1. In this Convention:

(a) The term "resident of Israel" means:

(i) An Israeli corporation, and

(ii) Any other person (except a corporation or any entity treated under Israeli law as a corporation) resident in Israel for purposes of Israeli tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to Israeli tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries.

(b) The, term "resident of the United States" means:

(i) A United States corporation, and

(ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United States tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries.

2. Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States:

(a) He shall he deemed to be a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests). In the case of a person who is an "oleh" (as defined in section 9(16) of the Israeli Income Tax Ordinance), his center of vital interests shall be deemed to be in Israel.

(b) If the Contracting State in which he has his center of vital interests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode;

(c) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) If he is a citizen of both Contracting States or of neither Contracting State, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. A corporation which is both a United States corporation within the meaning of paragraph (1) (f) (i) of Article 2 (General Definitions) and an Israeli corporation within the meaning of paragraph (1) (f)

(ii) of such Article 2 shall be considered to be outside the scope of this Convention except for purposes of Article 27 (Nondiscrimination) and Article 29 (Exchange of Information).

Commentary to Article 3 of the Israel - U.S. Tax Treaty

Definitions)) or any other person (except a corporation or any entity treated under Israeli law as a corporation) resident in Israel for purposes of Israeli tax.

Similarly, resident of the United States means a United States corporation (as defined in Article 2 (General Definitions)) and any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax.

Thus, a resident of the United States includes a resident alien individual, an alien present in the United States who elects to be treated as a resident under Code section 6013(g) or (h), and a resident citizen, but under no circumstances, a foreign corporation. A citizen of the United States or Israel is not automatically a resident of the United States or Israel for purposes

of this Convention. Whether a citizen of the United States is a resident of the United States for this purpose is to be determined by the principles of the Treasury regulations issued under Code section 871.

The Israel - U.S. Tax Treaty provides that a partnership, estate, or trust is a resident of a Contracting State only to the extent that the income derived by such person is subject to tax in such Contracting State as the income of a resident. For example, under United States law, a partnership is never, and an estate or trust is often not, taxed as such. Under the Israel - U.S. Tax Treaty, in the case of the United States, income received by a partnership, estate, or trust will not qualify for the benefits of the Israel - U.S. Tax Treaty unless such income is subject to tax in the United States as the income of a resident.

Thus, in effect, the treatment of income received by a partnership will be determined by the residence and taxation of its partners with respect to that income. To the extent the partners are subject to United States tax as residents of the United States, the partnership will be treated as a resident of the United States. Similarly, the treatment of income received by a trust or estate will be determined by the residence and taxation of the person subject to tax on such income, which may be the grantor, the beneficiaries or the trust or estate itself, as the case may be.

Under paragraph (2), an individual who is a resident of both Contracting States under paragraph (1) will be deemed to be a resident of the Contracting State in which he has his permanent home, his center of vital interests (closest personal and economic relations), a habitual abode, or his citizenship, in the order listed. In the case of an individual who is an “oleh” under section 9(16) of the Israeli Income Tax Ordinance, his center of vital interests will be deemed to be in Israel. If the issue is not settled by these tests, the competent authorities will decide by mutual agreement the one Contracting State of which he will be considered to be a resident.

Paragraph (3) provides that a corporation which qualifies both as a resident of the United States and as a resident of Israel under Article 2 (General Definitions) will be considered to be outside the scope of the Israel - U.S. Tax Treaty, except for purposes of paragraph (1) of Article 4 (Source of Income), Article 27 (Nondiscrimination), Article 29 (Exchange of Information), and Article 31 (Entry into Force).

The rule is necessary because a corporation incorporated in the United States may be deemed under the Israel - U.S. Tax Treaty to be a resident of Israel if it is taxed by Israel as a body of persons resident in Israel because it is managed and controlled in Israel. As a resident of Israel, the United States would be obliged, absent this provision, to extend to that United States corporation the benefits provided by the Israel - U.S. Tax Treaty. Since it is contrary to United States tax

policy to restrict United States taxation of United States corporations by tax conventions, this paragraph removes such corporations from the scope of the substantive taxing provisions of the Israel - U.S. Tax Treaty.

The exceptions to the exclusion of dual resident corporations are necessary to make the Israel - U.S. Tax Treaty operate as intended. Dual resident corporations are given the benefits of the nondiscrimination provisions, and the competent authorities are given the authority to exchange information with respect to such corporations. The exception for Article 4(1) permits the United

States to tax dividends paid to an Israeli resident by a corporation which is incorporated in the United States and is managed and controlled in Israel.

Without this exception, the United States could not tax such dividends because of paragraph (1) of Article 6 (General Rules of Taxation) which states that a resident of one Contracting State may be taxed by the other only on income from sources in the other. The exception for Article 31 (Entry into Force) assures that the Israel - U.S. Tax Treaty will enter into force for dual resident corporations with respect to those provisions for which they are covered. Situations of dual corporate residence should be infrequent.

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The above is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion. It is important to consult with an Israeli tax lawyer on the practical application of the Israel US tax treaty.