The Income and Capital Tax Treaty between Israel and Malta (“the Treaty”) has been ratified in Israel (after its ratification in Malta) and took effect on January 1, 2014.

The Treaty sets the withholding tax rates according to the passive type of income below, subject to the fulfillment of conditions and exclusions that have been prescribed in the relevant sections in the Treaty:

Dividend – the Treaty differentiates between a recipient that is a resident of Israel and one that is a resident of Malta:

A. With respect to a resident of Malta, receiving a dividend from an Israeli company, maximum withholding tax at the rate of 15% will be deducted. If the recipient is a Maltese company, holding at least 10% of the share capital of the company distributing the dividend, no withholding tax will apply.

B. With respect to a resident of Israel receiving a dividend from a Maltese company, the Treaty prescribes withholding tax at a limited rate. We shall point out that according to the Maltese tax law, tax is not withheld at source when distributing a dividend to a foreign resident.

Interest – the Treaty prescribes withholding tax in the source country at a maximum rate of 5%. We shall point out that according to the Maltese tax law, tax is not withheld when paying interest to a foreign resident.

Royalties – the Treaty grants an exclusive taxation right to the country of residency. We shall point out that in this case too, the Maltese tax law grants a full exemption from withholding tax.

The Treaty includes an extensive clause for the exchange of information between the two tax authorities and a “limitation of benefits” clause for prevention of abuse.

In addition, the term “person” also includes a trust. In the case of a trust being classified as a resident of both countries, the competent authorities will try to agreed on its residency by mutual agreement; for this purpose, major criteria for determining the place of residency of a trust for a certain period are brought up, such as the place of residency of the trustee, the settlor or the beneficiaries, the place of the assets of the trust or the law regulating the operation of the trust. In the absence of agreement, as a rule, the provisions of the Treaty will not apply to the trust.