Tax Alert No. 8 - 

International taxation  27.7.2010

New Tax Treaty with Georgia - 27.7.2010

The treaty between Israel and Georgia was signed in May 12, 2010. Like other new treaties Israel has signed lately (see tax alert No 7), this treaty sets out rules that enables Israel’s Competing abilities on an international level, as well as to encourage mutual investments. The treaty should enter into force on January 1st, 2011.

Important Principles in the New Treaties:

Individual Residency Tie Breakers:

When a double residency issue arises between Israel and Georgia, the residency should be determined according to the tie breakers exams as set in the OECD model. The exams are set in a hierarchy order as follows: The first exam set to determine one’s residency is the “permanent residency” exam. The second exam is the “Center of vital interests” (similar in its essence to the “center of life” exam set in the Israeli internal law). The third exam is the place of “habitual abode”. The forth exam is determined according to the individual’s nationality.

Further, if the residency status cannot be determined the two countries will turn to mutual agreement procedures.

Corporate Residency Ties Breaker:

In an event of a dual residency of a corporate, the matter would be resolved by implementing “the place of effective management” exam (similar to the control and management exam), as excepted in the OECD model.

Permanent establishment

The treaty provisions determine that a building site, construction or installation project constitutes a permanent establishment only if it lasts more than nine months.


According to the new treaty there will be no withholding tax (“WHT“) on dividend distributions in case of a substantial holding of 10% or more by the parent company, and 5% in all other cases.


According to the new treaty there will be no WHT on interest paid to one of the contracting country by the other country (state bonds), pension plans etc’. In other cases the rate will be 5% (like when paying interest between companies in these two countries)


As in Article 12 of the OECD Model, no WHT will apply. We would mention at this point that according to Georgia internal law, royalties are subject to 10% tax rate.

It should be noted that the treaty provisions relating to dividend, interest and royalties refer to the “Beneficial Owner”.

Indirect credit

According to the treaty, when dividend are being distributed between companies, and one has 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. This is similar to the provisions set in the new treaties Israel has signed with Estonia and Vietnam. We remind that 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 it seems, the condition in the treaty is mitigating with this rule.

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