Most people know that Israel is a center for commerce and manufacture of diamonds and that 50% of the world diamond trade passes through Israel. What most people are not aware of is that Israel is a fiscal paradise for the diamond industry.
There is a special tax arrangement in Israel according to which diamond companies need to pay only 0.4- 0.5% tax on turnover generated in Israel. (Subject to filing of financial and tax reports with the local tax authorities).

This special arrangement between the diamond industry and the local tax authorities was initiated in order to encourage activity in Israel. The purpose of these special conditions is to facilitate competition of Israeli companies with other international diamond centers.

According to this arrangement, tax authorities do not perform a tax audit on diamond companies provided that the financial and fiscal reports (tax return) show that the taxable income represents more than 1.3% of the turnover.
What makes it even more attractive is that the calculation of the taxable income can also include the salaries in Israel of the owners of the diamond company.

Therefore, diamond companies who are highly involved in trading with Israel should consider either setting up a subsidiary in Israel or registering the company involved with Israel as a branch operating in the local market. The branch should be registered with the local tax authorities for all the activities that are related to Israel.

According to the above arrangement, the Israeli taxation applicable for the branch operation in Israel will be the same as the one applicable to an Israeli subsidiary of a foreign company or an Israeli diamond company.

Furthermore, Israeli branches of foreign companies have an advantage over Israeli subsidiaries of foreign companies. Indeed, distribution of profits from Israel by the Israeli branch is exempt from withholding tax on dividends as opposed to an Israeli subsidiary which is subject to withholding tax on dividend distribution.

There are no limitations regarding the transfer of profits from the branch in Israel to the headquarters of the company outside of Israel.

This communication is provided for your information only and is not intended to constitute professional advice as to any particular situation.

Other useful links related to the diamond industry:
-Sightholder group definition
-Accounting services for the diamond industry