Israel tax treaty

Australia and Israel signed a new tax treaty – the Convention between the government of Australia and the government of the State of Israel for the Elimination of Double Taxation with Respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance.

When it enters into force, it will be the first tax treaty between the 2 nations.

The Assistant Treasurer, the Hon Stuart Robert MP, signed the new tax treaty and its associated Protocol on 28 March 2019 in Canberra.

Main features

Anti‑abuse and prevention of non‑taxation rules

The treaty’s purpose is to eliminate double taxation with respect to taxes on income and capital. It aims to do this without creating opportunities for non‑taxation or reduced taxation. These opportunities can occur through tax evasion or avoidance, including through treaty‑shopping arrangements.

Persons covered

Treaty benefits will be available for income derived by or through fiscally transparent entities or arrangements (such as partnerships and trusts). This applies to the extent that the income is treated as one of the country’s residents’ income under that country’s domestic law.

Taxes covered

The treaty covers income tax, fringe benefits tax and resource rent taxes.

Permanent establishment

The definition of ‘permanent establishment’ includes important integrity provisions. These provisions cover a range of circumstances in which both countries can tax business profits.

Income from immovable property

The definition of ‘immovable property’ will enhance both countries’ ability to tax income derived from their use. This includes mining rights.

Business profits

The ‘relevant business activity’ approach is used to attribute business profits to permanent establishments.

Shipping and air transport

Profits from international shipping and air transport operations will be taxable only in the country of residence of the operator. If the transport is between places in the other country, these profits may also be taxed in that other country.

Transfer pricing adjustments

There will be a 7‑year time limit for making transfer pricing adjustments. To prevent the transfer pricing adjustment resulting in a profit being taxed twice in the hands of 2 associated enterprises, profits of an associated enterprise will be adjusted correspondingly.

Dividends

Dividends may be taxed in the source (of the dividend) country up to the following limits:

• Zero: for dividends derived by:
  • governments (including government investment funds)
  • central banks
  • tax‑exempt pension funds
  • Australian residents carrying out complying superannuation activities on direct holdings of no more than 10 per cent;
• 5 per cent: of the gross amount of the dividend for intercorporate dividends paid to companies that hold 10 per cent or more of the paying company throughout a 365 day period
• 15 per cent: for all other dividends.

In practice, Australia only imposes dividend withholding tax on payments of unfranked dividends.

Interest

Interest may be taxed in the source (of the interest) country up to the following limits:

• Zero: for interest derived by:
  • government bodies (including government investment funds)
  • central banks
• 5 per cent: for interest derived by:
  • recognised pension fund
  • Australian residents carrying out complying superannuation activities
  • unrelated financial institutions
• 10 per cent: for all other interest.

Royalties

The source (of the royalty) country may tax royalties up to a limit of 5 per cent of the gross royalty.

Alienation of property

Comprehensive rules will govern how taxing rights over income, profits or gains from the alienation of different categories of property are allocated between Australia and Israel.

The country where the immovable property is situated may tax income, profits or gains from the disposal of:

• immovable property (such as land)
• shares or
• comparable interests in land‑rich entities.

Pensions

Pensions are generally taxable only in the country of residence of the recipient.

The source (paying) country may also tax the payment if they are lump sum payments from:

• certain pension funds
• retirement benefit schemes
• certain life events (for example, disability or death).

government service pensions will be taxable only in the source country with an exception. If the person is both a resident and a national of the other country, the pension will be taxable only in the residence country.

Professors, teachers and researchers

Remuneration derived by teachers, professors and researchers is exempt in the visited country if they are:

• residents of one country and
• visiting the other country for up to 2 years for the purposes of study, research or teaching.

No exemption is provided if research is not in the public interest and is for private benefit.

Other income

Income not expressly dealt with elsewhere in the treaty may be taxed by both countries.

Limitation on benefits

A rule denies treaty benefits, in certain circumstances, if a principle purpose of a person is to take advantage of the treaty.

Relief from double taxation

The treaty provides rules on how double taxation will be relieved by Australia and Israel.

Non‑discrimination

Rules prevent Australia and Israel from treating each other’s nationals and businesses less favourably for tax purposes, than they would treat their own in similar circumstances.

Mutual agreement procedure

The treaty provides mechanisms for taxpayers to present a case if they believe they are not, or will not be taxed, in accordance with the treaty, subject to certain criteria. It requires Australia and Israel to endeavour to resolve the case by mutual agreement.

Exchange of information

The treaty will provide a legal basis for the exchange of taxpayer information between tax officials in respect of taxes covered by the treaty.

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