Israel: Transfer pricing circular on business restructuring in MNE groups

Israel: Transfer pricing circular

Israel’s tax authority in November 2018 published guidance that presents its position regarding the identification and characterization of a business restructuring involving multinational entity (MNE) groups; the associated tax implications; and the specific valuation criteria for the functions, assets, and risks (FAR) of the business in question.


The guidance—Circular No. 15/2018 (English*) [PDF 1.1 MB] (Hebrew) [PDF 888 KB]—is based on the tax authority’s interpretation of Chapter IX of the OECD Transfer Pricing Guidelines regarding transfer pricing aspects of business restructurings, as well as Gteko Ltd. v. Kfar Saba Tax Assessor, T.A. 49444-01-13 (6 June 2017), a court decision that is considered to be precedent in this area.

*An unofficial English translation of the original Hebrew, provided by the KPMG member firm in Israel


Circular No. 15/2018 defines a business restructuring quite broadly to include the transfer, or even cessation, of existing business activity—in particular within the context of an acquisition by a foreign entity. 

  • The mere adjustment of existing intercompany contractual terms that affects the allocation of risks or returns between related parties can potentially be considered to be a taxable business restructuring.  
  • Valuations of a transferred activity must account for the sum of the FAR on a combined basis—as opposed to the value of specific tangible and intangible assets.
  • The circular discusses when certain changes constitute a capital transaction, regardless of whether a transaction has taken place from a legal perspective. The economic substance is deemed to be the determining factor, based on criteria such as the expected place of use, value creation, and expected useful life associated with a given asset or value component.
  • Any valuation must account for uncontrolled third-party indications such as a recent acquisition price or a significant capital injection. The circular notes a number of elements that are expected to be included within the overall enterprise valuation including various liabilities, transaction expenses, existing stock options granted to employees, as well as expected future commitments made to the Israel Innovation Authority (a formal body that provides grants and financing for local development).
  • The circular notes the tax authority’s position that synergies, control premiums, and goodwill are deemed to be integral parts of the overall business activity and do not constitute distinct stand-alone value components. A purchase price allocation report does not, in itself, provide an indication of an arm’s length value of the assets.
  • The circular presents detailed material and information requests that will be expected in the context of a business restructuring inquiry, and these potentially may have relevance for both the Israeli entity and other foreign entities within the broader MNE group.


For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Israel:

David Samson | (+972) 3.684.8970 |

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