Article 12 of the Israel U.S. Tax Treaty - Dividends

1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States.

2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed-

(a) 25 percent of the gross amount of the dividend paid; or

(b) When the recipient is a corporation, 12.5 percent of the gross amount of the dividend paid, but only if-

(i) During the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation, and

(ii) Not more than 25 percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50 percent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received).

3. Dividends paid by a corporation of one of the Contracting States to a person other than a resident of the other Contracting State (and in the case of dividends paid by an Israeli corporation, to a person other than a citizen of the United States) shall be exempt from tax by the other Contracting State.

4. Paragraphs (2) and (3) shall not apply if such dividends are treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such case, the provisions of Article 8 (Business Profits) shall apply.

Commentary to Article 12 of the Israel - U.S. Tax Treaty

Paragraph (1) provides that dividends derived from sources within one Contracting State by a resident of the other Contracting State may be taxed by both Contracting States.

Paragraph (2) limits the rate of tax in the Contracting State of source, in general, to a rate not in excess of twenty-five percent of the gross amount of the dividend paid. However, if the dividend recipient is a corporation, two special rules are provided. Under subparagraph (2)(b), where the dividend is paid out of income for a period during which the paying corporation is not entitled to the reduced rate of tax applicable to an approved enterprise under Israel's Encouragement of Capital Investments Law, the rate of tax in the Contracting State of source may not exceed twelve and one-half percent of the gross amount of the dividend paid.

Under subparagraph (2)(c), a maximum rate of 15 percent of the gross dividend is provided for dividends paid for a period during which the paying corporation is entitled to the reduced rates applicable to an approved enterprise under Israel's Encouragement of Capital Investments Law (1959). These special rate limitations only apply if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least ten percent of the outstanding voting stock of the corporation was owned by the recipient corporation, and not more than twenty-five percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, fifty percent or more of the outstanding voting stock of which is owned by the paying corporation at the time such dividends or interest is received). These rate limitations do not affect the taxation of profit of the company which pays the dividends.

Paragraph (3) provides that dividends paid by a corporation of one Contracting State to a person other than a resident of the other Contracting State (and in the case of dividends paid by an Israeli corporation, to a person other than a citizen of the United States) will be exempt from tax by the other Contracting State.

Paragraph (4) provides that the limitations of paragraphs (2) and (3) will not apply if the dividends are treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such case, the provisions of Article 8 (Business Profits) will apply. If the recipient of the dividend is a citizen of the source Contracting State, that Contracting State may tax the recipient without regard to this Article because of the saving clause of paragraph (3) of Article 6 (General Rules of Taxation).

No definition of the term “dividends” is provided. Accordingly, each Contracting State may use the definition under its domestic law, unless the context otherwise requires or the competent authorities agree to a common meaning. See paragraph (2) of Article 2 (General Definitions).


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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.

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