Deduction of Tax at Source from Payments to Foreign Residents 
Dr. Avi Nov, Adv. 
April 2009 

Section 170 of the Israeli Tax Ordinance (New Version), 5721-1961 (hereinafter: "the Ordinance”) titled "Duty of a person making payment to a non- resident”, provides the duty to deduct tax at source (withholding tax) from payments to a foreign resident:
"(a) If a person pays to a person who is not resident in Israel, direct or through another, any income chargeable with tax under this Ordinance, other than income from which tax has been deducted under section 161 or 164, shall deduct therefrom, at the time of payment, tax at the rate of 25 agorot per shekel if the recipient of the payment is an individual or tax at the rate imposed by sections 126 and 127 if the recipient is a body of persons, or tax at such other rate as the Assessing Officer may, in either case, prescribe by notice in writing; but the Assessing Officer may permit the income to be paid without deduction of tax if it has been proved to his satisfaction that the tax has already been paid or that it will be paid in some other manner. for this purpose: "person who pays" includes a financial institution, as defined in the Value Added Tax Law 5736-1975, through which the income is paid, unless the financial institution holds certification from the Assessing Officer, exempting it from the obligation to deduct at the source.

(b) The provisions of subsection (a) shall not apply to a person who pays income said in subsection (a) and who, under sections 108 to 115, is himself responsible for paying tax on it.

(c) Notwithstanding the provisions of subsection (a), if a real estate investment fund, as defined in section 64A2, transmits chargeable income of shareholders, within its meaning in section 64A4, to a person not resident in Israel, then it shall deduct from it tax at the tax rate that obligates it under the said section". 

In other words, section 170 of the Israeli Tax Ordinance provides that whosoever pays to a person not resident in Israel chargeable income not being income from which tax has been deducted at source according to sections 161-164 of the Ordinance, must deduct tax from the income (withholding tax).

We thus see that in order for the duty to deduct tax at source to apply to a payment to a non-resident, according to section 170 of the Israeli Tax Ordinance, all of the following conditions must be fulfilled:

· Payment is actually made;

· The payment that is made is chargeable income in Israel;

· The payment is payable to a non-resident;

· No tax at source has been deducted from the income payable, according to sections 161-164 of the Israeli Tax Ordinance;

· It has not been proved to the satisfaction of the Assessing Officer that the tax has already been paid or it will be paid in some other manner.  

Tax Treaties
The regular withholding tax rate on payments to foreign residents is 25%. In the case of payment to a foreign resident from a treaty country, a reduced withholding tax may apply (between 0% to 15%). 
See also: Withholding Tax Rates in Israel's Tax Treaties: withholding tax rates on payments of dividends, interest and royalties. 
Bank transfer
It should be noted that Israeli bank transfer of payment to a foreign resident or foreign company may require a Withholding Tax Authorization. The reduced rate may be obtained following the procedure involving the filing of a special Form: Declaration with respect to payment to a Foreign Resident and a Request to a Reduced Withholding Tax Rate
Israeli Tax Authority
The Israeli Tax Authority may question the Israeli payer and may ask clarifications as for the classification of payment, the beneficial ownership of the recipient and the terms of the international transaction. 
See also: 
Israeli Withholding Taxes on Dividends to Foreign Residents
Withholding Tax on Royalty: Israel US Tax Treaty
Dr. Avi Nov Law Offices, Israeli & international tax law 

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This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion.
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