article banner
Global transfer pricing guide

Transfer pricing - Israel

Please click on each section to expand further:

Introduction to transfer pricing in Israel
Transfer pricing rules

The legislation within Israel in respect of transfer pricing is disclosed within Section 85A of the Israel Tax Ordinance (New Version),1961 and the Income Tax Regulations (Determining Market Conditions) – 2006 (The Regulations) with an effective date commencing 1 November 2006.

The aforementioned legislation states that any international transaction in which there is a special relationship between the parties, in respect of the transaction, and for which a price was settled on for property, a right, a service or credit is required to be set in accordance with the arm's length principle.

The provisions within Section 85A of the Israel Tax Ordinance and the provisions thereunder include a description of the transfer pricing documentation required.

The transfer pricing regulations require taxpayers to report and submit relevant transfer pricing documentation for all cross-border transactions between related parties within 60 days of a request by the Israeli Tax Authorities (ITA). Occasionally, this can be reduced to 30 days in special circumstances.  

The taxpayer is required to include within their annual corporate tax return a special signed form (1385 Form and if required Form 1485) which details the transactions and relevant sums in respect to the related parties including a signed declaration that the transactions are conducted at arm's length.

OECD guidance

Israel is a full member of the OECD.

According to section 6 of the Income Tax Regulations (Determination of Market Conditions), 2006: 'A market conditions study that was conducted before the publication of these regulations will be regarded as a market conditions study that was conducted in accordance with these regulations, this for two years from the date of their publication, provided that it was conducted in accordance with the accepted guidelines published by the OECD or its member countries'. These regulations were published on November 2006. There is no other reference in the domestic legislation to the OECD Guidelines other than circulars that have been issued by the Israel Tax Authorities where reference is made to OECD Guidelines. However, the OECD Guidelines can be regarded as one of the interpretation aids.

However, as of yet, the requirements detailed within BEPS Action 13 have not yet been incorporated within the domestic Israeli legislation, although this is expected to be implemented within the near future.

Transfer pricing methods

To determine whether an international transaction is at arm's length, the Israeli transfer pricing regulations require the taxpayer to apply one of the following methods, in order of hierarchy:

  • Comparable Uncontrolled Price (CUP)
  • Comparable Profitability
  • Cost Plus or Resale Price
  • Comparable Profits Method/Transactional Net Margin Method
  • Other Methods.

In respect of the Comparable Profit Method/Transactional Net Margin Method, the Israeli transfer pricing regulations stipulate the use of several 'Profit Level Indicators' depending on the exact nature of the transaction, eg whether distribution or service based.

In respect of the above, other methods can be applied if they can be considered reliable and appropriate.

An international transaction will be regarded as a transaction at market conditions if as a result of its comparison in accordance with the comparison methods for similar transactions, the result obtained does not exceed the inter-quarterly range obtained in the comparison with similar transactions. Should however the comparison method be a Comparable Pricing method (such as CUP) and adjustments were not made for cancelling out the effect of the difference on the comparability criteria, the transaction will be regarded as a transaction at market conditions if the price does not exceed the value range in similar transactions.

Should it not be possible to regard an international transaction as a transaction at market conditions as said above, the transaction price will be reported according to the value located in the 50th centile in the value range.


All taxpayers are required to comply with the Israeli Transfer Pricing Regulations. There are no exemptions.

All taxpayers are required to maintain documentation and disclose related party transactions in the 1385 Form (and if required 1485 Form) which is attached to the corporate tax return.

Transfer pricing documentation
Preparation of transfer pricing documentation

The Legislation requires the taxpayer to prepare detailed transfer pricing documentation including a market conditions study.

The 1385 Form (and 1485 Form if required) always needs to be submitted together with the corporate tax return and should be based on an economically valid transfer pricing documentation and analysis.

The Israeli Tax Authorities (ITA) can request the documentation within 60 days. Occasionally, this can be reduced to 30 days in special circumstances.

Master and local file

In October 2020, the Israeli Tax Authorities publicized its proposal to amend Section 85A of the Income Tax Ordinance and its Regulations. The proposed legislation follows OECD’s Base Erosion and Profit Shifting (BEPS) Action 13. A Local File, Master File, and a Country-by-Country (CbC) report, will be required.

Grant Thornton Israel anticipates that the expected date of implementation will be during 2022 relevant for FY 2021 tax reporting.

It should be noted that the Master and Local file structure is considered best practice in Israel.

Some risk factors for challenge
  • Losses being generated in 'low risk' entities
  • Start-up IP mismatches
  • Business restructurings and transfer of functions, assets, and risks triggering taxable events
  • R&D and traditional cost-plus centers being challenged and ITA favoring profit split method in certain cases
  • Transfer of intangible assets between entities (publicized court cases)
  • Unusual intercompany transactions or complicated corporate/legal structures
  • Entities amending their transfer pricing model
  • Financial Transactions with low credit scores
  • International transactions between entities where one of the entities are located in 'Offshore' jurisdictions.

Failure to submit transfer pricing documentation when requested by the ITA or insufficient documentation or false declarations on the 1385 Form (or 1485 Form if required) may result in civil and criminal implications.

