Israel- United States: Income and Capital Tax Treaty (1975)

Income and Capital Tax Treaty (1975)

This Treaty was signed on November 20, 1975 and entered into force on December 30, 1994.

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE STATE OF ISRAEL WITH RESPECT TO TAXES ON INCOME

The Government of the United States of America and the Government of the State of Israel, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income have agreed as follows:

Article 1. Taxes Covered

1. The taxes which are the subject of this Convention are:

(a) In the case of the United States, the Federal income taxes imposed by the Internal Revenue Code, and

(b) In the case of Israel-

(i) The income tax (including capital gains tax),

(ii) The company tax,

(iii) The tax on gains from the sale of land under the land appreciation tax law,

(iv) The tax on income levied under the services tax law (banking institutions and insurance companies), and

(v) The war loans and security loans, hereinafter referred to as “compulsory loans”.

2. This Convention shall also apply to taxes substantially similar to those covered by paragraph (1) which are imposed in addition to, or in place of, existing taxes after the date of signature of this Convention.

3. For the purpose of Article 27 (Nondiscrimination), this Convention shall also apply to taxes of every kind imposed at the national level.

4. The competent authorities of the Contracting States shall notify each other of substantial amendments of the tax laws referred to in paragraph (1) and of the adoption of any taxes referred to in paragraph (2) by transmitting the texts of any substantial amendments or new statutes.

5. The competent authorities of the Contracting States shall notify each other of the publication by their respective contracting States of any material concerning the application of this Convention, whether in the form of regulations, rulings, or judicial decisions by transmitting the texts of any such materials.

Article 2. General Definitions

1. In this Convention, unless the context otherwise requires:

(a)

(i) The term “United States” means the United States of America; and

(ii) When used in a geographical sense, the term “United States” means the states thereof and the District of Columbia.

Such terms also includes:

(A) The territorial sea thereof, and

(B) The seabed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which the United States exercises sovereign rights, in accordance with international law, for the purpose of exploration for and exploitation of the natural resources of such areas, but only to the extent that the person, property, or activity to which the Convention is being applied is connected with such exploration or exploitation.

(b)

(i) The term “Israel” means the State of Israel; and

(ii) When used in a geographical sense the term “Israel” includes:

(A) The territorial sea thereof, and

(B) The seabed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which Israel exercises sovereign rights, in accordance with international law, for the purpose of exploration for and exploitation of the natural resources of such area, but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation.

(c) The term “Contracting State” means the United States or Israel, as the context requires.

(d) The term “State” means any national State, whether or not one of the Contracting States.

(e) The term “person” includes an individual, a partnership, a corporation, an estate, or a trust.

(f)

(i) The term “United States corporation” means a corporation (or any unincorporated entity treated as a corporation for United States tax purposes) which is created or organized under the laws of the United States or any state thereof or the District of Columbia; and

(ii) The term “Israeli corporation” means any body of persons taxed as a body of persons resident in Israel under the income tax ordinance.

(g) The term “competent authority” means:

(i) In the case of the United States, the Secretary of the Treasury or his delegate, and

(ii) In the case of Israel, the Minister of Finance or his delegate.

(h) The term “tax” means tax imposed by the United States or Israel, whichever is applicable, to which this Convention applies by virtue of Article 1 (Taxes Covered).

(i) The term “international traffic” means any voyage of a ship or aircraft operated by a resident of one of the Contracting States except where such voyage is confined solely to places within a Contracting State.

2. Any other term used in this Convention and not defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined. Notwithstanding the preceding sentence, if the meaning of such a term under the laws of one of the Contracting States is different from the meaning of the term under the laws of the other Contracting State, or if the meaning of such a term is not readily determinable under the laws of one of the Contracting States; the competent authorities of the Contracting States may, in order to prevent double taxation or to further any other purpose of this Convention, establish a common meaning of the term for the purposes of this Convention.

Article 3. Fiscal Residence

1. In this Convention:

(a) The term “resident of Israel” means:

(i) An Israeli corporation, and

(ii) Any other person (except a corporation or any entity treated under Israeli law as a corporation) resident in Israel for purposes of Israeli tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to Israeli tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries.

(b) The, term “resident of the United States” means:

(i) A United States corporation, and

(ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United States tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries.

2. Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States:

(a) He shall he deemed to be a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests). In the case of a person who is an “oleh” (as defined in section 9(16) of the Israeli Income Tax Ordinance), his center of vital interests shall be deemed to be in Israel.

