These days, the ordainments bringing the new treaties into force, as of January 1st, 2010, were signed. The new treaties are designed to improve the competing ability of many Israeli companies, operating in these countries over the past years, in areas such as technology and communications and to encourage mutual investments.

Important Principles in the New Treaties:

Individual Residency Ties Breaker:

In the treaties with Vietnam and Taiwan, the first test to determine the individual residency, in case he is considered as resident in both countries, is the “Center of vital interests”, instead of the “permanent residency”, as usually accepted as the first test in the OECD model. Since this exam very widespread and can’t provide the certainty needed to determine the individual’s residency, it may result in turning to mutual agreement procedures between the two countries in an early stage, which may bring the residency issue to be “hanging on the fence” for a while.

Corporate Residency Ties Breaker:

In the treaty with Estonia, in an event of a dual resident of a corporate, the authorized authorities of Israel and Estonia will try to settle this matter in mutual agreement procedures and not by the “effective management” exam as usually accepted in the OECD model. The treaty protocol indicated that in such an event, factors like “the actual place of management”, “the place of incorporation” and other relevant factors will be taken into account. In addition, if and when Estonia adopts the “effective management” criteria as its residency exam, the treaty will naturally adopt it as well. Unfortunately, as long as there is unclarity in this matter, there might be situations in which the corporation will have to pay double tax.

Indirect Credit in Mitigating Conditions

The new treaties with Estonia and Vietnam determine that when dividend are being distributed between companies, and one has a hold of 25% or more in the distributing company’s share capital, the indirect credit will take into account the corporate tax paid for the income in which the dividend was distributed from. Hence, it is sufficient for an Israeli company to hold 25% of the distributing company’s share capital in order to receive the indirect credit. According to the Israeli tax authority’s interpretation, in the absence of a special provision in the treaty the 25% holding should be in each and every “means of control”: the right for profit, the right to appoint a director or a CEO, voting rights etc’. As we can see, the condition in the treaty is mitigating with this rule.

Most Favorable Nation Rules (MNF).

In the new treaty with Taiwan when it comes to dividends and royalties the maximum tax rates are 10% in the country of origin, when in the treaty protocol a MFN rule is applied, accordingly if Taiwan signs a treaty with an OECD country, where the tax rate on dividends and\or royalties is lower than 10%, the new rate will automatically be applied in the treaty between Israel and Taiwan. We will keep you informed.

Trusts

In the new treaties there is no reference to the trust subject, which is very unfortunate, as it leaves the uncertainty in regards to “transparent bodies”. As we know, In the new treaty between Israel and the U.K. this subject was specifically addressed.

Technical Services

In the treaty with Vietnam there is a reference to management and consulting services, when the maximum tax rate is 7.5% in the country of origin. Accordingly, management and consulting services from an Israeli resident paid by a Vietnamese resident will be subject to tax in Vietnam, even if the service was given in Israel. It should be noted that the tax paid in Vietnam will be creditable in Israel.