What Is BEPS? Base Erosion and Profit Shifting

In the context of Action 7, it is also useful to review the explanation of a permanent establishment and its implications for a country’s right to tax the activity of a foreign company.

What Changed in Practice in Israel Following the BEPS Project?

Transfer Pricing: Master File, Local File, and CbCR

One of the most significant changes for Israeli companies operating within multinational groups is the expansion of documentation and reporting requirements in the field of transfer pricing. On July 5, 2022, Amendment 261 to the Income Tax Ordinance was published, expanding the documentation and reporting requirements in line with the principles of Action 13. The Income Tax Regulations (Determination of Market Terms) were also subsequently updated.

The Israeli framework includes three main layers of documentation and reporting, together with forms submitted as part of the annual tax return. For a fuller explanation of the overall structure, see our complete guide to transfer pricing documentation and reporting obligations in Israel.

Local File – Documentation of International Transactions

A taxpayer that carries out an international transaction with a related party, as defined by law, is subject to the applicable transfer pricing rules and documentation and reporting obligations. The purpose of the documentation is to demonstrate that the terms of the transaction, and in particular its price, are consistent with the terms that would have been agreed between unrelated parties acting at arm’s length.

Among other things, the documentation may include:

• A description of the parties to the transaction and the special relationship between them.
• A description of the business activity, assets, and risks of the parties.
• Details of the transaction terms and the relevant agreements.
• Selection of an appropriate transfer pricing method.
• A comparability analysis of similar transactions or companies.
• An explanation of the results and conclusions regarding compliance with arm’s length terms.

Under Regulation 5 of the Income Tax Regulations (Determination of Market Terms), as a general rule, a taxpayer subject to the regulation must provide the assessing officer, upon request, with the required documentation and data within 30 days. Before the regulations were amended, the period was 60 days. In addition, international transactions with related parties must be reported on Form 1385 – Declaration of an International Transaction, which is attached to the annual income tax return. As a general rule, the reporting obligation on the form is not subject to a minimum monetary threshold.

It is important to emphasize that the fact that the documents are submitted to the Israel Tax Authority upon request does not mean that their preparation should be postponed until a request is received. The short timeframe for providing the documentation may create significant difficulties for a company that has not prepared in advance.

Master File – Group-Level Documentation

A Master File is a document that describes the activities of the entire multinational group, not only the transactions of the Israeli company.

Under the Israeli regulations, when an Israeli taxpayer is an entity in a multinational group whose turnover in the year preceding the reporting year exceeded150 million NIS, the taxpayer must include in its documentation report an overview of the group, in accordance with the details prescribed in the regulations.

The overview includes, among other things:

• The ownership structure and entities in the group.
• A description of the group’s activities and key growth drivers.
• The supply chain for material products and services.
• The group’s transfer pricing policy.
• Details of intangible assets, including intellectual property.
• Intercompany financing arrangements and relevant tax rulings.

The 150 million NIS threshold is significantly lower than the international threshold used for CbCR. As a result, medium-sized groups that are not required to file a Country-by-Country Report may nevertheless be required to prepare extensive group-level documentation in Israel.

It is important to distinguish between the obligation to include group-level information in the documentation and an obligation to file a Master File annually on a standalone basis. In Israel, submission to the assessing officer is made in accordance with the mechanism prescribed in the regulations, including a request to provide the documentation.

CbCR – Country-by-Country Reporting

Country-by-Country Reporting, or CbCR, is a report intended for particularly large multinational groups. The report provides a jurisdiction-by-jurisdiction picture of the group’s activity, including revenues, profit before tax, taxes paid, number of employees, and additional data.

In Israel, section 85C of the Income Tax Ordinance imposes a reporting obligation on multinational groups whose consolidated turnover exceeds 3.4 billion NIS, subject to the conditions of the section.

As a general rule, the primary filing obligation applies to the ultimate parent entity of the group where it is an Israeli resident. In certain situations, reporting obligations may also apply to an Israeli entity that is not the ultimate parent entity, in accordance with the provisions of the law and information exchange arrangements.

The purpose of the report is to assist tax authorities in assessing tax risks and identifying possible gaps between the group’s economic activity and the allocation of its reported profits. For a dedicated explanation, see Income Tax Circular 1/2025 – Ultimate Parent Entity Report (CbCR).

What does this mean for an Israeli company? A group that carries out international transactions with related parties must examine both the pricing of those transactions and the documentation and reporting obligations that apply to it. Where the Israel Tax Authority may request documentation within 30 days, a company that begins preparing a transfer pricing study only after receiving the request may find it difficult to provide complete and substantiated documentation on time.

The Multilateral Instrument (MLI)

One of the important developments in the BEPS project is the multilateral convention known as the Multilateral Instrument, or MLI. The purpose of the MLI is to allow countries to update certain provisions in their bilateral tax treaties without conducting separate negotiations for each treaty. Israel signed the MLI on June 7, 2017, and the convention entered into force for Israel on January 1, 2019.