(b) If the Contracting State in which he has his center of vital interests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode;

(c) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) If he is a citizen of both Contracting States or of neither Contracting State, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. A corporation which is both a United States corporation within the meaning of paragraph (1)(f)(i) of Article 2 (General Definitions) and an Israeli corporation within the meaning of paragraph (1)(f)(ii) of such Article 2 shall be considered to be outside the scope of this Convention except for purposes of Article 27 (Nondiscrimination) and Article 29 (Exchange of Information).

Article 4. Source of Income

For purposes of this Convention:

1. Dividends shall be treated as income from sources within a Contracting State only if paid by a corporation of that Contracting State.

2. Interest shall be treated as income from sources within a Contracting State only if paid by such Contracting State, a political sub-division or a local authority thereof, or by a resident of that Contracting State. Notwithstanding the preceding sentence, if such interest is paid on an indebtedness incurred in connection with a permanent establishment which bears such interest, then such interest shall be deemed to be from sources within the State (whether or not a Contracting State) in which the permanent establishment is situated.

3. Royalties described in paragraph (2) of Article 14 (Royalties) for the use of, or the right to use, property or rights described in such paragraph shall be treated as income from sources within a Contracting State only to the extent that such royalties are for the use of, or the right to use, such property or rights within that Contracting State.

4. Income and gains (including royalties) to which Article 7 (Income from Real Property) applies shall be treated as income from sources within a Contracting State only if the real property (or, in the case of property referred to in paragraph (3) of such Article 7, the underlying real property) is situated in that Contracting State.

5. Income from the rental of tangible personal (movable) property shall be treated as income from sources within a Contracting State only to the extent that such income is for the use of such property in that Contracting State.

6. Income from the purchase and sale, exchange, or other disposition of intangible or tangible personal property (other than gains described in paragraph (2) of Article 14 (Royalties)) shall be treated as income from sources within a Contracting State only if such sale, exchange, or other disposition is within that Contracting State. Notwithstanding the preceding sentence, gains from the sale, exchange, or other disposition of stock to which paragraph (1) (e) of Article 15 (Capital Gains) applies shall be treated as income from sources within Israel.

7. Income received by an individual for his performance of labor or personal services, whether as an employee or in an independent capacity, shall be treated as income from sources within a Contracting State only to the extent that such services are performed in that Contracting State. Income from personal services performed aboard ships or aircraft operated by a resident of one of the Contracting States in international traffic shall be treated as income from sources within that Contracting State if rendered by a member of the regular complement of the ship or aircraft. Notwithstanding the preceding provisions of this paragraph, remuneration described in Article 22 (Governmental Functions) and payments described in Article 21 (Social Security Payments) paid from the public funds of a Contracting State or a political subdivision or local authority thereof shall be treated as income from sources within that Contracting State only.

8. Notwithstanding paragraphs (1) through (6), industrial or commercial profits which are attributable to a permanent establishment which the recipient, a resident of one of the Contracting States, has in the other Contracting State, shall be treated as income from sources within that other Contracting State. Industrial or commercial profits attributable to such permanent establishment include any item of income described in paragraphs (1) through (6) to the extent provided in paragraph (6) of Article 8 (Business Profits).

9. The source of any item of income to which paragraphs (1) through (8) are not applicable shall be determined by each of the Contracting States in accordance with its own law. Notwithstanding the preceding sentence, if the source of any item of income under the laws of one Contracting State is different from the source of such item of income under the laws of the other Contracting State or if the source of such income is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States may, in order to prevent double taxation or further any other purpose of this Convention, establish a common source of the item of income for purposes of this Convention,

Article 5. Permanent Establishment

1. For the purpose of this Convention, the term “permanent establishment” means a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity.

2. The term “fixed place of business” includes but is not limited to:

(a) A branch;

(b) An office;

(c) A factory;

(d) A warehouse;

(e) A workshop;

(f) A farm or plantation;

(g) A store or other sales outlet;

(h) A mine, quarry, or other place of extraction of natural resources;

(i) A building site, or construction or assembly project, or supervision activity connected therewith and conducted within the Contracting State where such site or project is located, where such site, project, or activity continues for a period of more than 6 months; and

(j) The maintenance of substantial equipment or machinery within a Contracting State for a period of more than 6 months.

