Article 15 of the Israel U.S. Tax Treaty - Capital Gains

1. A resident of one of the Contracting States shall be exempt from tax by the other Contracting State on gains from the sale, exchange, or other disposition of capital assets unless-

(a) The gain is from the sale, exchange or other disposition of property described in Article 7 (Income from Real Property) situated within the other Contracting State,

(b) The gain is from the sale, exchange or other disposition of property described in paragraph (2) of Article 14 (Royalties),

(c) The gain is treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the resident has in such other Contracting State,

(d) The resident, being an individual, is present in the other Contracting State for a period or periods aggregating 183 days or more during the taxable year, or

(e) The gain is derived by a resident of the United States from the sale, exchange, or other disposition of stock in an Israeli corporation, but only if-

(i) The resident of the United States owns either actually or constructively within the 12-month period preceding such sale, exchange, or other disposition, stock possessing more than 50 percent of the voting power of the Israeli corporation, and

(ii) More than 50 percent of the fair market value of the Israeli corporation's gross assets used in its trade or business are physically located in Israel on the last day of each of the 3 taxable years preceding the sale, exchange, or other disposition (or, if the corporation has been in existence for less than 3 years, on the last day of each preceding taxable year of the corporation).

2. In the case of gains described in paragraph (1) (a), the provisions of Article 7 (Income from Real Property) shall apply. In the case of gains described in paragraph (1) (b), the provisions of Article 14 (Royalties) shall apply. In the case of gains described in paragraph (1) (c), the provisions of Article 8 (Business Profits) shall apply.


Commentary to Article 15 of the Israel - U.S. Tax Treaty

Under paragraph (1), a resident of one Contracting State will be exempt from tax by the other Contracting State on gains from the sale, exchange or other disposition of capital assets. However, the exemption does not apply if (a) the gain is from the sale, exchange or other disposition of property described in Article 7 (Income from Real Property) situated within the other Contracting State;

(b) the gain is from the sale, exchange or other disposition of property described in paragraph (2)(c) of Article 14 (Royalties);

(c) the gain is treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to permanent establishment which the resident has in the other Contracting State; or

(d) the resident is an individual who is present in the other Contracting State for a period or periods aggregating 183 days or more during the taxable year.

For purposes of this Article and the other physical presence tests contained in the Convention with regard to an individual, the term "day" means a calendar day during any portion of which the individual is physically present in the relevant Contracting State.

Paragraph (1) contains an additional exception to the capital gains exemption which is not in previous United States conventions. Under Israeli tax law, gains from the sale of stock in an Israeli corporation are subject to tax by Israel regardless of the residence of the alienator or place where the sale occurs. The additional exception in paragraph (1) is intended to limit this rule of Israeli taxation.

This exception will apply (i.e., Israel will preserve its right to tax) only if the gain is derived from the sale, exchange or other disposition of stock in an Israeli corporation by a resident of the United states who owns either actually or constructively within the twelve month period preceding the sale, exchange, or other disposition, stock possessing more than fifty percent of the voting power of the Israeli corporation, and more than fifty percent of the fair market value of the Israeli corporation's gross assets used in its trade or business are physically located in Israel on the last day of each of the three taxable years preceding the sale, exchange, or other disposition (or, if the corporation has been in existence for less than three years, on the last day of each preceding taxable year of the corporation).

Paragraph (2) provides that the provisions of Article 7 (Income from Real Property) will apply to real property gains; the provisions of Article 14 (Royalties) will apply to certain royalty gains; and the provisions of Article 8 (Business Profits) will apply to gains attributable to a permanent establishment.

If the recipient of the gain is a resident of one Contracting State and a citizen of the other Contracting State, that other 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).

Where Article 9 (Shipping and Air Transport) applies to gains derived from the sale, exchange or other disposition of property, this Article does not apply to such gains.


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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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