Israeli transfer pricing guidance addresses low-interest loans

By Jacky Houlie & Shlomo Hubscher, JH & Co. Law Office, Tel Aviv-Yafo, Israel

The Israeli tax authorities on September 5 published Circular 13/2018, entitled “Low-Interest Loans,” clarifying Israel’s transfer pricing safe harbor for domestic loans among Israeli parties (not cross-border). 

In Circular 13/2018, the Israeli tax authorities attempt to clarify various sections of Israeli tax legislation, including sections 3(I), 3(J), 85A, 164 and 185.

The circular reiterates that capital notes or subordinated loans, as defined in Section 85A(6) of the Income Tax Ordinance, are viewed for Israeli tax purposes as investments and not loans, and therefore not subject to the laws of Section 85A.

Circular 13/2018 reemphasizes that capital notes must meet the following criteria: the loan must not be linked to any index; the currency of the loan must be of the country of residence of the borrower, the US dollar, or the euro; the loan must bear no interest or any yield; the loan cannot be repaid before the end of the five-year period from its date of issuance; and the repayment of the loan must be deferred to other liabilities or for the distribution of assets to shareholders in liquidation.

It should be noted, however, that if the terms of the capital note change or the note is repaid early, the note would be viewed as a loan from its first day of issuance.

Also, if the taxpayer claims that a capital note does meet the Section 85A(6) criteria, a new declaration form should be completed, the 1485 Form, which stipulates the required data. This declaration form is in addition to the 1385 Form, which addresses all other forms of intercompany transactions.

Finally, a list of the average Bank of Israel interest rates are listed as a ‘default’ reference with respect to domestic transactions (i.e. not subject to Section 85A) for the years 2012-2017.

–Jacky Houlie, LL.M, is founder and Managing Partner at JH & Co. Law Office and can be reached at [email protected] or phone: +972-52-851-2569.

–Shlomo Hubscher is a partner at JH Consulting Ltd and can be reached at [email protected] or phone: +972-52-600-6804.