3. Notwithstanding paragraphs (1) and (2), a permanent establishment shall not include a fixed place of business used only for one or more of the following:

(a) The use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident;

(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery (other than goods or merchandise held for sale by such resident in a store or other sales outlet);

(c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

(d) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information for the resident;

(e) The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident;

(f) A building site, or construction or assembly project, or supervision activity connected therewith, where such site, project, or activity continues for a period of not more than 6 months, or

(g) The maintenance of substantial equipment or machinery within a Contracting State for a period of not more than 6 months.

4. Even if a resident of one of the Contracting States does not have a permanent establishment in the other Contracting State under paragraphs (1), (2), and (3), nevertheless, such resident shall be deemed to have a permanent establishment in the other Contracting State if such resident sells in that Contracting State goods or merchandise which either-

(i) were subjected to substantial processing in that Contracting State (whether or not purchased in that Contracting State), or

(ii) were purchased in that Contracting State and not subjected to substantial processing outside that Contracting State.

5. A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (6) applies, shall be deemed to constitute a permanent establishment in the first-mentioned Contracting State if such a person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchase of goods or merchandise for that resident.

6. A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident engages in industrial or commercial activity in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business.

7. A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident sells at the termination of a trade fair or convention in such other Contracting State goods or merchandise which such resident displayed at such trade fair or convention.

8. In determining whether a resident of one Contracting State has a permanent establishment in the other Contracting State there shall not be taken into account the fact that such resident may be related to either a resident of the other Contracting State or to any other person who engages in business in that other Contracting State.

9. The principles set forth in paragraphs (1) through (8) shall be applied in determining for purposes of this Convention whether there is a permanent establishment in a State other than one of the Contracting States or whether a person other than a resident of one of the Contracting States has a permanent establishment in one of the Contracting States.

Article 6. General Rules of Taxation

1. A resident of one of the Contracting States may be taxed by the other Contracting State on any income from sources within that other Contracting State and only on such income, subject to any limitations set forth in this Convention. For this purpose, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income.

2. The provisions of this Convention shall not be construed to restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded—

(a) By the laws of one of the Contracting States in the determination of the tax imposed by that Contracting State, or

(b) By any other agreement between the Contracting States.

3. Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax its residents (as determined under Article 3 (Fiscal Residence) and its citizens as if this Convention had not come into effect.

4. The provisions of paragraph (3) shall not affect:

(a) The benefits conferred by a Contracting State under Articles 10 (Grants), 21 (Social Security Payments), 26 (Relief from Double Taxation), 27 (Nondiscrimination), and 28 (Mutual Agreement Procedure); and

(b) The benefits conferred by a Contracting State under Articles 22 (Governmental Functions), 23 (Teachers), 24 (Students and Trainees), and 30 (Diplomatic and Consular Officers) upon individuals who are neither citizens of, nor have immigrant status in, that Contracting State.

5. The United States may impose its personal holding company tax and its accumulated earnings tax notwithstanding any provision tax of this Convention. However, an Israeli corporation shall be exempt from the United States personal holding company tax in any taxable year unless any resident or citizen of the United States owns, directly or indirectly, within the meaning of section 544 of the Internal Revenue Code, 10 percent or more in value of the outstanding stock of the corporation at any time during the taxable year. An Israeli corporation shall be exempt from the United States accumulated earnings tax in any taxable year unless such corporation is engaged in trade or business in the United States through a permanent establishment at any time during such year and at least 25 percent of the voting stock of such corporation is owned by citizens or residents of the United States.

6. The competent authorities of the two Contracting States may each prescribe regulations necessary to carry out the provisions of this Convention.

Article 7. Income from Real Property

1. Income from real property, including royalties and other payments in respect of the exploitation of natural resources and gains derived from the sale, exchange, or other disposition of such property or of the right giving rise to such royalties or other payments, may be taxed by the Contracting State in which such real property or natural resources are situated. For purposes of this Convention, interest or indebtedness secured by real property or secured by a right giving rise to royalties or other payments in respect of the exploitation of natural resources shall not be regarded as income from real property.

2. Paragraph (1) shall apply to income derived from the usufruct, direct use, letting, or use in any other form of real property.

3. Gains from the alienation of shares of a real estate association (as defined in the Israeli Land Appreciation Tax Law) may be taxed by Israel.

Article 8. Business Profits

1. Industrial or commercial profits of a resident of one of the Contracting States shall he exempt from tax by the other Contracting State unless the resident has a permanent establishment in that other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the industrial or commercial profits of the resident but only on so much of them as are attributable to the permanent establishment.