In respect to transfer pricing adjustments, general tax related penalties (under section 191 of the Israel Tax Ordinance) include a penalty of 15% (which can in some circumstances be increased to 30%) of the deficit when the taxable income under audit is higher by 50% or more than the reported taxable income. However, the particular tax inspector has the discretion of cancelling a penalty when reaching a settlement.

It should be noted that penalties are considered in addition to the taxpayer's tax debt and therefore are linked to the index and carry 4% interest.

Economic analysis and how to demonstrate an arm’s length result

The Israel Tax Authorities will expect to see that a search for potential internal comparable companies (under the CUP method) has taken place before defaulting to an external database search for potential comparable companies.

Although not stated in the legislation, The Israel Tax Authorities would prefer use of local comparable companies where appropriate and reliable.

Taxpayers must demonstrate a detailed economic analysis and explanation of search criteria and methods and conclusions applied.
An interquartile range is acceptable and common practice.

The ITA has issued guidance (in the form of circulars - issued during 2018) in respect to certain safe harbor provisions. In respect to the provision of limited risk distribution services - a safe harbor of around 3%-4% based on Operating Margin. In respect to the provision of marketing services the safe harbor is between 10%-12% based on net cost plus. Also, low-level services (following the OECD Guideline definitions) are set with a net cost plus of 5%. This has been confirmed in various circulars issued by the ITA. Such safe-harbor provisions allow for simplified approach for low value-adding intra-group services.

Advance Pricing Agreements (APAs), dispute avoidance and resolution

The following mechanisms are available in Israel to taxpayers to prevent and/or resolve transfer pricing disputes including advance pricing agreements and rulings:

    • Rulings
    • Advance Pricing Agreements (APA's) including;
    • Unilateral APA's
    • Bilateral APA's
    • Multilateral APA's
    • Mutual Agreement Procedures (MAP).

It should be noted that Israel has an extensive treaty network, and the Mutual Agreement Procedure (MAP) will often be available when double tax occurs.


All companies that engage in international transactions with related parties need to comply with transfer pricing legislation.

A 'One Time' transaction legislation may provide an exemption from some of the transfer pricing documentation obligations. In respect of this, there may be no need to perform and do a comparability analysis.

However, it should be noted that such exemption is extremely rare and will usually require some form of prior approval from Israel Tax Authorities.

The reference in respect of this is detailed within Section 4 of the Income Tax Regulations (Determination of Market Conditions), 5767, 2006.

Related developments
The profit diversion compliance facility (PDCF)

The ITA recently announced its intention to tighten its standpoint with tax audits in relation to transfer pricing (TP) policies with regard to research and development (R&D) centers in Israel.

According to the ITA (stated in unofficial public discussion), it should be examined carefully, within the functional, asset, and risk analysis whether the Israeli R&D centre indeed functions as a service provider or as a partial/full owner of an intangible asset being developed.

International groups with relevant R&D centers in Israel should revew their TP policies in light of these developments.

Digital services tax

Israel was part of OECD's Digital Taxation Deal signed October 2021, which is a major reform of the international tax system regarding the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy.

Tax authorities and taxpayer behaviour

The ITA has a dedicated and sophisticated transfer pricing department handling all TP issues including raising tax assessments, issuing circulars and guidance, updating legislation, reviewing/approving rulings and advance pricing arrangements and MAP procedures.

The Israeli Tax Authorities can be described to take an aggressive approach with regards compliance with transfer pricing legislation and respective intercompany transactions. TP tax audits are common for all taxpayers with international transactions.

In particular, business restructuring and intellectual property (IP) migration are under scrutiny from the Israeli Tax Authority.

In addition, traditional cost-plus structure are under scrutiny and the Israeli Tax Authorities are shifting to favor under certain conditions a revenue or profit split method.

The ITA takes the position that stock options must be included in the cost base. It should be noted that in many circumstances, stock options are not deductible expenses for tax purposes. This is usually scrutinised in detail by the ITA.

Israel Tax Authorities focuses on improving the standards of transfer pricing documentation and economic analyses via reviews of taxpayer and agent 'behavior'. It will expect local reviews of functions, assets and risks, accurate characterization, and high-quality TP documentation. ITA has during the last few years held round table talks to help define new legislation and policies and invited leading transfer pricing consultants (including Grant Thornton Israel) promoting the benefits of 'cooperative compliance'.


No specific Covid-19 policies have been introduced in respect to transfer pricing, however, the pandemic has given taxpayers the opportunity the review their transfer pricing practice.

During the Covid-19 pandemic, the ITA in FY 2020 released a circular in respect of the 'burden of proof' with an emphasis on client to prepare sufficient TP documentation and empowering the Tax Assessing Officer to undertake an assessment based on his/her best adjustment', and 'experience' without the need to prepare/present an alternative economic study.

It should be noted that although the circular represents the ITA position and practices during course of tax audit, it is not legally binding.

For further information on transfer pricing in Israel please contact:

Shay Moyal
T +972 (0)3 7106612