Dr. Avi Nov, Adv.
With respect to foreign persons, taxable income is defined in section 2 of the ITO as income or profits that were derived or generated in Israel from one of the sources enumerated in the Israeli Tax Ordinance.
In other words, with respect to foreign persons, the Israeli Tax Ordinance imposes a tax only on Israeli-sourced income. Section 1 of the Israeli Tax Ordinance defines “income” as the total amount of revenues derived from sources enumerated in the Israeli Tax Ordinance; those include, inter alia, rental and royalties from real property (section 2(6)), as well as rental or gains derived from any property other than real property, i.e., royalties and rental income of tangible and intangible property (section 2(7)).
Section 4A of the Israeli Tax Ordinance lays down the rules for sourcing income. For example, section 4A(a)(7) sources income from intangible property, including royalties, to the payer’s residence. See: Source rules in Israeli Tax Law.