Australia and Israel Tax Treaty
Australia has signed its first tax Treaty with Israel, establishing a range of measures that Australian tax residents should be aware of if they have any cross-border interests in Israel.
Australia and Israel have long had an established economic relationship and as of March 2019, a new tax Treaty is in place to be ratified by both countries.
The Treaty is intended to promote opportunity for bilateral trade and investment according to Treasurer Josh Frydenberg, however its chief purpose is to provide some certainty to Australian individuals and companies with cross-border interests.
While the Treaty aims to eliminate double taxation on income and reduce the opportunity for tax avoidance, it will also provide greater certainty for people working in either country, enable tax authorities to resolve conflicts and inconsistencies between the two countries’ tax systems, establish data sharing, and resolve issues around tax residency.
It has been a Treaty that has been a long time coming as the two countries announced 2015 that it was underway to harmonise tax arrangements that open up the opportunities in what is already a warm and engaged relationship between the two countries.
So, what does the Australia-Israel tax Treaty mean for Australian taxpayers?
What is included in the tax Treaty?
Australian and Israeli investors with interests in either country need to be aware of how the Treaty will impacts on:
- Residency rules for individuals, corporations, and trusts
- Dividend Payments
There are several core features that taxpayers need to be aware of, which we outline below.
Business and Investment Structures
- Understanding the impact of ‘permanent establishment’ and how profits will be taxed on the basis of ‘relevant business activity’ and how integrity provisions will be applied.
- Reduced withholding rates for dividends and interest, which is particularly relevant to the tech sector in terms of licence fees for software, patents, and intellectual property (Israel is a major player in the tech sector)
- Reduced withholding tax rates for dividends and interest (0%, 5%, and 15% depending on the circumstances) to foster investment between Israel and Australia
- When the recipient of a dividend is a company, the withholding rate will be limited to 5% provided that the shareholding company holds at least 10% of the rights in the company distributing the dividend; otherwise the withholding rate will be limited to 15%
- Reduced withholding tax for royalties, which may be taxed in the source country up to 5% of the gross royalty.
- Australian investors in Israeli Real Estate Investment Trusts will receive a substantial benefit under the Treaty, in that the Israeli tax will be limited to 15%, rather than 25% or even, in some circumstances, up to 50% Israeli tax in the absence of the Treaty benefit.
- Pension funds and some government investors with holdings of less than 10% of a company will be exempt under the Treaty.
- A 7-year time limit will generally apply for making transfer pricing adjustments.
- Residency status as a taxpayer is impacted by the double-taxation aspects of the Treaty and any investments, family assets, or foreign income will be treated.
- The Treaty limits the withholding tax rate on interest to 10%, and to 5% when the interest is paid to certain financial institutions and pension funds.
- Australian investors in Israeli companies should be aware of how the Treaty impacts dividends, as Australia does not impose withholding tax on fully franked dividends while Israel imposes a 30% withholding tax in most cases.
A note about trusts
One area isn’t entirely clear centres around how trusts will be affected by the Treaty and for that reason, it is highly recommended that both business and personal investment interests that are managed within trust structures seek professional guidance.
Enhanced data sharing
The Government has established numerous treaties with other tax jurisdictions that enhance data sharing and exchange of information about tax payer interests. The Australia-Israel Tax Treaty will provide a legal basis for such exchanges that concern the taxes that are covered by the Treaty.
A framework will also be established regarding the sharing of sensitive tax information between the two jurisdictions, with provisions that will aim to prevent discrimination of taxpayers in either country.
Speak to a specialist advisor
Cross-border taxation is a complex area of law and tax and while the Treaty is yet to be ratified, there are many facets that taxpayers should be proactive on understanding its potential impacts.
Please contact the Bates Cosgrave International Tax team on 02 9957 4033 for more information or to arrange a review of your current situation.
Last updated July 2019. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.