(photo credit: INGIMAGE)
It took 70 years, but finally on March 28 Israel and Australia signed a draft income tax treaty. The new treaty will enter into force on January 1 next year after both countries have completed their domestic ratification procedures.
Below is a brief summary:
In 2017-18, total merchandise trade between Australia and Israel was worth over AUD1 billion, and Israel’s investment in Australia in 2017 was AUD 301 million.
The preamble clarifies that the express purpose of the treaty is to eliminate double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.Persons covered
Treaty benefits will be available for income derived by or through fiscally transparent entities or arrangements (such as partnerships) but only to the extent that the income is taxed under that country’s domestic law. Israel will continue to tax trusts according to Israeli tax law.Taxes covered
Taxes covered by the treaty will include income tax, Australian fringe benefits tax and resource rent taxes, but not VAT/GST.Permanent Establishment
This refers to companies resident in one country have a taxable fixed place of business or “dependent agent” in the other country. The latest OECD pronouncements affecting e-commerce have been adopted, including those relating to warehouses, conclusion of contracts and use of 50.1% subsidiary companies.Immovable property
The definition of “immovable property” will confirm both countries’ ability to tax income and capital gains derived from real estate mining and gas rights in their territory, including the Mediterranean where Israel exercises sovereign or other rights under Israeli and international law.Transfer pricing adjustments
A seven-year time limit will generally apply for making transfer pricing adjustments, with a corresponding adjustment to be made to the profits of an associated enterprise.Dividends
Dividends may be taxed in the source (of the dividend) country up to the following limits:
• 0%: for dividends derived by governments, recognized pension/superannuation funds – on direct holdings of less than 10%;
• 5%: for intercorporate dividends paid to companies that hold 10% or more of the paying company throughout a 365-day period that includes the payment date;
• 15%: for all other dividends.
In practice, Australia only imposes dividend withholding tax on payments of unfranked dividends. Special rules apply to REITS (real estate investment trusts).Interest
Interest may be taxed in the source (of the interest) country up to the following limits:
• 0%: for interest derived by governments;
• 5%: for interest derived by recognized pension/superannuation funds, and unrelated financial institutions (not insurance company); and
• 10%: for all other interest.Royalties
A 5% withholding tax rate will apply to royalties paid to a resident of the other country.
Pensions are generally taxable only in the country of residence of the recipient. However, the source (paying) country may tax lump sum payments from certain pension funds, retirement benefit schemes or in certain life events (e.g. disability or death). In addition, government service pensions will be taxable only in the source country unless the person is both a resident and a national of the other country, in which case the pension will be taxable only in the residence country.Professors, teachers and researchers
Remuneration derived by teachers, professors and researchers who visit the other country for up to two years may be exempt in the other country unless the research is for private benefit.Limitation on benefits
The treaty will include a rule denying treaty benefits, in certain circumstances, if a principle purpose of a person is to take advantage of the treaty.Relief from double taxation
The treaty allows both countries to continue with their foreign tax credit regimes.Exchange of information
The treaty will provide a legal basis for the exchange of taxpayer information between tax officials of the two countries, in order to carry out treaty provisions, or for the administration or enforcement of domestic laws
The new treaty is not yet in effect. That requires Knesset and Australian Parliamentary ratification. It seems this may not occur before 2020; we await a further announcement from each country in this regard.
The reduction in interest withholding tax in Australia from 10% to 5% if paid by an Australian financial institution (not insurance company) or recognized pension fund will be welcome.
Online businesses in e-commerce and hi-tech companies should especially check their situation – both income tax and VAT/GST.
Anyone else with links to Australia should also check their anticipated situation.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.
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