2. Where a resident of one of the Contracting States has a permanent establishment in the other Contracting State, there shall in each Contracting State be attributed to the permanent establishment the industrial or commercial profits which would reasonably be expected to have been derived by it if it were an independent entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident of which it is a permanent establishment.

3. In the determination of the industrial or commercial profits of a permanent establishment, there shall be allowed as deductions expenses which are reasonably connected with such profits, including executive and general administrative expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere.

4. No profits shall be attributed to a permanent establishment of a resident of one of the Contracting States in the other Contracting State merely by reason of the purchase of goods or merchandise by that permanent establishment, or by the resident of which it is a permanent establishment, for the account of that resident.

5. For purposes of this Convention, the term “industrial or commercial profits” includes but is not limited to, income derived from manufacturing, mercantile, banking, insurance, agricultural, fishing or mining activities, the operation of ships or aircraft, the furnishing of services, the rental of tangible personal (movable) property, but not the rental or licensing of motion picture films or films or tapes used for radio or television broadcasting. Such term does not include the performance of personal services by an individual either as an employee or in an independent capacity.

6. For purposes of paragraph (1), industrial or commercial profits which are attributable to a permanent establishment include income from dividends, interest, royalties described in paragraph (2) of Article 14 (Royalties), and capital gains and income derived from property and natural resources, but only if such income is effectively connected with the permanent establishment. To determine whether income is effectively connected with a permanent establishment, the factors taken into account shall include whether the rights or property giving rise to such income are used in or held for use in carrying on an activity giving rise to industrial or commercial profits through such permanent establishment and whether the activities carried on through such permanent establishment were a material factor in the realization of such income. For this purpose, due regard shall be given to whether or not such property or rights or such income were accounted for through such permanent establishment.

7. Where industrial or commercial profits include items of income which are dealt with separately in other articles of this Convention, the provisions of those articles shall, except as otherwise provided therein, supersede the provisions of this Article.

Article 9. Shipping and Air Transport

1. Notwithstanding Article 8 (Business Profits) and Article 15 (Capital Gains:

(a) Where a resident of the United States derives income from the operation in international traffic of ships or aircraft, or gains from the sale, exchange, or other disposition of ships or aircraft used in international traffic by such resident, Israel shall exempt such income or gains from taxation if the ships or aircraft are registered in either Contracting State or in a State with which the United States has a convention which exempts such income or gains.

(b) Where a resident of Israel derives income from the operation in international traffic of ships or aircraft, or gains from the sale, exchange, or other disposition of ships or aircraft used in international traffic by such resident, the United States shall exempt such income or gains from taxation.

2. For purposes of this Article, income derived from the operation in international traffic of ships or aircraft includes—

(a) Income derived from the rental of ships or aircraft operated in international traffic if such rental income is incidental to other income described in paragraph (1); and

(b) Income derived from the use, maintenance, and lease of—

(i) Containers,

(ii) Trailers for the inland transport of containers, and

(iii) Other related equipment

in connection with the operation by the resident in international traffic of ships or aircraft described in paragraph (1).

Article 10. Grants

1. For the purpose of computing United States tax, if Israel, a political subdivision thereof, or any agency of either makes a qualifying cash grant to a resident of the United States, then-

(a) the amount of such grant shall be excluded from the gross income of such resident,

(b) if the resident is a corporation the amount of such grant shall be treated as a contribution to its capital,

(c) the resident shall be considered to have contributed as a shareholder the amount of such grant to the Israeli corporation designated by the terms of the grant, and

(d) the resident’s basis for the stock of the Israeli corporation shall not be increased by the amount contributed under subparagraph (c).

2. For purposes of paragraph (1), a qualifying cash grant is one approved by Israel for investment promotion in Israel, but shall not include any amount which in whole or part, directly or indirectly-

(a) is in consideration for services rendered or to be rendered, or for the sale of goods,

(b) is measured in any manner by the amount of profits or tax liability, or

(c) is taxed by Israel.

Article 11. Related Persons

1. Where a person subject to the taxing jurisdiction of one of the Contracting States and any other person are related and where such related persons made arrangements or impose conditions between themselves which are different from those which would be made between independent persons, any income, deductions, credits, or allowances which would, but for those arrangements or conditions, have been taken into account in computing the income (or loss) of, or the tax payable by, one of such persons may be taken into account in computing the amount of the income subject to tax and the taxes payable by such person.

