How a UK Company Ended Double Tax on Its Israeli Fees Through MAP

Result: Israeli charge reduced from NIS 400,000 to NIS 173,000 and credited in full by HMRC, ending economic double taxation on three years of fees · Timeline: 26 months from presentation to agreement · Challenge: Israel found a permanent establishment, HMRC did not · Authority: Competent authorities of the Israel Tax Authority and HMRC · Financial Impact: NIS 400,000 of double taxation removed

Background

A small engineering consultancy near Reading, owned and run by a married couple with four employees, holds a long standing contract with an Israeli industrial group. Between 2021 and 2023 it invoiced roughly NIS 400,000 a year for technical supervision of a production line upgrade at the group's Ashdod plant. The firm has no Israeli company, no Israeli office and no Israeli bank account. It paid UK corporation tax on the profits and thought no more about it.

In late 2023 the Israeli assessing officer opened an enquiry into the group's payments abroad. The lead engineer, one of the four employees, had spent between 140 and 160 days a year on the Ashdod site over the three years, worked from a desk the client provided, and held a site badge. On that basis the assessing officer determined that the UK company had a permanent establishment in Israel and assessed Israeli tax on the profits attributed to it, coming to NIS 400,000 across the three years.

The couple did what most people do. They told their UK accountant, who claimed double taxation relief in the company's corporation tax return. HMRC refused it. On HMRC's analysis the supervision activity did not create a permanent establishment under the convention, the profits were UK profits, and the Israeli tax was therefore not properly payable. Two revenue authorities, each internally consistent, and one small company paying tax twice on the same income.

The Challenge

This is the situation the mutual agreement procedure exists for, and it is the situation domestic remedies cannot fix. An Israeli objection can only persuade the Israeli side. A UK appeal can only persuade the UK side. Neither authority is bound by the other's characterisation, and a taxpayer who wins in one country and loses in the other still pays twice.

The mutual agreement procedure sits in Article 20 of the 1962 Israel-UK double taxation convention, as amended by the Protocol signed on 17 January 2019 and in force from 28 October 2019. It lets a person who considers that the actions of one or both states result in taxation not in accordance with the convention present the case to the tax authorities of either contracting party, and it obliges the authorities to endeavour to resolve the matter by mutual agreement. Two features of the Israeli practice matter more than the article's wording. The Israeli file is run by the MAP unit inside the Israel Tax Authority's international taxation department, deliberately separated from the assessing officer whose assessment created the problem, under Income Tax Circular 1/2023 published on 12 February 2023. And presentation has a deadline that runs from the taxing action, not from the day negotiations with the assessing officer break down.

The trap in this case was the domestic clock. Opening a MAP does not suspend anything in Israel. The objection window under Section 150(a) of the Income Tax Ordinance [New Version] 5721-1961 is 30 days from the assessment, and it kept running while the couple's accountant was corresponding with HMRC about relief. Had that window closed, the Israeli assessment would have become final and the Israeli competent authority would have arrived at the negotiation with nothing left to concede.

In Practice: Income Tax Circular 1/2023, issued by the Israel Tax Authority (Rashut HaMisim) on 12 February 2023, governs mutual agreement procedure requests, which are handled by the MAP unit in the international taxation department and kept separate from the assessing officer. Israel's treaties generally allow 3 years from the first notification of the taxing action to present the case, while the domestic objection deadline under Section 150(a) of the Income Tax Ordinance [New Version] 5721-1961 stays at 30 days and must be met independently. The OECD benchmark for closing a MAP case is 24 months. On a disputed Israeli charge of NIS 400,000, Israeli professional costs of running the procedure through to agreement commonly fall between NIS 40,000 and NIS 120,000.

What We Did

The objection went in first, on day 22. Everything else in this file was reversible. That deadline was not.

We then agreed with the assessing officer that the objection would be held in abeyance rather than decided, which is a request the Israeli side grants readily where a MAP is genuinely on foot and refuses where it looks like delay for its own sake. The company's position stayed alive without a decision being forced on it.

The case was presented to HMRC as the company's own competent authority, which is the ordinary route for a UK resident. We also lodged with the Israeli MAP unit, because Article 20 permits presentation to the authorities of either contracting party and a file that exists on both desks moves faster than one that has to be forwarded. That second lodgement cost a fortnight of work and saved considerably more than that in elapsed time.