It is important to note that the MLI does not automatically amend all of Israel’s tax treaties. In order for a particular treaty to be affected by the arrangement, it is necessary to examine whether both countries included it in their lists of covered tax agreements, which provisions they adopted, and what reservations and choices each country made.

Israel chose to implement the minimum standard for preventing treaty abuse through the Principal Purpose Test (PPT).

Under this test, a treaty benefit may be denied where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefit was one of the principal purposes of an arrangement or transaction, unless it is established that granting the benefit in the circumstances is consistent with the object and purpose of the relevant treaty provisions.

This test is highly important when examining international holding structures. For example, an Israeli company that holds a European company through a holding company in a third country cannot assume that the mere existence of a tax treaty with the intermediary country guarantees a reduced withholding tax rate.

It is necessary to examine whether the structure was established for genuine business and economic reasons, what activity takes place in the holding company, who makes the material decisions, and whether the other conditions for obtaining the benefit are met. The absence of employees or offices in the intermediary country does not necessarily deny every treaty benefit automatically. An examination of the circumstances and the relevant treaty provisions is required.

Preferential Tax Regimes – The Preferred Technological Enterprise

Action 5 of the BEPS project was designed to address harmful tax practices, particularly regimes that grant benefits for income from intellectual property without a sufficient connection to the economic activity carried out in the country granting the benefit.

In this context, the Nexus approach developed. This approach seeks to link the scope of qualifying research and development activity with the scope of intellectual property income eligible for tax benefits.

In Israel, the Preferred Technological Enterprise track under the Law for the Encouragement of Capital Investments includes a mechanism based on the principles of the Nexus approach. Therefore, legal ownership of intellectual property alone is not necessarily sufficient to benefit from the tax incentives. It is necessary to examine the substantive conditions set out in the law and regulations, including the nature of the research and development activity, qualifying expenses, and intellectual property income.

The combination of transfer pricing rules and the conditions for eligibility for tax benefits requires technology companies to plan and document their development activity, ownership of intangible assets, and intragroup arrangements in an orderly manner.

BEPS 2.0: The Two Pillars of International Tax Reform

Action 1 of the BEPS project addressed the tax challenges posed by the digital economy. The development of business models, and in particular the ability to generate significant revenues from a country without a substantial physical presence there, raised new questions regarding the allocation of taxing rights between countries.

In 2021, the OECD Inclusive Framework reached a broad agreement on a solution based on two pillars, known as Pillar One and Pillar Two.

Pillar One – Reallocation of Taxing Rights

Pillar One is intended to change the way taxing rights are allocated with respect to certain large multinational groups. The main component, Amount A, is designed to allocate part of the taxing rights over the profits of the largest and most profitable groups to the countries where their markets and customers are located, even in the absence of a traditional physical presence.

However, as of October 2026, the multilateral convention required to implement Amount A has not yet entered into force. Therefore, this mechanism is not yet implemented as a binding international framework.

Another component, Amount B, is intended to simplify the application of transfer pricing rules to certain baseline marketing and distribution activities. The implementation of Amount B depends on the decisions of individual countries and the relevant provisions of domestic law.

Pillar Two – The Global Minimum Tax

Unlike Pillar One, the implementation of Pillar Two has already begun in many countries. Pillar Two is intended to establish a minimum effective tax rate of 15% on the profits of large multinational groups, based on a special calculation system known as the GloBE Rules.

As a general rule, the rules apply to multinational groups whose consolidated revenues were EUR 750 million or more in at least two of the four fiscal years preceding the year under review, subject to the exceptions and adjustments set out in the rules.

It is important to emphasize that the effective tax rate for Pillar Two purposes is not necessarily the same as the ordinary corporate tax rate in a country. The calculation is made according to dedicated rules that take into account income and covered taxes, together with adjustments and reliefs.

Three main charging mechanisms were developed under Pillar Two:

• Qualified Domestic Minimum Top-up Tax (QDMTT) – a domestic top-up tax that allows the jurisdiction where the activity takes place to collect additional tax where the effective tax rate is below the minimum rate.
• Income Inclusion Rule (IIR) – a mechanism that allows the jurisdiction of the parent company to collect top-up tax in respect of the income of group entities that have been subject to a low effective tax rate.
• Undertaxed Profits Rule (UTPR) – a supplementary mechanism intended to address situations in which income was not subject to top-up tax through the other mechanisms.

The Global Minimum Tax in Israel Beginning in 2026

On December 29, 2025, the Knesset enacted the Law for Minimal Corporate Tax in a Multinational Group. The law entered into force on January 1, 2026, and applies to the income of Israeli entities within its scope beginning from the tax year that started on or after that date.

Israel has chosen, at this stage, to adopt the Qualified Domestic Minimum Top-up Tax (QDMTT) mechanism, and not the IIR or UTPR mechanisms

This means that where a multinational group falls within the scope of the regime and the effective tax rate calculated for its activity in Israel is lower than 15%, a domestic top-up tax liability may arise in Israel.

