The EU-Israel Free Trade Agreement (also known as an Association Agreement) should eliminate customs duties originating in the EU for delivery to Israel and vice versa. Briefly, your goods may qualify if they fully meet the Rules of Origin requirements: undergo processing that result in the finished product having a different customs product code from all the imported raw materials, at the 4 digit product code level.
The exporter does not have to pay corporation tax in the other country unless it maintains a “permanent establishment" (PE), as defined in the relevant double taxation tax treaty, e.g. the UK-Israel tax treaty.
A PE is generally a “fixed place of business" (a branch) or a “dependent agent" (e.g. it concludes sales on behalf of the exporter). In the case of electronic commerce, the OECD indicates that a smart server which handles transactions is regarded as a PE.
Where a PE exists, corporation tax is payable on the PE's profits. The standard rates of corporation tax are 20% - 26% in the UK and 24% in Israel. UK and other foreign residents must appoint an Israeli resident fiscal representative.
In practice, exporters often move on from distributors to setting up their own dedicated subsidiary company.
Most global trade is conducted via multinational groups. Both Israel and the UK have detailed rules requiring multinational group members to transact with each other on arms length terms. This is meant to prevent tax planning but usually has the opposite effect…
Companies are often surprised to find out that tax is withheld at source from cross-border payments relating to items such as dividends, interest, royalties, software license payments, franchise fees or capital gains. In Israel, the banks are obliged to withhold 25% from outbound payments unless advance clearance is obtained from the Israeli Tax Authority e.g. pursuant to a tax treaty. The UK-Israel tax treaty specifies the following withholding tax rates: dividends and interest - 15%, royalties - 0% or 3.6%, capital gains - 0%, except for real estate deals.
Value Added Tax
Never under-estimate VAT. The standard rate of VAT is 16% in Israel and 20% in the UK. In Israel VAT is applied to all goods by the same rate, with some exceptions such as fresh produce. In the UK there is a very wide variety of rates.
VAT on imported goods is normally collected by the Customs authorities. Each country has complex rules to catch the VAT due in the area of services and e-commerce.
For Israeli exporters who supply services to UK business customers (B2B -business to business) most services will be treated as supplied in where the business customer is established, i.e. the UK, and the business customer will itself account for VAT under a “reverse charge" mechanism. In the case of B2C (business to consumer) the Israeli supplier should account for any UK VAT due.
In the case of UK service suppliers, they should in theory account for Israeli VAT on services supplied to Israeli residents. If they do any part of their business in Israel, they must register for Israeli VAT purposes and appoint an Israeli resident fiscal representative within 30 days.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
(*) Leon Harris is a UK Chartered Accountant and an Israeli Certified Public Accountant.