Tel Aviv Court Rules IKEA Israel Must Pay Tax on Franchise Fees to Global Parent Company

The Tel Aviv District Court has ruled that IKEA Israel must pay tax on franchise fees transferred to its global parent company, rejecting the company's claim that these payments were for operational services rather than royalties. The decision, handed down by Judge Magen Altuvia, upholds a tax assessment of NIS 2.5 million for the years 2013 to 2015.

The ruling could have broader implications for multinational franchise operations in Israel, particularly those leveraging international branding, intellectual property, and business models.

Court: Payments Are for Use of Intellectual Property

IKEA Israel argued that the **monthly payments—3% of gross sales—**were made in exchange for services provided by IKEA Global, including site selection, staff training, store design, and marketing support.

However, Judge Altuvia rejected that position, ruling that the payments are, in fact, franchise fees for the use of IKEA’s proprietary know-how, trademarks, and its distinct operating method.

“The nature of these payments clearly aligns with the definition of royalties under international tax principles and bilateral treaties,” the court stated.

These fees amount to tens of millions of shekels annually and are paid by IKEA Israel to a Dutch-registered holding company that holds the global rights to the IKEA brand.

Triggers 5% Withholding Obligation

The court found that under the Israel–Netherlands Double Taxation Treaty, royalties paid to a Dutch resident company are subject to a 5% withholding tax. As such, IKEA Israel is required to withhold tax at the appropriate rate on these payments to its Dutch affiliate.

This decision could impact other Israeli companies engaged in similar arrangements with foreign licensors.

Past Tax Arrangement No Longer Applies

The case stems from a 2004 compromise agreement between IKEA Israel and the Israel Tax Authority, under which 75% of the payments to the global parent company were classified as royalties, with IKEA Israel required to withhold tax accordingly.

That agreement was valid for five years, and in 2009, IKEA Israel requested an extension. A provisional arrangement was put in place, allowing the company to continue withholding tax based on the original agreement until a final ruling was made.

Judge Altuvia’s ruling now retroactively applies to all payments made after the original agreement expired, meaning IKEA Israel could face additional retroactive tax liabilities.