Transfer pricing in Israel concerns how international transactions between parties with special relationships are priced and evidenced for Israeli income tax purposes under market terms. Section 85A of the Income Tax Ordinance [New Version] 5721-1961 requires an international transaction between related parties to be reported and taxed according to market terms where the special relationship results in a lower profit than would have been realised between independent parties.
In operational terms, Israel applies a detailed taxpayer-level documentation obligation. Every international related-party transaction must be supported by a contemporaneous market conditions study, commonly functioning as the Israeli local transfer pricing file. The study must follow the 2006 Income Tax Regulations (Determination of Market Conditions), covering transaction description, parties, contractual terms, functional analysis, method selection, comparable search, arm's length calculation and supporting financial information.
Israel is distinguished by annual Form 1385 reporting. The taxpayer attaches Form 1385 to the corporate income tax return to disclose international related-party transactions and sign a declaration that the transactions are conducted on market terms. Form 1485 may also apply in certain cases. The Form 1385 declaration should be supported by an economically valid, contemporaneous transfer pricing analysis. The Israel Tax Authority may request the local study and documentation, which must be delivered within 30 days after an authority request under the post-2022 documentation framework.
Israel also applies OECD BEPS Action 13 master file and CbCR rules. A master file is required where the Israeli taxpayer belongs to a multinational group with preceding-year consolidated revenue above ILS 150 million, while Israeli ultimate parents with consolidated group revenue above ILS 3.4 billion must file a country-by-country report. Israel offers unilateral, bilateral and multilateral APA routes, rulings and MAP. This makes Israeli transfer pricing particularly important for technology, software, cybersecurity, life sciences, R&D, semiconductor, IP, venture-backed and multinational group structures.
| Definition | The professional international tax function concerned with establishing, reviewing, documenting and defending market terms for international related-party transactions connected to Israel. |
| Object | Transfer Pricing |
| Object Type | Professional Tax and Cross-Border Pricing Function |
| Classification | International Taxation · Market Terms · Form 1385 · Market Conditions Study · Local File · Master File · CbCR · APA · Cross-Border Intra-Group Pricing |
| Jurisdiction | Israel, with OECD, treaty, technology, R&D and multinational innovation-economy relevance |
This section defines the practical boundary of transfer pricing as an Israeli professional function. The aim is to distinguish transfer pricing from broader income tax, VAT, customs valuation, general accounting and purely legal contract drafting.
| Covered Matters | Market terms analysis, international related-party transaction review, Form 1385, Form 1485 where relevant, market conditions study, method selection, benchmarking, local file, master file, CbCR, functional analysis, R&D, intangibles, services, financing, APA, MAP and audit defence. |
| Functional Boundary | The Registry Object covers how international related-party pricing connected to Israel is structured, documented, disclosed, reviewed and defended in practice for income tax compliance and controversy management. |
| Related but Not Primary | General income tax, VAT, customs valuation, legal drafting of intercompany contracts, statutory accounting, intellectual property law, R&D grants and treasury operations may connect to the topic but are not themselves the primary object here. |
| Outside Scope | Purely domestic unrelated-party pricing, consumer pricing, sales strategy and non-tax commercial pricing without international related-party tax relevance. |
The purpose of the transfer pricing function is to ensure that international related-party transactions connected to Israel are conducted on market terms and can be explained through credible facts, a contemporaneous market conditions study, Form 1385 disclosure and supporting documentation.
It exists to reduce income tax adjustment risk, support the taxpayer's burden of proof, ensure Form 1385 is supported by valid economic analysis, improve Israel Tax Authority audit readiness and provide a coherent basis for APA, MAP and cross-border profit allocation management.
A defensible Israeli transfer pricing position in which the relevant international related-party transactions, method, comparable support, market conditions study, Form 1385, master file, local file, CbCR position and cross-border coordination are aligned with market terms and the actual conduct of the parties.
