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Foreign lawyers and law firms in Israel: a tax amendment or a revolution

By Adv. Yaniv Rog (senior partner and head of the Tax Department at S. Friedman & Co.) and Adv. Zohar Fisher (head of Robus, Legal Marketing and Strategic Consulting Firm). The article is also available in Hebrew here

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international israel taxationThe legal profession is one of the largest guilds in Israel. In December 2013, over 1,250 new qualified members joined the Israel Bar Association, brining the total to around 50,000 lawyers. Considering Israel has a population of just 7 million people, that’s one lawyer for about every 140 (!) citizens

As if that’s not enough, since August 2012 foreign lawyers have been permitted to practice law in Israel, under an Amendment to article 33 of the Bar Association Law. The expression “Foreign Workers” may conjure in your mind a Filipino nurse, a Thai farmer, or a Chinese builder. Try again; this time picture a Lawyer

In the past, foreign lawyers have been prohibited from practicing in Israel. There were restrictions hampering any sort of work relationships between Israeli and foreign firms. In the wake of Amendment 33, all such obstacles have fallen away and a dramatic change is expected to across the entire Israeli market

Amendment 33 allows foreign lawyers to provide their specialist services inside Israel. ‘Foreign Lawyer’ is defined as a lawyer licensed in a foreign country, with at least two years’ local practice. These foreign lawyers can represent Israeli clients in negotiations related to the law of their original country, and may draft contracts where foreign laws apply. However, they cannot appear in an Israeli court

Amendment 33 allows foreign law firms to open branches in Israel and to send their lawyers to permanent work on behalf of an Israeli law firm (secondment), to provide ongoing advice. Prior to Amendment 33, Israeli and foreign firms had to send representatives overseas to handle complex international deals

It is difficult to comprehend the potential impact of Amendment 33 on the Israeli legal market. So far, we haven’t seen heavy registration of foreign law firms in Israel. There is no way to know which law firms, large or small, will benefit, and which may suffer. Still, there is no doubt such changes will eventually transform Israel’s legal system

foreign law firms taxation israelWith new changes arise new questions- How will foreign lawyers’ services be taxed in Israel. Non-residents may be exempt from tax due to the Israeli Double Taxation Avoidance Agreements. Israel signed over 50 treaties, mostly based on the OECD “Model Tax Convention“. These treaties grant nonresidents tax exemptions and control tax rates across various salary gradients

One condition to receive such a tax exemption comes from not working in a ‘permanent establishment’ in Israel. This tricky term is defined in the Model Tax Convention as – a fixed place of work through which the business of an enterprise is wholly or partly carried out

There are three conditions under which a place of business can be considered a ‘permanent establishment’

A) The place of business is fixed

B) The place of business is at the disposal of the enterprise, by virtue of ownership or contract

C) The business is conducted in a fixed place for an extended period – usually a period of over six months

Notwithstanding these points, when a non-resident has no fixed place of business he may still form a ‘permanent establishment’ through an agent of independent status acting habitually on his behalf in Israel

Still, an enterprise is usually not considered to have a permanent establishment, if such ‘independent’ agents seem to be acting in the ordinary course of their business. The following example will illustrate it clearly. If a UK attorney who wishes to work in Israel has no physical or fixed place of business, and he has no agent acting on his behalf, he is exempt from paying taxes from his profits

‘Permanent establishment’ may become an important factor in the way the foreign law firms in Israel are taxed. According to the Convention, a company’s profits will be taxed at its country of origin

taxation Israel foreign law firmsHowever, if activities of the foreign firm cross the threshold of the permanent establishment, it will also be taxed also in Israel, causing double taxation. Double taxation can be prevented if the firm’s country of origin signed a Tax Treaty with Israel

The goal of Amendment 33 is to increase the exposure of the Israeli market to international law firms and their clients, expand their global networksecurity reach. In addition, Israel will be entitled to tax the income of foreign lawyers who work in Israel according to the same criteria by which all foreign workers are taxed in Israel

In most signed tax treaties, Israel is entitled to tax foreign workers’ income unless they meet three conditions

A) The employee was in Israel for periods not exceeding 183 days per tax year

B) The employee’s salary is paid by a foreign resident

C) The employee’s salary is not deducted from profits of the permanent establishment in Israel, owned by the employer

When these three conditions are not met, there is no tax exposure for foreign lawyers in Israel. However, repetitive long stays will ring ‘alarm bells’ and may be followed by claims from the Israeli tax authorities requesting the foreign lawyer to take Israeli citizenship, and to pay tax in both jurisdictions

Based on information from the Israel Bar Association in November 2013, there are now six foreign lawyers and three branches of foreign law firms registered in Israel. In addition, 12 foreign lawyers took, and passed, the Israeli Bar exam

Let us wait to see the consequences of Amendment 33. Perhaps the influx will reach gigantic proportions, bringing much-anticipated change in the Israeli market. The other possibility is that foreign firms will be deterred from leaping into a flooded, complex Israeli market, afraid to tackle the tax maneuvers that lie in wait

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 The article was published in volume 22 (January 2014) of ‘The Lawyer’, Israel’s Bar Association magazine

Adv. Yaniv Rog is senior partner and head of the Tax Department at S. Friedman & Co., Adv. Zohar Fisher is head of Robus, Legal Marketing and Strategic Consulting Firm

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