2. Where a redetermination has been made by one Contracting State to the income of one of its residents in accordance with paragraph (1), then the other Contracting State shall, if it agrees with such redetermination and if necessary to prevent double taxation, make a corresponding adjustment to the income of a person in such other Contracting State related to such resident. In the event the other Contracting State disagrees with such redetermination, the two Contracting States shall endeavor to reach agreement in accordance with the mutual agreement procedure in paragraph (2) of Article 28 (Mutual Agreement Procedure).

3. For purposes of this Convention, a person is related to another person if either person owns or controls directly or indirectly the other, or if any third person or persons own or control directly or indirectly both. For this purpose, the term “control” includes any kind of control, whether or not legally enforceable, and however exercised or exercisable.

Article 12. Dividends

1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States.

2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed-

(a) 25 percent of the gross amount of the dividend paid; or

(b) When the recipient is a corporation, 12.5 percent of the gross amount of the dividend paid, but only if-

(i) During the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation, and

(ii) Not more than 25 percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50 percent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received).

3. Dividends paid by a corporation of one of the Contracting States to a person other than a resident of the other Contracting State (and in the case of dividends paid by an Israeli corporation, to a person other than a citizen of the United States) shall be exempt from tax by the other Contracting State.

4. Paragraphs (2) and (3) shall not apply if such dividends are treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such case, the provisions of Article 8 (Business Profits) shall apply.

Article 13. Interest

1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States.

2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 17.5 percent of the gross amount of such interest, except that, if the interest is derived from a loan of whatever kind granted by a bank, savings institution, or insurance company or the like, the interest shall not be taxed at an amount in excess of 10 percent of the gross amount of such interest.

3. Notwithstanding paragraphs (1) and (2), interest beneficially derived by (a) one of the Contracting States, or by an instrumentality of that Contracting State, not subject to tax by that Contracting State on its income, or (b) a resident of such Contracting State with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof, shall be exempt from tax by the other Contracting State.

4. Interest paid by a resident of one of the Contracting States to a person other than a resident of the other Contracting State (and in the case of interest paid by a resident of Israel, to a person other than a citizen of the United States) shall be exempt from tax by the other Contracting State unless such interest is treated as income from sources within the other Contracting State under paragraph (2) of Article 4 (Source of Income).

5. Paragraphs (2), (3), and (4) shall not apply if the interest is treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such a case, the provisions of Article 8 (Business Profits) shall apply.

6. Where an amount is paid to a related person and would be treated as interest but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable.

7. The term “interest” as used in this Convention means income from money lent and other income which under the taxation law of the Contracting State in which the income has its source is assimilated to income from money lent.

Article 14. Royalties

1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State-

(a) May be taxed by both Contracting States, but

(b) Shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of a copyright or film royalty or at a rate in excess of 15 percent of the gross amount of an industrial royalty.

2. For purposes of this Article-

(a) Copyright or film royalties are payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, or scientific works, including copyrights of motion picture films or films or tapes used for radio or television broadcasting;

(b) Industrial royalties are payments of any kind made as consideration for the use of, or the right to use, patents, designs, models, plans, secret processes or formulae, trademarks, or other like property or rights and

(c) Copyright or film royalties and industrial royalties include gains derived from the sale, exchange, or other disposition of any such property or rights to the extent that the amounts realized on such sale, exchange, or other disposition for consideration are contingent on the productivity, use, or disposition of such property or rights.

3. Paragraph (1) (b) shall not apply if the royalty is treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such a case, the provisions of Article 8 (Business Profits) shall apply.

4. Where an amount is paid to a related person and would be treated as a royalty but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case, the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable.

Article 15. 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.

Article 16. Independent Personal Services

1. Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity may be taxed by that Contracting State. Except as provided in paragraph (2), such income shall be exempt from tax by the other Contracting State.

2. Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if the individual is present in that other Contracting State for a period or periods aggregating 183 days or more in the taxable year.

Article 17. Dependent Personal Services

1. Except as provided in Article 2 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation or company, may be taxed by that Contracting State. Except as provided by paragraph (2) and in Articles 20 (Private Pensions and Annuities), 22 (Governmental Functions), 23 (Teachers), and 24 (Students and Trainees), such remuneration derived from sources within the other Contracting State may also be taxed by that other Contracting State.

2. Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if-

(a) He is present in that other Contracting State for a period or periods aggregating less than 183 days in the taxable year;

(b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State;

(c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State; and

(d) The remuneration is subject to tax in the first-mentioned Contracting State.

3. Remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in international traffic by a resident of that Contracting State may be taxed by that Contracting State.

Article 18. Public Entertainers

Notwithstanding Article 16 (Independent Personal Services) and 17 (Dependent Personal Services), the income derived by an individual who is a resident of one Contracting State from his performance of personal services in the other Contracting 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 Contracting State, but only if the gross amount of such income exceeds 400 United States dollars or its equivalent in Israeli pounds for each day such person is present in the other Contracting State for the purpose of performing such services therein.

Article 19. Amounts Received for Furnishing Personal Services of Others

1. Amounts received by a resident of one of the Contracting States in consideration of furnishing in the other Contracting State the personal services of one or more other persons, including a public entertainer referred to in Article 18 (Public Entertainers), shall not constitute industrial or commercial profits under Article 8 (Business Profits) to the extent that-

(a)

(i) The person for whom the services were rendered designated the person or persons who would render the services, whether or not he had the legal right to do so and whether or not the designation was made formally;

(ii) The person for whom the services were rendered had the right to designate the person or persons who would render the services; or

(iii) By reason of the facts and circumstances the arrangement for personal services had the effect of designating the person or persons who would render the services; and

(b) The resident of the first-mentioned Contracting State directly or indirectly pays compensation for such services to any person, other than another resident of the first-mentioned Contracting State or of that other Contracting State who is subject to tax on such compensation.

2. Paragraph (1) shall not apply to any amount received if it is established to the satisfaction of the competent authority of that other Contracting State with respect to such amount that neither the creation nor organization of the resident of the first-mentioned Contracting State (where such resident is a corporation or other entity) nor the furnishing of the services through such resident has the effect of a substantial reduction of income, war profits, excess profits, or similar taxes.

Article 20. Private Pensions and Annuities

1. Except as provided in Article 22 (Governmental Functions), pensions and other similar remuneration paid to an individual shall be taxable only in the Contracting State of which he is a resident.

2. Alimony and annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State.

3. Child support payments made by an individual who is a resident of one of the Contracting States to an individual who is a resident of the other Contracting State shall be exempt from tax in that other Contracting State.

4. The term “pensions and other similar remuneration”, as used in this Article, means periodic payments other than social security payments covered in Article 21 (Social Security Payments) made (a) by reason of retirement or death and in consideration for services rendered, (b) by way of compensation for injuries or sickness received in connection with past employment, or (c) by reason of payments made under a plan benefiting self-employed individuals all or some of the contributions to which qualify for special tax treatment.

5. The term “annuities”, as used in this Article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

6. The term “alimony”, as used in this Article, means periodic payment made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support which payments are taxable to the recipient under the internal laws of the Contracting State of which he is a resident.

7. The term “child support payments”, as used in this Article, means periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support.

Article 21. Social Security Payments

Social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State shall be exempt from tax in both Contracting States. This Article shall not apply to payments described in Article 22 (Governmental Functions).

Article 22. Governmental Functions

Wages, salaries, and similar remuneration, including pensions, annuities, or similar benefits, paid from public funds of one of the Contracting States:

(a) To a citizen of that Contracting State, or

(b) To a citizen of a State other than a Contracting State who comes to the other Contracting State expressly for the purpose of being employed by the first-mentioned Contracting State,

for labor or personal services performed as an employee of the national Government of that Contracting State, or any agency thereof, in the discharge of functions of a governmental nature shall be exempt from tax by the other Contracting State.

Article 23. Teachers

1. Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision, or a local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other Contracting State.

2. This Article shall not apply to income from research if such research is undertaken not in the public interest but primarily for the private benefit of a specific person or persons.

Article 24. Students and Trainees

1.

(a) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of-

(i) Studying at a university or other recognized educational institution in that other Contracting State, or

(ii) Securing training required to qualify him to practice a profession or professional specialty, or

(iii) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization,

shall be exempt from tax by that other Contracting State with respect to amounts described in subparagraph (b) for a period not exceeding 5 taxable years from the date of his arrival in that other Contracting State.

(b) The amounts referred to in subparagraph (a) are-

(i) Gifts from abroad for the purpose of his maintenance, education, study, research, or training;

(ii) The grant, allowance, or award; and

(iii) Income from personal services performed in that other Contracting State in an amount not in excess of 3,000 United States dollars or its equivalent in Israeli pounds for any taxable year.