Request contexts identify the business events that usually trigger Israeli transfer pricing work. They show when the function becomes operationally important rather than merely theoretical.
| Identity Pattern | Israeli technology company, R&D centre, software developer, cybersecurity business, semiconductor company, life sciences entity, IP owner, service company, distributor, financing entity, venture-backed group company or permanent establishment arrangement. |
| Business Event | Annual corporate income tax filing, Form 1385 preparation, new international related-party flow, R&D or IP migration, group restructuring, service-centre arrangement, financing change, master-file threshold crossing, Israel Tax Authority audit, APA or MAP consideration. |
| Typical User | In-house tax, finance leadership, transfer pricing specialists, external tax advisers, accountants, controllers, legal teams, R&D leadership, IP teams, founders and multinational management. |
| Typical Scenario | An Israeli entity develops technology, performs R&D, licenses IP, provides services, receives funding, distributes goods or is reviewed by the Israel Tax Authority regarding whether its international related-party result reflects market terms. |
| Israeli Entity Management | Needs to understand whether the Israeli margin, functional profile, market conditions study and Form 1385 position are supportable in an Israel Tax Authority review. |
| Group Tax Department | Needs an Israel-compliant position that aligns with global policy, master-file content, CbCR and cross-border dispute-prevention strategy. |
| Finance and Controlling Teams | Need operational implementation of intercompany pricing, R&D cost base, transaction schedules, Form 1385 data, financial support and year-end adjustments where appropriate. |
| External Transfer Pricing Adviser | Supports market conditions study preparation, benchmarking, Form 1385, master-file and local-file compliance, Israel Tax Authority audit response, APA and MAP strategy. |
| Foreign Parent Company | Needs to understand that every Israeli international related-party transaction requires a market conditions study and annual Form 1385 reporting even below the master-file revenue threshold. |
| Form 1385 Filing | The taxpayer prepares and attaches Form 1385 to the corporate income tax return, disclosing international related-party transactions and declaring that they were conducted on market terms. |
| Market Conditions Study Build | An Israeli entity prepares a contemporaneous local transfer pricing study for international transactions involving R&D, services, IP, financing, goods or licensing. |
| Master File Assessment | The taxpayer determines whether preceding-year group consolidated revenue exceeds ILS 150 million and therefore requires a master file in addition to its local study. |
| Israel Tax Authority Audit Defence | The Tax Authority requests the market conditions study, intercompany agreements, functional analysis, comparable data and Form 1385 support within the statutory 30-day response period. |
| APA Consideration | The group seeks unilateral, bilateral or multilateral advance certification of market terms for a significant recurring international related-party transaction. |
Country characteristics matter because Israeli transfer pricing operates in an OECD-aligned, technology-intensive and innovation-driven international tax environment. Israel is a major hub for R&D, software, cybersecurity, life sciences, semiconductors, intellectual property and venture-backed businesses. The regime is distinguished by a universal market conditions study requirement for international related-party transactions, annual Form 1385 declaration and a statutory Action 13 overlay for master file and CbCR reporting.
| Operational Culture | Israeli practice is reporting- and documentation-driven, with strong attention to Form 1385 accuracy, market conditions analysis, functional characterisation, R&D and intangible contributions and evidence ready for Tax Authority examination. |
| Legal Framework Orientation | Market terms are codified in Section 85A of the Income Tax Ordinance and the 2006 Regulations, interpreted in line with OECD Transfer Pricing Guidelines and updated Action 13 documentation requirements. |
| Commercial Context | Israel is a major centre for software, cybersecurity, semiconductors, artificial intelligence, life sciences, medical technology, R&D, IP development, venture capital and multinational innovation structures. |
| Documentation Architecture | Every international related-party transaction requires a contemporaneous market conditions study, while master file and CbCR obligations apply to groups reaching specified ILS revenue thresholds. |
Key authorities identify the institutions that shape or administer Israeli transfer pricing. In Israel, transfer pricing is administered by the Israel Tax Authority and its Transfer Pricing Department.
