Carlos Arroyo 224.88.
(photo credit: carlosarroyo.com)
The Israeli basketball league has a large number of visiting players, mainly from the US. Are they taxed in Israel? And what about visiting US entertainers? Recently a case in the Beersheba District Court clarified matters (Elitsur Ashkelon vs Ashkelon Assessing Officer, Income Tax Appeal 000505/04).
The taxpayer was a not-for-profit club that fielded a basketball team in the Premier League. In the years 2000-2001, the club had from six to nine players who were United States citizens and residents. The club did not withhold any tax from their salaries, based on the club's interpretation of the US-Israel tax treaty. However, the Israel Tax Authority had a different interpretation and claimed 25 percent tax pursuant to regulations for foreign sportsmen. So what does the US-Israel tax treaty say?
Article 16 of the treaty enables Israel to tax income derived by a US resident independent contractor on income from personal services in Israel if the individual is present in Israel for 183 days or more in the taxable year.
Article 17 of the treaty generally enables Israel to tax wages, salaries and similar remuneration derived by a US resident employee unless he is present in Israel less than 183 days and is employed by a US employer (and the remuneration is taxed in the US and is not borne by a "permanent establishment," i.e. a fixed place of business, of the employer in Israel).
Article 18 deals with public entertainers and states: "Notwithstanding Article 16... and 17... the income derived by an individual who is a resident on one... state from his performance of personal services in the other... state as a public entertainer, such as a theater, motion picture, radio or television artist, a musician or an athlete, may be taxed by the other... state, but only if the gross amount exceeds $400 or its equivalent in Israeli pounds for each day such person is present in the other... state for the purpose of performing such services therein."
It was generally accepted that Article 18 is relevant to US basketball players in Israel. But its applicability was unclear.
Does Article 18 apply instead of Articles 16 and 17? If so, the basketball players would enjoy an exemption from Israeli tax so long as their gross pay did not exceed $400 per day, and the club would not need to withhold tax from such exempt pay.
Or does Article 18 apply in addition to Articles 16 and 17? The Tax Authority claimed this is the case. For example, if a US public entertainer is present in Israel 183 days or more in year, he can be taxed under Articles 16 or 17, but if the entertainer is present under 183 days and earns $400 or more per day, he can be taxed under Article 18.
Faced with these two very different interpretations with different results, the court cited the words of Judge M. Naor in the case of Haifa Property Taxation Director vs Polti (civil appeal case 8569/06 of May 28, 2008): "Part of a literary or musical work should not be interpreted without looking at the work as a whole, and we should not interpret provisions in a law without looking at the law as a whole".
The court found support for the Tax Authority's viewpoint in the commentary to the model tax treaty of the Organization of Economic Cooperation and Development (OECD) on similar "public entertainer" clauses.
Accordingly, the Court accepted the Tax Authority's interpretation that Article 18 of the treaty applies in addition to Articles 16 and 17, and ruled that tax may be imposed on the basketball players under Articles 16 or 17, even if their pay was under $400 per day.
That the local tax office had allowed a more lenient tax treatment in prior years did not change this judgement. The court also stated it was not bound by a US technical memorandum of the US Treasury.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an international tax partner at Ernst & Young Israel.
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