Several months ago, a new treaty for the avoidance of double taxation, was initialed by and between Israel and Austria. The new treaty sets lower withholding tax rates compared to the current treaty in force. The new treaty will be in force following the formal signing and ratification procedures by both states.

Dividends

According to the new treaty, there will be no withholding tax (“WHT“) from dividends paid by a company, resident of a contracting state, to a company that is a substantial share holder (holding 10% or more), and a resident of the other state; in all other cases, the WHT rate will not exceed 10%. We may note that the current treaty sets a WHT rate of 25% from dividends. For that reason, Austrian companies were used by Israeli residents as a buffer for avoiding possible taxation of “deemed dividends” according to Israeli CFC legislation. In light of the new tax rates aforementioned, passive income derived by an Austrian company (taxed at a low rate) may be exposed to Israeli taxation imposed on an Israeli controlling shareholder.

Interest

According to the new treaty there will be a WHT rate of only 5% on interest paid to a resident of the contracting state by a resident of the other. This compared to 15% rate that is imposed by the current treaty. It should be noted that according to the law in Austria there is no withholding tax rate on interest payments.

Royalties

The new treaty follows the OECD model by setting an exemption from WHT by the source state on royalties paid to a resident of the other contracting state. The current treaty sets a WHT of 10% on royalty income, excluding royalties from Movies played in theaters or on T.V. the latter are exempt from tax. We may note that other tax treaties recently signed by Israel also follow that rule by allocating the taxation right of royalties to the state of residence.

Trusts

We expect that the new treaty will refer to the taxation of trust, in a similar manner to what was determined in other treaties Israel has signed lately (example: U.K, Denmark and Belgium). This, in order to avoid double taxation situations arising from a possible dual tax residence of a trust.  This has great importance, especially in light of the recent Israeli tax legislation regarding trusts.