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62 The US-Israel Legal Review 2019
ISRAEL: TAX
are prevented from exercising their shares which
were transferred within the restructuring), and
the allowance of issuing new rights during the said
required period, under certain conditions.
US-ISRAEL TAX TREATY AND MLI
Tax rates under the US-Israel treaty are relatively
high compare to new tax treaties to which Israel is
party to. It is worthwhile mentioning that there are
preliminary negotiations for a new treaty.
WHT Rates under the US-Israel Tax Treaty:
In
general, under the domestic law in Israel the
following withholdings rates are applicable: (i)
a 25% withholding tax is imposed on dividends
paid by an Israeli resident company to a non-
resident (higher rate of 30% applies when the
recipient holds an interest of at least 10% in the
company); (ii) a 23% withholding tax is imposed
on interest paid by an Israeli resident corporation
to a foreign corporation, and a lower rate of 15%
may be applicable where the interest is paid to a
foreign individual and does not include linkage
differentials; (iii) a 23%withholding tax is imposed
on royalties paid to a foreign corporation, and a 25%
withholding tax is imposed on royalties where the
recipient is an individual; (iv) the withholding tax
rate with respect to capital gain is generally 25%.
Notwithstanding,theabovementionedwithholding
tax rates may be reduced according to the US-Israel
tax treaty. As such, if certain conditions are met,
the distribution of dividends by an Israeli resident
company to a US resident company may be subject
to a reduced withholding tax rate of 12.5%; interest
and royalty payments made to a US resident may
be subject to withholding tax at reduced rates of
17.5% and 10% (respectively). Needless to say, the
aforementioned tax reliefs are applicable also in the
opposite direction (i.e., while payments are being
made from a US resident company to an Israeli
resident).
Permanent Establishment of a US resident Corporation
in Israel:
In principle, the tax treaties provide that
a permanent establishment may be created by
an entity mainly by one of the following: (i) the
company has a fixed place of business throughwhich
it carries on its business, provided that the activity
is not of a preparatory or auxiliary character; or (ii)
the company conducts its activity using a dependent
agent that habitually concludes contracts, or
habitually plays a principal role leading to the
conclusion of contracts that are routinely concluded
without material modification by the company.
In this respect, the possibility of double taxation
may be avoided, or at least mitigated, through the
provisions of the US-Israel Tax Treaty.
The MLI Provisions:
The Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting (
“MLI”
) had
developed over the recent years, in order to modify
tax treaties between two or more parties. Among
other issues, the MLI’s measures and amendments
give the competent authorities the responsibility
to determine the taxpayer residency, where there
is dual residency, through a mutual agreement.
Moreover, the MLI modifies the tax treaty’s
provisions relating to permanent establishments.
In this respect please note that Israel has started to
implement theMLI’smeasures within its tax treaties
as of January 1, 2019. However, the US-Israel Tax
Treaty was not affected by the MLI’s measures since
the US did not sign the MLI.
n
ABOUT THE AUTHOR
DanielPaserman
,ADV(CPA)TEP,headsGornitzky’s
Tax practice. He is involved in intricate corporate
tax planning - both domestic and cross-border. His
broad experience includes negotiations with the
Israel Tax Authority regarding tax regulatory issues,
seeking and obtaining tax rulings for both Israeli
and global companies operating in Israel, as well as
handling wide-scope tax assessment cases and tax
litigation for both global and Israeli corporations and
private entities operating in Israel. He has extensive
experience in worldwide M&A transactions and has
represented some of the leading Israeli corporations
in multi-million dollar transactions, both in Israel
and abroad.
In the field of private wealth, Daniel represents
client in matters concerning taxation of trusts
and estates and provides tax planning guidance
for high net worth individuals. He also serves
as the secretary of Society of Trust and Estate
Practitioners Israel (STEP) and is a lecturer on
Corporate & International Taxation at Tel Aviv
University.