In the wake of prolonged geopolitical instability, internal political uncertainty, and the rise of global anti-Israeli sentiment, a growing number of Israeli entrepreneurs are choosing to incorporate their startups abroad—seeking stability, greater access to international investors, and strategic insulation from regional volatility.
While this trend may offer meaningful business advantages, it also carries significant tax implications that Israeli entrepreneurs must be aware of. Without proper planning, these cross-border structures can inadvertently expose founders to unexpected Israeli tax liabilities and compliance risks. In this article, we will examine the potential tax exposure associated with creating a permanent establishment (PE) in Israel, particularly in cases where Israeli entrepreneurs are actively involved in developing the company’s intellectual property from within Israel.
It is increasingly common for Israeli entrepreneurs to incorporate their startups as foreign entities—most often in the United States—at the very early stages of the venture. This strategy is typically driven by commercial considerations such as easier access to venture capital, favorable legal infrastructure, and alignment with future expansion plans. In many cases, the founders envision relocating abroad at a later stage once the company matures or begins scaling its operations. However, during the initial development phase, much of the core activity—including product development and IP creation—continues to take place in Israel. This disconnects between the legal structure and the actual business activity may inadvertently trigger a permanent establishment (PE) in Israel, exposing the foreign company to Israeli taxation. If not properly addressed, this risk can significantly complicate matters at critical junctures such as raising funds or executing an exit, where investors and acquirers scrutinize the company’s global tax exposure.
When Israeli entrepreneurs remain in Israel and continue to lead key functions such as product development, R&D, and strategic decision-making, their activities may give rise to a permanent establishment (PE) of the foreign company in Israel—even if the entity is formally incorporated abroad. Under Israeli tax law, a PE can be triggered where there is a fixed place of business or where core entrepreneurial functions are conducted locally. Once a PE is established, the foreign company is required to allocate an appropriate portion of its global income to Israel based on transfer pricing principles. This means that even at early stages—when the company may be operating at a loss on a consolidated basis—it must still file annual tax returns in Israel and may become liable for Israeli corporate tax on the income attributed to the Israeli PE. Failing to recognize and plan for this exposure can result in significant compliance issues and unexpected liabilities later on.
Importantly, the existence of a PE in Israel is not the only concern. When Israeli entrepreneurs are actively involved in the development of the startup’s intellectual property (IP) from within Israel, the Israeli Tax Authority may argue that the IP is at least partially—if not fully—owned by the Israeli PE. In such cases, even if the legal ownership of the IP is held by the foreign parent company, the economic substance of the IP creation may be attributed to Israel. This can have far-reaching implications: if the IP is later licensed, sold, or transferred as part of an exit event, the Israeli tax authorities may assert that a significant portion (or even all) of the resulting income should be subject to Israeli taxation. This position can lead to unexpected tax liabilities and complicate the valuation and structuring of future transactions.
In an increasingly globalized and uncertain environment, structuring your startup abroad may seem like the logical path—but Israeli entrepreneurs must recognize that legal incorporation is only one piece of the puzzle. The location of actual business activity, especially IP development, has real and potentially costly tax implications. Early-stage companies can and should take proactive steps—whether through tax rulings, proper transfer pricing, or long-term planning—to reduce exposure and avoid unpleasant surprises at later stages. Consulting with experienced advisors early on can make all the difference between a clean, scalable structure and a future entangled in tax disputes.
Have questions or faced similar challenges? Anat Shavit from STL will be happy to assist you and your company with the tax planning.