1. Overview
Double taxation treaties (DTTs) — also known as tax conventions or tax agreements — are bilateral treaties between Israel and other countries that govern how cross-border income is taxed. Their primary purpose is to prevent the same income from being taxed twice: once by Israel and once by the other country.
For foreign nationals with Israeli income, or for Israeli residents with foreign income, DTTs can significantly reduce the overall tax burden by:
- Reducing the withholding tax rate applied to dividends, interest, and royalties paid to non-residents
- Allocating taxing rights over specific income types to one country exclusively
- Providing tie-breaker rules where both countries claim a person as tax resident
- Allowing credit for taxes paid in one country against liability in the other
Israel's treaty network follows the OECD Model Convention in most respects, though individual treaties contain specific variations negotiated with each partner country.
2. How Double Taxation Treaties Work
A DTT divides taxing rights over various types of income between the two contracting states. The standard approach:
- Source state taxation: The country where the income arises (the source) has primary (or shared) taxing rights, subject to a cap on the rate it can charge.
- Residence state taxation: The country where the recipient is tax-resident also has a right to tax, but must give credit for any tax paid to the source state, preventing double taxation.
- Exclusive taxing rights: Some income types are allocated exclusively to one country — e.g., business profits are generally taxed only in the country of the business unless carried on through a permanent establishment in the other country.
Israel's domestic withholding rates (25% on dividends, 15–25% on interest, 25% on royalties) are frequently reduced under treaty provisions. The reduced rate applies when the recipient is resident in a treaty country and properly claims the benefit.
3. Key Treaty Countries and Selected Rates
Israel has DTTs with the following key countries (among many others). The rates shown are indicative — the actual treaty provisions should always be verified for the specific transaction:
| Country | Dividends | Interest | Royalties |
|---|---|---|---|
| United States | 12.5% / 25% | 10% / 17.5% | 15% |
| United Kingdom | 5% / 15% | 5% / 10% | 0% |
| Germany | 5% / 10% | 5% | 5% |
| France | 5% / 15% | 5% / 10% | 10% |
| Canada | 5% / 15% | 10% / 15% | 10% |
| Australia | 5% / 15% | 5% / 10% | 5% |
| Netherlands | 5% / 10% | 10% / 15% | 5% |
| Switzerland | 5% / 15% | 5% | 5% |
| India | 10% | 10% | 10% |
| China | 10% | 7% / 10% | 7% / 10% |
Lower dividend rates typically apply where the recipient holds a qualifying percentage of the company's shares (usually 10–25%). All rates are indicative and subject to change — verify the current treaty text before relying on these figures.
4. Dividends
Under most Israeli DTTs, dividends paid by an Israeli company to a non-resident shareholder in a treaty country are subject to Israeli withholding tax at a reduced rate — typically 5–15% depending on the treaty and the level of shareholding, rather than the domestic 25%.
The lower treaty rate typically applies where the recipient holds a substantial stake in the company (commonly 10–25%+). Portfolio investors (smaller stakes) usually qualify for a somewhat higher rate (typically 15%). The specific thresholds vary by treaty.
5. Interest
Interest paid to non-residents is subject to reduced withholding under most Israeli treaties — typically 5–10% rather than the domestic 15–25%. Some treaties exempt certain categories of interest (e.g., interest paid to the government, central bank, or financial institutions) entirely.
6. Royalties
Royalties from the use of intellectual property (patents, trademarks, copyrights, software) paid to non-residents are subject to domestic withholding at 25%. Treaty rates are typically 5–15%. Some treaties (notably the UK treaty) reduce royalty withholding to zero.
Israel's technology sector makes royalty provisions particularly important — companies receiving royalties from Israeli technology licenses should verify the applicable treaty rate carefully.
7. Capital Gains
Most Israeli DTTs follow the OECD Model in allocating capital gains taxation:
- Real property gains: Israel generally retains exclusive taxing rights over gains from the sale of Israeli real estate, regardless of treaty provisions.
- Share gains: Most treaties allocate taxing rights over gains on company shares to the seller's country of residence — meaning Israeli capital gains tax may not apply to non-residents selling shares of Israeli companies. However, this depends heavily on the specific treaty language and whether a "real property company" exception applies (for companies whose assets consist primarily of Israeli real estate).
8. Residency Tie-Breaker
Where a person qualifies as a tax resident of both Israel and the treaty country under each country's domestic rules, the treaty resolves the conflict through a tie-breaker hierarchy:
- Permanent home — where do you have a permanent place of residence available to you?
- Centre of vital interests — where are your personal and economic relations closer?
- Habitual abode — where do you normally live?
- Nationality
- Mutual agreement between tax authorities (for individuals who cannot be resolved by the above)
The tie-breaker result determines residency for all treaty purposes — including which country has the right to tax worldwide income.
9. How to Claim Treaty Benefits
Treaty benefits are not applied automatically — they must be actively claimed:
- Obtain a tax residency certificate from the tax authorities of your home country confirming that you are a tax resident of that country.
- Submit the certificate to your Israeli payer (the Israeli company paying dividends, interest, or royalties).
- The payer applies to the Israeli Tax Authority for a reduced withholding rate certificate, or applies the treaty rate directly where permitted.
- For capital gains: A pre-clearance or exemption certificate from the Israeli Tax Authority may be required before completing the transaction.
Procedures vary by income type and transaction. Engaging an Israeli tax advisor or lawyer who is familiar with the relevant treaty is strongly recommended.