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Transfer Pricing - Section 85A of the Ordinance

Section 85A of the Ordinance which contains the provisions of the transfer pricing rules in the Ordinance sets out as follows:


(a) If, in an international transaction, there are special relationships between the parties to the transaction, because of which the price for the asset, right, service or credit was determined, or other conditions for the transaction were set so that a smaller profit was realized therefrom than would have been realized, under the circumstances of the case, if the price or the conditions had been set between parties without a special relationship (hereafter: market terms), then the transaction shall be reported in accordance with market terms and charged tax accordingly.

(b) For purposes of this section:

"means of control" and "together with another" – as defined in section 88;

"Credit" – including all debt.

"special relationships" – including relations between a person and his relative, and also control of one party to the transaction over the other, or control of one person over the parties to the transaction, whether direct or indirect, alone or together with another;

"control" – the holding, direct or indirect, of 50% or more of one of the means of control;

"relative" – as defined in section 76(d).

(c) (1) An assessee must deliver to the Assessing Officer, at his demand, all the documents and data he has and that relate to a transaction or to a foreign resident party to the transaction, and also about the manner in which the price of the transaction was determined.

(2) If the assessee delivered documents said in paragraph (1) and documents prescribed under subsection (e) to the Assessing Officer, then the onus of proof shall be on the Assessing Officer, if he prescribes anything that differs from what was agreed between the parties.


(d) (1) A party to a transaction may apply to the Director and request advance certification that the price of a certain transaction or of a series of similar transactions, agreed between parties that have special relationships, is according to market terms.

(2) The application shall include all the substantive facts and particulars that relate to the transaction and also the way its price was set, and documents, certifications, opinions, declarations, valuations, the transaction agreement or a draft thereof and every other document or particular, all as the Director shall prescribe in rules, shall be attached to it.

(3) The Director may demand any additional document or particular, which he deems necessary for his decision on the application.

(4) The Director shall announce his decision and the reasons for it within 120 days after the application and all the documents said in subparagraphs (2) and (3) reached him, but – for reasons that shall be recorded – he may extend the time up to 180 days, on condition that he informed the applicant of the extension before the end of the original period.

(5) If the Director did not reply to the application within the period set in subparagraph (4), then that shall be deemed a priori certification that the transaction was carried out on market terms…".


As can be inferred from the above according to article 85A of the Ordinance, a transaction between related parties, that at least one of them is a non-Israeli resident, in which the profit is below what would have been between unrelated parties, shall be reported for tax purposes according to “arm’s length" standard.


According to the article, "related parties" include, inter alia, family members, situations where one side of the transaction controls the other side ("control" means at least 50 percent direct or indirect holding) and situations where both of the transacting parties are controlled by the same person.


Upon demand of the assessing officer the assessee should provide the officer with suffice document to support the arm length price of the specific transaction.


In addition it is important to note that special form (1385 Form) should be submitted to the assessing officer each year to indicate the existence of the International Transaction and to confirm the application of the arm length profit in the specific transactions.


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