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The United States — Israel Tax Convention
Published online by Cambridge University Press: 12 February 2016
Extract
The Convention between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income has reached its final stages of ratification. This is the third attempt of the two governments to reach agreement on tax questions of mutual interest. The United States Senate failed to ratify the first proposed convention because of the inclusion of a “tax sparing” clause. Although the second attempt would have granted U.S. taxpayers an investment credit for investments in Israel, in lieu of the tax sparing, this substitute was still not considered sufficiently neutral to accord it ratification.
The present attempt makes use of the foreign tax credit as its primary means of alleviating double taxation.
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- Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 1977
References
1 Article 26.
2 Article 1(1) (a).
3 Article 1(1) (b) (I)–(V).
4 The Convention refers to Israeli tax law which in turn defines in sec. 1 of the Israeli Income Tax Ordinance, a corporation to be resident where its business is controlled and managed. The Israeli definition is based on English case law, see De Beers Consolidated Mines, Ltd. v. Howe [1906] A.C. 455.
5 Article 3(2) (a). Today the definition is in sec. 35 and not 9(16), of the Ordinance as stated in the Convention.
6 Article 4.
7 The Israeli Income Tax Ordinance applies to income “accruing in, derived from or received in Israel”. While the terminology employed emphasizes the link of the income to Israel other provisions of the Ordinance deem certain income to accrue in or be derived from Israel. These provisions stress the personal link of the taxpayer to Israel. Thus, residence brings about in certain cases taxation of worldwide income, with such income being deemed to be derived from Israel (see Rafael, , “Tax Problems of American Investments in Israel” (1971) 6 Is.L.R. 321–359, 517–568, at 342–350Google Scholar). The Israeli source rules when applied to non-residents may be stated as follows: business income will be located at the place of contract or the performance of services; employment income will be regarded as derived at the place of the performance of services; interest, rents and royalties will be deemed of an Israeli source if paid by an Israeli resident, except if borne by a permanent establishment outside of Israel on account of indebtedness on property for its own use, and except if the payment was made outside of Israel and was not incurred for the production of income; capital gains are regarded as derived in Israel if the property is situated in Israel or the property is situated outside of Israel but confers directly or indirectly a right to property situated in Israel (e.g., shares in an Israeli corporation with assets in Israel). Other items of income are not assigned a geographical source, however, income of residents although derived outside of Israel, is deemed, in some instances, as derived in Israel (e.g., capital gains, business income, employment income, world-wide income of resident companies).
8 Article 6.
9 Article 8.
10 Article 6(5). The convention does not specify whether the mere such holding of a 25% interest at any time during any taxable year will bring about the loss of the exemption. By contrast, the 10% requirement concerning the personal holding company tax is applicable throughout the entire taxable year under consideration.
11 Article 25. Where the corporation under consideration is an Israeli corporation, within the 25% non-resident shareholders are included U.S. citizens, even though they might be permanent residents of Israel. It would seem that this provision might do away with tax benefits which Israel might wish to grant to multinational corporations, resident in Israel and held by non-residents of various countries.
12 Article 26.
13 Article 10. The article is not very precise in its wording and seems to refer mainly to an Israeli corporation receiving a grant, said corporation being held by a United States resident. Query why such Israeli corporation is taxed on the grant and why the reference to the Israeli corporation in the first place. Paragraph (1) acts to exclude from gross income grants in aid received by individuals, but does not deal with the basis of the assets to be purchased by the resident with the grant. Moreover, the convention lacks provisions to cover grants received by partnerships.
14 In some cases, such grants are taxed at a maximum rate of 50%, as provided for in sec. 3(b) (3) of the Israeli Income Tax Ordinance.
15 The disallowance of these expenditures is relevant for purposes of the special deduction allowed under sec. 27 of the Israeli Income Tax Ordinance upon the exchange of equipment and machinery used in trade or business.
16 Income Tax Order (Exemption from Tax on Capital Gains on the Sale of Shares) 1965, K.T. no. 1746 p. 2378.
17 Income Tax Ordinance, sec. 161(a) (2).
18 Defence Loan (Approved Enterprises) (1974) S.H. no. 732, p. 67 amended S.H. no. 773, p. 165. The loan carries 6% tax free interest per annum and the principal of the loan is linked to the cost-of-living index.
19 S.H. no. 806, p. 158.
20 Law for the Encouragement of Capital Investments, (Amendment No. 14, 1976) S.H. no. 827, p. 294.
21 See supra n. 7.
22 Sec. 53 of the Law provides: “Where any company the business and management of which are controlled from outside Israel receives in Israel any income derived from, or accrued outside Israel, the Minister of Finance may, on its application, direct that it pay tax at a rate not exceeding 15% of such income or, in special cases, that it be exempt from tax”.
23 Income Tax Order (Relief from Tax on Foreign Income of Residents), 1963, K.T. no. 1504, p. 151.
24 Income Tax Order (Relief from Double Taxation), 1963, K.T. no. 1504, p. 152. Relief under this order is conditioned upon the taxpayer's not being entitled to relief under a double taxation treaty. This condition is stated rather broadly. Hence, the existence of the treaty is not sufficient to deny relief; such relief will be denied only where the treaty specifically provides other exclusive relief for the individual taxpayer under consideration.
25 See five reports of U.N. Tax Treaties Between Developed and Developing Countries (U.N. publications: E/4614, ST/ECA/110; E/4936, ST/ECA/137; ST/ECA/166; ST/ECA/188; ST/ECA/18).