Amendment 261 to the Israeli Tax Ordinance

Amendment 261 to the Israeli Tax Ordinance (The Ordinance), which was published to the Knesset Records in July 2022, updates the reporting obligations of an Israeli entity that is part of a multinational group starting from the 2022 fiscal year.

In addition, following Amendment 261, the Income Tax Regulations (determining market conditions) (2006) (the Regulations), were also amended.

Under Amendment 261, sections 85B and 85C were added to the Ordinance, creating the requirement to fill out forms 1585 and 1685.

Definitions Added following Amendment 261 to the Ordinance

What is an entity under section 85A?

An entity is “a body of persons including a business unit of a body of persons for which separate financial statements are prepared.”

What is a multinational group?

A multinational group consists of two or more entities, where at least one of them is a foreign resident and one owns, directly or indirectly, the means of control of the other entities.
Therefore, all structures with a parent company and a subsidiary where one is a foreign resident, are considered to be a multinational group. On the other hand, a structure in which an individual holds an entity doesn’t fall under the scope of a multinational group.

What is an ultimate parent entity?

An ultimate parent entity is an entity that holds the majority of the means of control of the other entities within the group and meets the following criteria:

• According to Israeli accounting laws, or if it were publicly traded, a submission of a consolidated report would be required.
• No other entity holds it.

Expansion of Reporting Liability

Local file – Transfer pricing study

As a result of the amendment, transfer pricing studies must also include information on the taxpayer’s organizational structure, its main competitors, and amounts received due to transactions with foreign relations.

Master file

Due to the amendment, a taxpayer who is part of a multinational group with a turnover above 150 million NIS (in the tax year before the reporting year) must prepare a master file according to section 5(A)(10) of the regulations.

The information in the master file must include, among others, an overview of the group’s business, information on intangible assets, details about the group’s funding, and other relevant data.

Form 1685- Ultimate parent entity report (‘Country by Country Reporting’)

The ultimate parent entity report was initially introduced by the OECD Organization as part of the BEPS program. The OECD organization published the required information in the report, including general information on the financial and business data of the group. For example, the residence of the group’s entities, their main field of activity, their income, etc. In Israel, the reporting requirement was introduced as part of Amendment 261 and went into effect in the 2022 fiscal year.

A taxpayer who is part of a multinational group with a consolidated turnover surpassing 3.4 billion NIS, where the ultimate parent entity is Israeli, must submit form 1685. This form needs to be submitted to the Israeli Tax Authority within twelve months of the end of the tax year via a unique portal, the Automatic Exchange of Information (AEOI) Portal.

In the situation that the consolidated turnover surpasses 3.4 billion NIS but the ultimate parent entity is not Israeli, the taxpayer must update the Israeli Tax Authority in which country the form is submitted. In addition, the Israeli Tax Authority allows a taxpayer whose ultimate parent entity is not Israeli to submit the form in Israel.

If the ultimate parent entity is Israeli and the taxpayer is interested in submitting the form outside of Israel, they must request approval from the Israeli Tax Authority.

The information reported by the taxpayer in the form will be transferred, as part of the AEOI, to other countries where the multinational group’s entities operate and are part of an automatic information exchange agreement.

Form 1585-Declaration of being part of a multinational group

Taxpayers part of a multinational group must state this on form 1585. Reporting is required even if the taxpayer didn’t perform international intercompany transactions during the fiscal year.

The form includes information on; the Israeli entities, the multinational group, and the group’s turnover.

Additional Updates in Amendment 261

• A smaller time frame for a taxpayer to submit transfer pricing documentation (both local and master files), from the moment of the assessor’s request, reduced from 60 before the Amendment to 30 days after the Amendment.
• Repeal of Regulation four of the regulations regarding one-time transactions and the addition of Section 85A(E1) in its place. Section 85A(E1) allows the manager of the Tax Authorities to determine the requirements of Section 85A(E) won’t apply to one-time transactions or transactions of a small scope, as well as for transactions where there is a concern that setting a price not according to market conditions, doesn’t justify the application of the section.

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