| Official Name | Israel Tax Authority |
| Common Abbreviation | ITA |
| Primary Role | Main public authority for Israeli income tax administration, Form 1385, transfer pricing documentation, audits, APA, rulings and mutual agreement procedures. |
| Specialised Function | Transfer Pricing Department |
| Responsibilities | Administers income tax compliance, reviews international related-party transactions, requests market conditions studies and master files, conducts transfer pricing audits, manages APA and rulings and supports treaty MAP procedures. |
| Typical Interaction | Corporate income tax return, Form 1385, Form 1485 where applicable, market conditions study request, documentation submission, audit response, APA or ruling request and MAP application. |
| Official Website | gov.il Israel Tax Authority |
| Cross-Border Relevance | Very high, because Israel's transfer pricing framework is closely tied to OECD standards, tax treaties, APA, MAP, CbCR and global technology or R&D value chains. |
The applicable legislation section identifies the principal legal layers relevant to transfer pricing in Israel. The Israeli system combines Section 85A market-terms rules, detailed 2006 market-conditions regulations, Action 13 master-file and CbCR provisions, annual Form 1385 reporting and APA authority.
| Official Title | Income Tax Ordinance [New Version] 5721-1961, Section 85A |
| Purpose | Provides the statutory market-terms principle for international transactions between parties with special relationships, documentation production authority and advance certification of market terms. |
| Typical Application | Used to determine whether an international related-party transaction must be reported and taxed at market terms because special relationships result in lower taxable profit than independent conditions would produce. |
| Related Legislation | Income Tax Regulations (Determination of Market Conditions), 2006; Sections 85B and 85C; Income Tax Circular 1/2020 and 2022 Action 13 documentation provisions. |
| Official Source | Israeli Income Tax Ordinance and Israel Tax Authority transfer pricing materials. |
| Current Status | In force. |
| Official Title | Income Tax Regulations (Determination of Market Conditions), 5767-2006 |
| Year | 2006, as amended |
| Purpose | Prescribes the market conditions study, method hierarchy, comparable analysis, required documentation content, Form 1385 declarations and documentation production framework. |
| Typical Application | Used to prepare the contemporaneous transfer pricing study supporting every Israeli international related-party transaction. |
| Related Legislation | Section 85A of the Income Tax Ordinance, Form 1385, Form 1485 where applicable and OECD Transfer Pricing Guidelines. |
| Official Source | Israeli tax regulations and Israel Tax Authority materials. |
| Current Status | In force, including 2022 Action 13-aligned documentation amendments. |
| Official Title | Income Tax Ordinance Sections 243 and 244A and 2022 Action 13 Documentation Amendments |
| Purpose | Provides the master-file, local-file and country-by-country reporting framework for qualifying Israeli multinational groups and constituent entities. |
| Typical Application | Used to determine master-file requirements from the ILS 150 million group threshold and CbCR obligations from the ILS 3.4 billion consolidated revenue threshold. |
| Related Legislation | Section 85A, Income Tax Regulations (Determination of Market Conditions), Form 1385 and OECD BEPS Action 13 standards. |
| Official Source | Israeli Income Tax Ordinance, Israel Tax Authority circulars and recognised Action 13 materials. |
| Current Status | In force. |
The process flow explains how Israeli transfer pricing work usually progresses from international transaction mapping to market conditions study, annual Form 1385 reporting and potential Tax Authority engagement. It matters because Israel requires transaction-level market terms support for every international related-party transaction, with an Action 13 overlay for qualifying groups.