2. An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State as an employee of, or under contract with, a resident of the first-mentioned Contracting; State, for the primary purpose of-

(a) Acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State or other than a person related to such resident, or

(b) Studying at a university or other recognized educational institution in that other Contracting State,

shall be exempt from tax by that other Contracting State for a period not exceeding 12 consecutive months with respect to his income from personal services in an aggregate amount not in excess of 7,500 United States dollars or its equivalent in Israeli pounds.

3. An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for a period not exceeding 1 year, as a participant in a program sponsored by the Government of that other Contracting State, for the primary purpose of training, research, or study, shall be exempt from tax by that other Contracting State with respect to his income from personal services in respect of such training, research, or study performed in that other Contracting State in an aggregate amount not in excess of 10,000 United States dollars or its equivalent in Israeli pounds.

4. The benefits provided under Article 23 (Teachers) and paragraph (1) of this Article shall, when taken together, extend only for such period of time, not to exceed 5 taxable years from the date of arrival of the individual claiming such benefits, as may reasonably or customarily be required to effectuate the purpose of the visit. The benefits provided under Article 23 (Teachers) shall not be available to an individual if, during the immediately preceding period, such individual enjoyed the benefits of paragraph (1) of this Article.

Article 25. Investment or Holding Companies

A corporation of one of the Contracting States deriving dividends, interest, royalties or capital gains from sources within the other Contracting State shall not be entitled to the benefits of Articles 12 (Dividends), 13 (Interest), 14 (Royalties) or 15 (Capital Gains) if-

(a) By reason of special measures the tax imposed on such corporation by the first-mentioned Contracting State with respect to such dividends, interest, royalties or capital gains is substantially less than the tax generally imposed by such Contracting State on corporate profits, and

(b) 25 percent or more of the capital of such corporation is held of record or is otherwise determined, after consultation between the competent authorities of the Contracting States, to be owned, directly or indirectly, by one or more persons who are not individual resident of the first-mentioned Contracting State (or, in the case of an Israeli corporation, who are citizens of the United States).

Article 26. Relief from Double Taxation

Double taxation of income shall be avoided in the following manner:

1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended front time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to Israel and, in the case of a United States corporation owing at least 10 percent of the voting stock of an Israeli corporation from which it receives dividends in any taxable year, shall also allow credit for the appropriate amount of taxes paid or accrued to Israel by the Israeli corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to Israel, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within Israel or on income from sources outside of the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to Israel, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to Israel, the taxes referred to in paragraphs (1)(b) and (2) of Article 1 (Taxes Covered) shall be considered to be income taxes.

2. If for any taxable year a citizen or resident of the United States takes as a credit against tax under paragraph (1) an amount with respect to a compulsory loan to Israel (which is included as a tax under paragraph (1)(b)(v) of Article 1 (Taxes Covered)), then-

(i) Any interest received on such loan shall not be included in taxable income for purposes of United States income tax and no deduction shall be allowed for any interest assessed or collected to which clause (iv) applies;

(ii) Upon repayment or recoupment of the principal of the loan, the amount of the value in United States dollars received shall be treated as a refund for the year the loan was made of taxes paid to Israel for such year equal to the basis for such loan;

(iii) Any such amount in excess of such basis shall be included in taxable income for purposes of United States tax for the year the repayment or recoupment is made; and

(iv) No interest shall be assessed or collected by the United States on any amount of tax due for the year the loan was made except to the extent that interest referred to in clause (i) was received.

The Secretary of the Treasury or his delegate shall prescribe regulations he deems necessary to carry out the purposes of this paragraph including rules for determining whether all amount included as a tax under paragraph (1)(b)(v) of Article 1 (Taxes Covered) has been taken as a credit against tax.

3. Israel shall allow to a resident of Israel as a credit against Israeli tax the appropriate amount of income taxes paid or accrued to the United States and, in the case of an Israeli corporation owning at least 10 percent of the voting stock of a United States corporation from which it receives dividends in any taxable year, shall also allow credit for the appropriate amount of taxes paid or accrued to the United States by the United States corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the United States but shall not exceed that portion of Israeli tax which such resident’s net income from sources within the United States bears to his entire net income for the same taxable year. For the purpose of applying the Israeli credit in relation to taxes paid or accrued to the United States, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the Israeli credit in relation to taxes paid or accrued to the United States, the taxes referred to in paragraphs (1) (a) and (2) of Article 1 (Taxes Covered) shall be considered to be creditable taxes.