However, the liability is not necessarily calculated as a simple difference between the Israeli corporate tax rate and 15%. It is a dedicated calculation under the law and the rules adopted under it, including adjustments, exceptions, and special arrangements. The Israeli law includes a special provision regarding the non-application of the substance-based income exclusion in calculating the domestic top-up tax.

In addition, in 2026, an arrangement to encourage and incentivize research and development was enacted. Subject to its conditions, the arrangement is intended to provide benefit mechanisms in respect of qualifying research and development expenses. This arrangement may be important for technology companies that benefit from tax incentives in Israel, particularly where they belong to multinational groups that fall within the scope of Pillar Two.

What Changed in 2026? The Side-by-Side Package

In January 2026, the countries of the OECD Inclusive Framework agreed on a new package of adjustments to the global minimum tax rules, known as the Side-by-Side Package.

The package is intended to enable coordination between the Pillar Two system and certain tax regimes in countries that meet recognized minimum requirements, and to reduce the administrative burden involved in applying the rules. It includes, among other things:

• Side-by-Side Safe Harbour – relief for groups whose ultimate parent entity is located in a country with a recognized tax regime, with respect to the IIR and UTPR mechanisms, subject to the conditions.
• UPE Safe Harbour – relief regarding the application of the UTPR to the jurisdiction in which the ultimate parent entity is located.
• Simplified ETR Safe Harbour – a mechanism designed to simplify the calculation of the effective tax rate and the related compliance requirements.
• Substance-Based Tax Incentives Safe Harbour – an arrangement for the treatment of certain tax benefits connected to substantive economic activity.

The United States plays a central role in the new arrangement, after its tax regime was recognized for purposes of the Side-by-Side mechanism. However, the reliefs do not eliminate domestic minimum top-up tax mechanisms (QDMTT).

Therefore, U.S. multinational groups may also be subject to domestic top-up tax obligations in the countries in which they operate, including Israel, where the conditions are met. For an Israeli company that is part of a multinational group, it is important to conduct an integrated review of Israeli law, the rules in the parent company’s jurisdiction, and the current reliefs.

Has the BEPS Project Succeeded?

The implementation of the BEPS project has brought about a significant change in the international tax system, but it is difficult to say that it has completely solved the problem of base erosion and profit shifting.

On the one hand, the project has strengthened the ability of tax authorities to address tax planning that is not aligned with the economic activity of multinational groups. Expanded reporting requirements, information exchange between countries, stricter conditions for obtaining treaty benefits, and the emphasis on genuine value creation make it more difficult to use artificial structures designed primarily to reduce tax. CbCR reports provide tax authorities with group-level information that was not previously available in the same format, enabling them to identify gaps between the location where income is generated, the location of employees and assets, and the allocation of profits between countries. Transfer pricing rules have also developed in a way that requires more detailed consideration of the functions performed by group companies, the risks they assume, and their contribution to value creation.

On the other hand, implementation of the project is still not uniform. Different countries have adopted different rules, some of the project’s recommendations have not been fully implemented, and central mechanisms such as Pillar One continue to face challenges in international implementation.

Pillar Two, despite its progress, was also adjusted in 2026 through new arrangements and reliefs, reflecting the complexity of creating a uniform minimum tax system among countries with different tax policies.

Another challenge is the increase in compliance costs. Preparing transfer pricing documentation, collecting group-level data, complying with reporting obligations in different countries, and examining the minimum tax may create significant costs even for groups that do not engage in aggressive tax planning.

What Should Israeli Companies Review in 2026?

In light of the developments in the BEPS project, Israeli companies operating abroad and companies that are part of multinational groups should review several key issues.

First, documentation and reporting obligations should be examined. Does the company carry out international transactions with related parties? Is there up-to-date transfer pricing documentation? Does the group exceed the ₪150 million threshold relevant to group-level information as part of the Master File, or the ₪3.4 billion threshold relevant to CbCR?

Second, international holding structures should be reviewed. Do the holding companies and subsidiaries operate in accordance with their economic role? Are the conditions for benefits under the relevant tax treaties met? Is there exposure to the application of the PPT?

Third, the application of the global minimum tax should be examined. Does the group meet the revenue thresholds for Pillar Two? Is there Israeli activity that may be subject to a domestic top-up tax? Have the notification and reporting obligations, possible reliefs, and eligibility for research and development incentive mechanisms been reviewed?

Finally, it is important to assess exposure to double taxation. A transfer pricing adjustment in one country may affect the tax liability in another country. In appropriate cases, the use of Mutual Agreement Procedures (MAP) under tax treaties should also be considered.

How Can We Help?

Nimrod Yaron & Co. has a team specializing in transfer pricing in Israel and international taxation. The firm assists Israeli companies and multinational groups with the review of international operating structures, the preparation of Local File and Master File documentation, the assessment of reporting obligations and global minimum tax issues, and tax assessment discussions with the Israel Tax Authority.