign parent and applying arm’s length principles to exclusive manufacturer relationships that lack formal equity control.

Compliance Table

Document	Deadline	Language	Thresholds, Scope & Penalties
Local File	Prepared by CIT return deadline (usually 31 May); submitted within 30 days of request.	Hebrew or English.	Threshold: No materiality threshold; required for all international transactions. Penalty: Discretionary assessments and secondary adjustments.
Master File	Prepared by CIT return deadline (usually 31 May); submitted within 30 days of request.	Hebrew or English.	Threshold: Annual consolidated MNE group revenue > ILS 150 million. Penalty: General non-compliance fines.
CbC Notification	Last day of the reporting fiscal year; also confirmed in Form 1585 with the return.	Hebrew or English.	Scope: All Israeli constituent entities of an MNE group. Penalty: Increased audit risk classification.
CbC Report	Within 12 months after the end of the reporting tax year.	English.	Threshold: Israeli UPE in MNE group with consolidated revenue > ILS 3.4 billion. Penalty: Fines for failure to submit or incorrect data.
Other / SMEs	Declared with CIT return.	Hebrew or English.	Exemption: “One-time transactions” with low frequency and value < ILS 4 million may be exempt from full comparability analysis.

Disclaimer: This information is obtained from secondary sources and is included for informative purposes. It should be confirmed by a local advisor.