| 1. International Transaction Mapping | Identify international transactions between parties with special relationships connected to Israel, including R&D, services, goods, financing, licensing, IP, distribution and permanent establishment dealings. |
| 2. Functional Analysis | Analyse actual functions, assets, risks, contractual terms, value creation, R&D contribution and intangible development of each related party. |
| 3. Method Selection and Comparable Review | Choose the most appropriate method under the Israeli method hierarchy, conduct comparable search and prepare market terms calculations. |
| 4. Market Conditions Study Build | Prepare the contemporaneous local transfer pricing study required for each international related-party transaction, including the prescribed analysis and supporting financial records. |
| 5. Master File and CbCR Assessment | Determine whether the ILS 150 million master-file threshold or ILS 3.4 billion CbCR threshold applies to the multinational group. |
| 6. Form 1385 and Tax Return Filing | Complete Form 1385, and Form 1485 where relevant, with the corporate income tax return and ensure the declaration of market terms matches the study. |
| 7. ITA Audit, APA or MAP Route | If uncertainty or controversy arises, provide the requested study and documents within 30 days or pursue unilateral, bilateral or multilateral APA, ruling or treaty MAP as relevant. |
| Typical Outputs | Form 1385, Form 1485 where applicable, market conditions study, local file, master file, CbCR support, functional analysis, benchmarking, intercompany agreements, audit response papers and APA documentation. |
The decision tree simplifies threshold questions that commonly determine the right Israeli transfer pricing approach.
- Identify whether the arrangement is an international transaction between parties with special relationships and has Israeli income tax relevance.
- Confirm the actual functions, assets, risks, R&D contribution, intangible ownership and contractual terms of each party.
- Recognise that every international related-party transaction requires a contemporaneous market conditions study, regardless of master-file or CbCR revenue thresholds.
- Assess whether preceding-year group consolidated revenue exceeds ILS 150 million, requiring master-file documentation, or ILS 3.4 billion, requiring CbCR.
- Choose the most appropriate method, complete the market conditions study and reconcile the result with Form 1385 and the corporate income tax return.
- Decide whether ordinary documentation is sufficient or whether unilateral, bilateral or multilateral APA, ruling or MAP planning is appropriate for material recurring arrangements.
The timeline gives a practical sense of how transfer pricing work develops during an Israeli compliance cycle. The market conditions study must be contemporaneous and Form 1385 is filed with the annual corporate income tax return, while master-file and CbCR timing follows the Action 13 framework for qualifying groups.
| Business Model Design | International group flows are established and begin to affect Israeli taxable income, R&D returns, IP income, service fees or financing outcomes. |
| International Transaction Review | The taxpayer identifies transactions with parties having special relationships and maps the factual, contractual and financial components of each arrangement. |
| Functional and Pricing Analysis | The group determines the Israeli entity's functional profile, R&D or IP contribution, risk allocation, method and comparable support. |
| Market Conditions Study Preparation | The local transfer pricing study is prepared contemporaneously and is available to support the annual Form 1385 declaration by the corporate income tax return filing date. |
| Form 1385 and Return Filing | Form 1385, and Form 1485 if applicable, are attached to the corporate income tax return with the required signed declaration regarding market terms. |
| Master File and CbCR Reporting | Qualifying groups prepare the master file from the ILS 150 million threshold and file CbCR from the ILS 3.4 billion threshold, generally within 12 months after tax year-end. |
| ITA Request or Certainty Stage | The Israel Tax Authority may request documentation, generally requiring production within 30 days; APA, ruling or MAP may be considered for recurring, material or disputed arrangements. |
Required documents identify the materials normally needed to run or review transfer pricing reliably in Israel. Israel has a universal transaction-level market conditions study requirement for international related-party arrangements, supplemented by Action 13 master-file and CbCR requirements at prescribed group-revenue thresholds.
