Recently, the ITA has been “updating” old income tax treaties which were concluded by Israel in the sixties. The new treaties are based on the OECD Model Convention on Income and Capital. A new tax treaty with Germany was signed (with initials) and similarly the new tax treaty with the UK (April 2, 2009).
The full text of the treaties shall not be published before they are formally and fully signed and become effective. However, the Israeli Foreign ministry has issued a briefing regarding the UK – Israel treaty. This includes the following information:
Dividends – No withholding tax (“WHT“) on dividend distributions in case of a minimal (substantial) holding of 10% by the parent company and 5% in all other cases (instead of the 15% WHT); No WHT will be imposed if the recipient is a pension fund. A new provision in Israeli tax treaties was firstly introduced in relation to REIT: a maximal WHT rate of 15% on payments from REIT’s if the recipient holds less then 10% interest in the distributing REIT.
Interest – the former 15% WHT rate is replaced with a maximal rate of 5% WHT. In addition, the taxpayer may elect to be taxes on the net interest income as business income. A WHT exemption is introduced with respect to certain interest transactions (e.g. payments to pension funds, interest on bonds).
Royalties – as in the OECD Model convention, no WHT will apply.
Capital gains – as a general rule, gains from the sale of shares would be subject to tax only in the residence state of the seller excluding: (i) shares in a real – estate company, where the value of the shares is mostly from real property and (ii) shares in a traded company, which is not classified as a REIT).
Trusts – the new treaty contains other changes, however, it is worth mentioning that a new innovative provision related to the taxation of trusts was introduced. Trusts are included in the definition of “persons” under the new treaty and a special provision requires the contracting states to settle dual residency disputes in relation to trusts, while examining the residency of all the parties (settlor, beneficiaries and trustee).
