Under new guidelines issued by the Israel Tax Authority on Monday, foreign companies that operate websites and sell various services such as advertising and brokerage will be subject to 17 percent VAT as well as income tax on their activities in Israel.
Companies expected to be affected include Alphabet's Google, Facebook, Amazon, and ebay.
These and other companies that do a lot of business in Israel will be required to register with authorities as an approved enterprise so that transactions are liable for VAT.
Until now, a foreign company's income from providing services in Israel was only subject to tax if it was generated in Israel. A company would be liable for tax only if its activity rendered it a "permanent establishment".
But the Israeli authorities have widened the definition of permanent to include online businesses, where the economic activity of the foreign company is mainly through the Internet.
"Facebook pays taxes according to the law in every country it operates, including Israel," the company said in a statement, without elaborating.
A spokesman for Google in Israel declined to comment. ebay, and Amazon were not immediately available for comment.
The issue has been raised in parliament that foreign firms do not pay the same tax rates as Israeli ones. Last week, a blimp with "Google must pay tax" written across it floated over the Tel Aviv skyline and near Google's offices.
The tax authority is also seeking to implement a law in which digital services - such as downloading music or books - from a foreign online store would also be subject to VAT.
© Thomson Reuters 2016
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