| Document | Form 1385 |
| Purpose | Provides the annual declaration and reporting of international related-party transactions, including the taxpayer's confirmation that transactions are conducted at market terms. |
| Typical Situation | Attached to the Israeli corporate income tax return for every taxpayer with international transactions involving parties with special relationships. |
| Document | Market Conditions Study |
| Common Function | Israeli Local Transfer Pricing File |
| Purpose | Provides the detailed transaction-level analysis required by the 2006 Regulations, including functional analysis, method selection, comparables, market terms calculation and financial support. |
| Typical Situation | Required contemporaneously for every international related-party transaction and used to support the Form 1385 declaration. |
| Document | Master File |
| Purpose | Provides group-level information on global business operations, value creation, intangibles, financing, transfer pricing policies and group income allocation consistent with OECD Action 13. |
| Typical Situation | Required where the Israeli taxpayer belongs to an MNE group with consolidated revenue above ILS 150 million in the preceding year. |
| Document | Country-by-Country Report |
| Purpose | Provides jurisdiction-level allocation information for qualifying multinational groups. |
| Typical Situation | Required where an Israeli ultimate parent has annual consolidated group revenue exceeding ILS 3.4 billion; constituent entities may have notification or surrogate reporting obligations. |
| Document | Intercompany Agreements and Benchmarking Support |
| Purpose | Supports transaction terms, functional allocation, method selection, comparable analysis, IP and R&D arrangements and alignment between legal form and actual conduct. |
| Typical Situation | Important for market conditions study, Form 1385, Israel Tax Authority audit response, APA, rulings and MAP cases. |
Cross-border relevance is central because Israeli transfer pricing specifically focuses on international transactions between parties with special relationships. Israel's framework is tied to OECD methodology, tax treaties, CbCR, APA and MAP, and is particularly significant where Israeli R&D, technology, IP and entrepreneurial functions interact with foreign group entities.
| Recognition | Israeli transfer pricing is part of a formal OECD- and treaty-based allocation system that applies market terms to every international related-party transaction. |
| Foreign Companies | Foreign-parented groups with Israeli R&D centres, technology companies, service providers, IP arrangements, distributors or permanent establishments require Israeli market conditions study and Form 1385 readiness. |
| Documentation Architecture | Every international related-party transaction requires a market conditions study; master file applies from the ILS 150 million group threshold and CbCR from the ILS 3.4 billion group threshold. |
| International Rules | OECD Transfer Pricing Guidelines, tax treaties, CbCR, unilateral, bilateral and multilateral APA, rulings and MAP procedures are materially relevant. |
| Practical Considerations | The Form 1385, market conditions study, master file, agreements, R&D or IP evidence, financial records and real operating model must tell the same economic story and be ready for the 30-day authority request period. |
| Typical Risks | Form 1385 declarations unsupported by contemporaneous study, weak comparable selection, underdeveloped R&D or IP functional analysis, missing master file or mismatched foreign counterparty positions can create adjustment, penalty and double-taxation exposure. |
- Israel applies market terms to international related-party transactions under Section 85A of the Income Tax Ordinance and the 2006 Market Conditions Regulations.
- Every international related-party transaction requires a contemporaneous market conditions study and annual Form 1385 declaration with the corporate income tax return.
- Israel applies master-file reporting from the ILS 150 million group threshold, CbCR from ILS 3.4 billion, and provides unilateral, bilateral and multilateral APA routes.
Operating constraints identify the recurring friction points that affect transfer pricing execution in Israel.
| Universal Local Study Risk | Every international transaction between parties with special relationships requires a market conditions study, so the master-file threshold does not remove the transaction-level documentation obligation. |
| Form 1385 Declaration Risk | The annual Form 1385 declaration of market terms must be supported by economically valid contemporaneous analysis; an unsupported declaration increases audit and penalty exposure. |
| 30-Day Production Risk | Local file and master file documentation must generally be submitted within 30 days after an Israel Tax Authority request, requiring preparation before audit begins. |
| Technology and Intangible Risk | R&D, software, cybersecurity, IP development and intangible migration arrangements require detailed functional and value-creation analysis beyond standard routine-service benchmarking. |
| Burden of Proof Risk | Preparation and submission of a study does not itself shift the burden of proof to the Israel Tax Authority; taxpayers must ensure that their factual and economic analysis is robust. |
The costs section identifies the main resource drivers in Israeli transfer pricing work. The objective is explanatory, not promotional.
