Boaz Schwartz has been accused of misreporting 550m shekels (£118.4m) worth of transactions over the past six years. He has been freed by Jerusalem Magistrate's Court, provided he abides by certain conditions.
The authorities in Israel also searched Deutsche Bank's offices in the country Monday, seizing computers and mobile phones belonging to executives and managers as part of its investigation.
It is alleged that transactions were put through at the zero rate applicable to foreign residents, when they should have been put through at the full rate of 17 per cent.
A statement from Deutsche Bank read: "Deutsche Bank in Israel and abroad acts in accordance with the law and strict legal advice. We are cooperating with the tax authorities on this inquiry and will continue to do so."
According to Deutsche Bank's 2015 annual report, its Israel division produced revenues of €9m (£7.8m), profits before tax of €5m and employed 11 people full-time during the 2015 financial year.
The arrest and office search are the latest in a string of legal woes for the bank. The German giant racked up litigation costs totalling €2.4bn in its 2016 full-year accounts, and costs of €5.2bn the year before that.
In a bid to right past wrongs, the bank took out a full-page advert in German newspapers this weekend, to apologies for its misdeeds in the past.