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U.S.-Israel Income Tax Treaty

 

For Discussion Only

EFFECTIVE JANUARY 1, 1995

An Income Tax Treaty is a bilateral agreement between two Contracting States (in this case the U.S. and Israel), whereby each State commits to modify its own tax laws in order to achieve reciprocal benefits. The primary objective of a tax treaty is the elimination or reduction of the impact of double taxation (generally, via a foreign tax credit or reduced withholding taxes). Contrary to popular belief, an income tax treaty usually benefits the residents and citizens of the Contracting States.

Determination of Residency - Article 3: In a situation where there is dual residency in both the U.S. and Israel, a tiebreaker formula applies as follows: Contracting State in which a permanent home is maintained; If a permanent home exists in both Contracting States or in neither Contracting State, the Contracting State in which the personal and economic interests are closer; Habitual abode; If an habitual abode exists in both Contracting States or in neither Contracting State, the Contracting State in which the individual is a citizen; If the individual is a citizen in both Contracting States or in neither Contracting State, the Contracting State shall settle the question of residency by mutual agreement.

Social Security Benefits - Article 21: Under the Treaty, U.S. taxpayers are excluded from paying Israeli and U.S. income tax on U.S. Social Security payments. This provision is subject to change at any time by the U.S. government and supersedes the new Israeli Tax Reform Regulations. In addition, it is generally recommended for convenience purposes, that U.S. citizens who are living in Israel, first deposit their U.S. Social Security checks into a U.S. bank or investment brokerage account and then transfer funds to Israel at a later date, as needed.

General Withholding Tax Provisions - Article 12 and 13: The withholding tax rates for interest (10% - 17.5%) and dividends (12.5% - 25%) pertain to the Contracting State in which the payor is a resident. In addition, certain income may be taxed by the Contracting State in which the recipient resides. However, foreign tax credits may generally offset the impact of double taxation.

Capital Gains - Article 15: Capital Gains are generally taxable by the Contracting State of residence of the person realizing the gain. However, gains on real estate transactions may also be taxed in the Contracting State in which the real estate is situated. As noted, foreign tax credits may generally offset the potential of any double income taxation.

Exchange of Information - Article 29: The Treaty indicates, in general, that the Contracting States shall exchange information as is pertinent to carrying out the provisions of the Treaty or in preventing fraud or fiscal evasion. Any information so exchanged shall be considered secret, and shall not be disclosed to any persons or authorities other than those concerned with the assessment, collection or administration of the taxes which are subject of the Treaty.