International Tax Treaties
What are international tax conventions? As part of legally dealing with the current business environment, in which many companies operate in a number of different countries, and in order to prevent double taxation, many countries have entered into international tax treaties to prevent over-taxing of businesses that operate outside of the country where they were founded.
As the years go by, more and more international tax treaties are being created, as part of developed countries’ growing trend of encouraging international commerce. It is important for businesses to be familiar with the issue in order to operate according to these treaties, so as to avoid illegal tax planning. In this article, attorney Michael Decker, a partner in our office and an expert on corporate law and international taxation, explains what this involves.
International tax treaties in Israel and abroad
In the modern age, when more and more businesses operate in many countries, international companies regularly deal with legal issues regarding taxation. Without a doubt, the main issue is the need to avoid over-taxation (double taxation), meaning an obligation to pay taxes in two countries or more for the same transactions and income. In order to avoid this, international tax treaties were created. Most developed countries have entered into many such treaties with other countries. Israel on its own is a signatory on about 60 double taxation treaties, with countries including the USA, the United Arab Emirates and the European Union countries (including Germany, the Netherlands, France and Belgium).
What is the meaning of double taxation treaties?
As a rule, the vast majority of treaties for the prevention of double taxation are based on models that were developed by the UN or the OECD. These treaties determine the division of taxes so that individuals or companies that are taxed in two countries do not pay more than the required rate. For example, if the tax rate on a certain income in Germany is 15% and in Israel it is 25%, an Israeli resident who works in Germany will pay 15% in Germany and the remaining 10% in Israel. These treaties apply to various kinds of income, including income from interest or royalties, rent on real estate, dividends, capital gains and more.
It is also important to know that in order to administer international tax laws and avoid illegal tax planning, the signatories on international tax treaties set regulations for exchanging information between tax authorities. Israel has such an agreement with each of the countries with whom it has entered into a treaty for preventing double taxation, according to the Income Tax Code. The agreement states that Israel must pass on information to certified tax officials in these countries. One of the countries with whom Israel has such an agreement is the US.
How do authorities rule in cases of double residence?
Often individuals being taxed are considered residents of two countries at the same time. How should they be taxed in this case? The law sets out “tie-breaker rules” for categorizing those being taxed, to determine whether they should be recognized as residents of country A or country B. Sometimes it is ruled that one of the countries has exclusive taxation rights over those with with double residence. In other cases, the ruling is that one of the countries, in which the income was created de-facto, will have initial taxation rights. The other country, in which the taxed person is residing, will have a residual right only. This means that if the second country taxes the same income as the first, it will have to make a credit or deduction according to the taxes that were already paid in the first country.
International tax treaties – contact an attorney with expertise in international tax law
In this article we have explained international tax treaties, their meaning and the importance of operating according to them. If you have any questions regarding this issue or international taxation in general, you can contact our offices and we will be glad to help. Our offices, in Jerusalem and in Tel Aviv, specialize in corporate law and international taxation. The attorneys from our offices have experience in offering extensive and professional legal assistance to companies and individuals that operate in Israel and abroad. You can reach us at the phone numbers and e-mail address below.