Revisions To Tax Treaty Between Israel And The United Kingdom

Author:Herzog Fox & Neeman
Profession:Herzog Fox & Neeman
 
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On January 17, 2019, Israel and the UK signed a significant Amending Protocol to the 1962 Income Tax Treaty between the two contracting States. The Amending Protocol will enter into force once ratified by both countries (not expected before January 1, 2020).

The revised Treaty includes numerous changes, resulting in a modern Treaty that is in line with the OECD BEPS guidelines and the MLI. The main changes and additions under the revised Treaty are as follows:

Application of the Treaty for New Immigrants and Non-Domiciled Individuals There is a doubt whether Non-Domiciled UK individuals and New Immigrants in Israel can benefit from the reduced withholding rates under the current Treaty. It appears that, in most cases, the revised Treaty will apply to New Immigrants and Non-Domiciled individuals as well. This is one of the most far-reaching amendments in the revised Treaty. This is also a surprising development, as all of Israel's recent Tax Treaties (e.g. The Tax treaty with Canada and the Tax Treaty with Germany) include certain provisions, which can be interpreted to suggest that these Treaties do not apply in the case of New Immigrants.

Accordingly, it is expected, for example, that New Immigrants from the UK will be entitled to exemption on their pension payments. In addition, it is expected that UK Non-Domiciled individuals will be able to benefit from the reduced tax rates on dividends that they receive from Israeli companies.

Residency of Corporations and Trusts Where an entity - namely a company, partnership or trust (rather than an individual) - is resident in both countries, the residency of the entity will be determined according to mutual agreement procedures between the Israeli and the UK tax authorities. The Treaty does not provide for a binding arbitration procedure, and does not force the parties to agree. Therefore in the absence of an agreement between the countries (and until such an agreement is reached) the entity will not be entitled to any relief or exemption under the Treaty. This of course has the potential to create many double taxation situations, and therefore requires careful planning.

This provision constitutes a significant change to the current situation whereby the residency of an entity is determined according to the physical location of the management of the entity.

This new provision is also expected to have significant influence on the taxation of trusts. Under the current Treaty, trusts that are...

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