The substance of the file was days and functions, not law. We assembled the client's badge system records showing the engineer's actual site presence, boarding passes and flight records for three years, the supervision clauses of the contract, and a functional description of what the engineer did on site against what the rest of the firm did in Reading. The point we built towards was not that there was no permanent establishment. On 140 to 160 days a year at a fixed desk that argument was weak, and running a weak argument to a competent authority wastes the credibility you need on the strong one. The point was attribution. Most of the value in the engagement came from design and analysis performed in the UK, and the profit properly attributable to the Israeli site activity was a fraction of the total.

Collection ran alongside all of this and had to be managed separately. An Israeli tax debt does not freeze because a MAP is pending. We negotiated an arrangement with the Israel Tax Authority collection department under which payment was deferred against security rather than enforced, which kept the company solvent through a 26 month process without conceding the assessment.

In Practice: Article 20 of the 1962 Israel-UK double taxation convention, as amended by the Protocol signed 17 January 2019 and in force from 28 October 2019, allows the case to be presented to the tax authorities of either contracting party and provides that any agreement reached is implemented notwithstanding time limits in domestic law. That provision is what allowed HMRC to give relief for the 2021 year after the ordinary UK amendment window had closed. Filing the MAP did not stay Israeli collection, so a deferral against security was agreed separately with the Israel Tax Authority collection department for the 26 months the procedure ran.

The Outcome

The competent authorities reached agreement 26 months after presentation, close to the OECD benchmark and faster than this couple had been warned to expect. Israel retained taxing rights over the profits attributable to the Ashdod site for two of the three years, on an attribution materially below the assessing officer's, and released the third year entirely. The Israeli charge came down from NIS 400,000 to NIS 173,000.

HMRC then gave credit for the full NIS 173,000. The most valuable part of the agreement was that the credit reached the 2021 year, which had already closed under ordinary UK time limits by the time the authorities agreed. Article 20 provides that an agreement reached is implemented notwithstanding domestic time limits, and without it the company would have won the Israeli reduction and still borne double tax on the earliest and largest year.

Israeli professional costs were NIS 88,000, inside the usual band for a general track case and roughly 22% of the amount in dispute. That ratio is the honest test of whether the procedure is worth opening. On a six figure exposure it usually is. On a disputed charge of NIS 60,000 it is not, and the answer there is the domestic objection alone.

The forward looking result mattered as much as the refund. The engagement continues, and the agreement gave both authorities a settled basis for the treatment of the same activity going forward. The firm restructured how the work is delivered from 2026, cutting the engineer's Israeli days and moving the design review to Reading, so that the question does not have to be argued again.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. File the domestic objection first and worry about the treaty second. The Section 150(a) window is 30 days from the Israeli assessment and it keeps running while you argue with your home revenue authority. An Israeli assessment that has become final leaves the Israeli competent authority nothing to give.
2. Present to both competent authorities where the treaty allows it. Article 20 permits presentation to either contracting party, and a file already open on the Israeli desk does not have to wait to be forwarded.
3. Concede the argument you are going to lose. An engineer on site for 140 to 160 days a year is a permanent establishment problem, and disputing that would have cost credibility on the attribution question, which is where the money actually was.
4. Manage Israeli collection as a separate workstream. A pending MAP does not stay enforcement, and a deferral against security has to be negotiated with the collection department while the merits sit elsewhere.
5. Test the economics before you start. Israeli costs here were NIS 88,000 against NIS 400,000 in dispute. The procedure earns its keep on six figure exposures and rarely below that. Our guide to the UK-Israel tax treaty for British non-residents covers the underlying allocation rules.

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Facing a Similar Situation?

If Israel and your home revenue authority have both taxed the same income and neither will move, the domestic objection alone cannot solve it, and the deadline that decides your position is the Israeli one. We file the Section 150 objection to preserve the assessment year, build the Israeli evidence for the competent authority file, and deal with the Israel Tax Authority collection department while the two states talk. Our answer on asking the tax authorities to resolve double taxation between them explains how the procedure works.

Contact us for a confidential consultation about your Israeli legal matter.