Article 27. Non-Discrimination

1. A citizen of one of the Contracting States, who is a resident of the other Contracting State shall not be subject in that other Contracting State to more burdensome taxes than a citizen of that other Contracting State who is a resident thereof.

2. A permanent establishment which a resident of one of the Contracting States has in the other Contracting State shall not be subject in that other Contracting State to more burdensome taxes than a resident of that other Contracting State carrying on the same activities. This paragraph shall not be construed as obliging a Contracting State to grant to individual residents of the other Contracting State any personal allowances, reliefs, or deductions for taxation purposes on account of civil status or family responsibilities which it grants to its own individual residents.

3. A corporation of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirements connected with taxation which is other or more burdensome than the taxation and requirements to which a corporation of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned or controlled by one or more residents of the first-mentioned Contracting State, is or may be subjected.

Article 28. Mutual Agreement Procedure

1. Where a resident or citizen of one of the Contracting States considers that the action of one or both of the Contracting States results or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of the Contracting States, present his case to the competent authority of the Contracting State of which he is a resident or citizen. Should the resident’s or citizen’s claim be considered to have merit by the competent authority of the Contracting State to which the claim is made, it shall endeavor to come to an agreement with the competent authority of the other Contracting State with a view to the avoidance of taxation not in accordance with the provisions of this Convention.

2. The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application of this Convention. In particular, the competent authorities of the Contracting States may agree-

(a) To the same attribution of industrial or commercial profits to a resident of one of the Contracting States and its permanent establishment situated in the other Contracting State;

(b) To the same allocation of income, deductions, credits, or allowances between a resident of one of the Contracting States and any related person and to the readjustment of taxes imposed by each Contracting State to reflect such allocation;

(c) To the same determination of the source of particular items of income; or

(d) To the same characterization of particular items of income.

3. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of this Article. When it seems advisable for the purpose of reaching agreement, the competent authorities may meet together for an oral exchange of opinions.

4. In the event that the competent authorities reach such an agreement, taxes shall be imposed on such income, and refund or credit of taxes shall be allowed, by the Contracting States in accordance with such agreement, notwithstanding any procedural rule (including statutes of limitations) applicable under the law of either Contracting State.

Article 29. Exchange of Information

1. The competent authorities of the Contracting States shall exchange such information as is necessary for the carrying out of this Convention and of the domestic laws of the Contracting States concerning taxes covered by this Convention insofar as the taxation thereunder is in accordance with this Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons or authorities other than those concerned with the assessment, including judicial determination, or collection of the taxes which are the subject of the Convention.

2. In no case shall the provisions of paragraph (1) be construed so as to impose on one of the Contracting States the obligation-

(a) To carry out administrative measures at variance with the laws or the administrative practice of that or of the other Contracting State;

(b) To supply particulars which are not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) To supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would he contrary to public policy.

Article 30. Diplomatic and Consular Officers

Nothing in this Convention shall affect the fiscal privileges of diplomatic and consular officials under the general rules of international law or under the provisions of special agreements.

Article 31. Entry Into Force

This Convention shall be subject to ratification in accordance with the constitutional procedures of each Contracting State and instruments of ratification shall be exchanged as soon as possible. It shall enter into force 30 days after the date of exchange of instruments of ratification and shall then have effect for the first time:

(a) As respects the rate of withholding of tax, to amounts paid on or after the first day of the second month following the date on which this Convention enters into force.

(b) As respects other taxes, to taxable years beginning on or after January 1 of the year following the date on which this Convention enters into force.

Article 32. Termination

1. This Convention shall remain in force until terminated by one the Contracting States. Either Contracting State may terminate the Convention at any time after 5 years from the date on which this Convention enters into force provided that at least 6 months’ prior notice of termination has been given through diplomatic channels. In such event, the Convention shall cease to have force and effect as respects income of calendar years or taxable years beginning (or, in the case of taxes payable at the source, payments made) on or after April 1 next following the expiration of the 6-month period.

2. Notwithstanding the provisions of paragraph (1), and upon prior notice to be given through diplomatic channels, the provisions of this Convention exempting social security payments from taxation in the Contracting State which makes the payments may be terminated by either Contracting State at any time after this Convention enters into force.

DONE at Washington, in duplicate, in the English and Hebrew languages, the two texts having equal authenticity, this twentieth day of November, 1975.

For the Government of the United States of America:
WILLIAM E. SIMON.

For the Government of the State of Israel:
SIMCHA DINITZ.