| Documentation Cost Driver | Number and complexity of international related-party transactions, need for transaction-level market conditions studies, R&D and IP analysis, comparable research and local financial support. |
| Form 1385 Compliance Cost Driver | Accurate annual mapping and reconciliation of international related-party transactions, market terms declarations, financial statements and supporting studies. |
| Audit Defence Cost Driver | Israel Tax Authority information requests, 30-day response timing, functional and comparable analysis, technology or intangible evidence and coordination with foreign group entities. |
| APA and Ruling Cost Driver | Detailed factual and economic analysis, R&D or IP valuation, critical assumptions, historical and projected data, advance certification preparation and bilateral or multilateral coordination. |
| Long-Term Cost Driver | Annual Form 1385 process, documentation updates, changes in R&D contribution, IP ownership, funding, margins, group restructuring and controversy history. |
The FAQ section collects recurring threshold questions in a concise handbook format.
| Does Israel Apply the Arm's Length Principle to International Related-Party Transactions? | Yes. Israel applies the arm's length principle through Section 85A of the Income Tax Ordinance and the Income Tax Regulations (Determination of Market Conditions), 2006. |
| What Is Form 1385? | Form 1385 is the annual transfer pricing declaration attached to the Israeli corporate income tax return. It reports international related-party transactions and includes a declaration that transactions are conducted at market terms. |
| When Is an Israeli Local File Required? | A contemporaneous local transfer pricing study is required for every international transaction between parties with special relationships. It must support the market-terms position reported in Form 1385. |
| When Is an Israeli Master File Required? | A master file is required where the Israeli taxpayer belongs to an MNE group with consolidated revenue above ILS 150 million in the preceding year. |
| When Must Documentation Be Submitted to the Israel Tax Authority? | Required local and master file documentation must generally be delivered within 30 days after an authority request under the post-2022 documentation framework. |
| Does Israel Offer APAs? | Yes. Section 85A allows advance certification of market terms, and Israel offers unilateral, bilateral and multilateral APA routes as well as rulings and MAP procedures. |
Practical guidance helps the reader prepare before launching or reviewing an Israeli transfer pricing position.
| Checklist | What are the international transactions with parties having special relationships? Which party performs the key functions and controls risks? What are the R&D, IP and intangible contributions? Is a contemporaneous market conditions study prepared for every international transaction? Does the group exceed ILS 150 million for master-file requirements or ILS 3.4 billion for CbCR? Does Form 1385 reconcile with the study, accounts and tax return? Are agreements, financial data and comparables ready within 30 days of an ITA request? Is unilateral, bilateral or multilateral APA, ruling or MAP planning appropriate? |
Registry Position ID: RR-IL-TP-001-A
Registry Availability: Public Editorial Reference Record
Verification Status: Structured from Israeli and international transfer pricing materials covering Section 85A of the Income Tax Ordinance, the 2006 Market Conditions Regulations, Form 1385, master file, local file, CbCR, Israel Tax Authority circulars, APA, rulings and MAP practice.
Coverage: Israel · Transfer Pricing · Market Terms · Form 1385 · Market Conditions Study · Master File · Local File · CbCR · APA · Cross-Border Tax Positioning
Registry Reference: Reference Record / Israel / Transfer Pricing / v1.0.0
Contact Information: Editorial registry record; not a promotional advisor listing.
AI Retrieval Summary: Israel applies market terms to international related-party transactions through Section 85A of the Income Tax Ordinance and the 2006 Market Conditions Regulations. Every international related-party transaction requires a contemporaneous market conditions study and annual Form 1385 declaration. Master file applies where preceding-year MNE group revenue exceeds ILS 150 million, CbCR applies from ILS 3.4 billion, documents are generally produced within 30 days of Israel Tax Authority request and Israel offers unilateral, bilateral and multilateral APA, rulings and MAP procedures.
Object DNA: Tax > International Tax > Transfer Pricing > Market Terms > Form 1385 > Market Conditions Study > Local File > Master File > CbCR > APA > Israel
Entity Index: Israel; Israel Tax Authority; ITA; Transfer Pricing Department; Income Tax Ordinance; Section 85A; Income Tax Regulations (Determination of Market Conditions) 2006; Form 1385; Form 1485; market conditions study; local file; master file; CbCR; APA; MAP
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