Israel double tax treaties and anti-tax avoidance rules

Dr. Avi Nov, Adv.

September 2011

According to Section 196 of the Israeli Income Tax Ordinance [New Version], 1961 (the “Ordinance”), a double tax treaty, which has come into force by virtue of an Order of the Israeli Minister of Finance, will be valid notwithstanding any legislation. See: Israel Tax Treaties.

Treaty override

Are tax treaties overridden by domestic law? First, we need to understand the meaning of Treaty Override. The Organization for Economic Cooperation and Development (OECD) defines Treaty Override as follows: “The term Treaty Override refers to a situation where the domestic legislation of a State overrules provisions of either a single treaty or all treaties hitherto having had effect in that state.” 

The OECD Model Tax Convention takes a positive approach towards the application of domestic anti-avoidance rules in tax treaties. In commentaries 9.2-9.6 on Article 1 of the 2003 OECD Model Tax Convention, the OECD states that as "a general rule, there will be no conflict between such rules and the provisions of tax conventions".

The Israeli tax authority position

The Israeli tax authority position is that anti-avoidance provisions in domestic tax legislation may override the provisions of a double tax treaty, and hence, tax breaks under a double tax treaty may be denied by applying domestic anti-avoidance provision.

The District Court of Tel Aviv determined that the relevant tax treaty provisions should be read in light of the local anti-avoidance rules.

However, I hold a different view from the Israeli tax authority and the District Court of Tel Aviv. According to Articles 26 & 31 of the Vienna Convention a Double Tax Treaty should be implemented in good faith. Article 27 provides, further, that a Government may not invoke its internal law as justification for its failure to perform a treaty. Therefore, in my view Israel cannot override a 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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