The new Australia-Israel tax treaty – major boost to trade and co-operation

May 20, 2019
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In 2017 the Afik&Co. law firm took upon itself to promote the Israel-Australia trade relationship and join the amazing work done for decades by the Australia-Israel Chamber of Commerce. Afik & Co. does that in cooperation with Australian law firms and with Israeli and Australian accounting firms, including the national Australian law firm of Hall Chadwick. Among other actions the offices assist Israeli companies to list on the ASX, assisting Australian businesses to open shop in Israel and assist Australian businesses in their activities in Israel. One of the main obstacle for years has been tax and banking issues, and mainly the obstacles in transferring funds between jurisdictions. Thus, for example, we recently had to spend many hours of work convincing various banks in Israel to allow funds to be transferred to Australia as part of the Security Meters (ASX: SMX) successful secondary public offering, in which about a third of more than six million Dollars raised were from Israeli investors. The long awaited Australia-Israel Tax Treaty marks a new era for the long and thriving relationship between the two countries that share a strong historical and present bond and should ease the intercountry economic relations.
The signing of the Australia-Israel Tax Treaty on 28 March 2019 is a further, and particularly significant, milestone in the burgeoning trade relationship between the two countries. It follows other recent developments – in 2016, the establishment in Tel Aviv of Australia’s first business landing pad and the signing of the Working Holiday Agreement; and in 2017 the signing of the Air Services Agreement and the Technological Innovation Cooperation Agreement– that have seen bilateral trade surge to well in excess of AUD1 billion per annum.
Why a double tax treaty? A double tax treaty functions to prevent double taxation on income and on capital by guaranteeing that a person’s country of residence will provide either a tax credit for tax which has been paid in the non-resident country or, alternatively, that the income sourced from the non-resident country will be exempt from tax in that non-resident country for the non-resident. Accordingly, the main purpose of the new Treaty, as its preamble suggests, are eliminating double taxation with respect to taxes on income and capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
The taxes covered by the treaty are Israeli income tax and company tax (including capital gains tax), alienation of property tax (Real Estate Taxation Law) and taxes imposed under the Petroleum Profits Law, but not VAT. On the Australian side the treaty covers income tax, resource rent taxes and fringe benefits tax, but not GST.
Among the other arrangements in the treaty the following are some aspects that are relevant when planning cross border business arrangements:
– The treaty benefits will be available for income derived by or through fiscally transparent entities or arrangements (such as partnerships and trusts) but only to the extent that the income is treated as the income of one of the country’s residents under that country’s domestic law.
– Permanent Establishment rules enable Australia and Israel to tax business profits under varying circumstances. Some of the key items are:
o Deeming a Permanent Establishment: where a person (other than an independent agent) acting in a contracting State on behalf of an enterprise habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise;
o Ensures that persons who act exclusively or almost exclusively for a closely related enterprise do not qualify as independent agents;
o Narrows the specific activity exceptions by making each of them subject to the condition that the relevant activity is preparatory or auxiliary for the enterprise; and
o Introduces an anti-contract splitting rule to aggregate connected activities by closely related enterprises for the purpose of time based Permanent Establishment tests.
– Transfer pricing adjustments. A seven year time limit will generally apply for making transfer pricing adjustments, with an adjustment to be made to the profits of an associated enterprise so that the transfer pricing adjustment does not result in double taxation of the same profits in the hands of two associated enterprises
– Dividends may be taxed in the source (of the dividend) country up to the following limits: Zero: for dividends derived by governments (including government investment funds), central banks, tax exempt pension funds or Australian residents carrying out complying superannuation activities on direct holdings of no more than 10 per cent;5%: of the gross amount of the dividend for intercorporate dividends paid to companies that hold 10 per cent or more of the paying company throughout a 365 day period;and 15%: for all other dividends. Australia only imposes dividend withholding tax on payments of unfranked dividends;
– Interest may be taxed in the source (of the interest) country up to the following limits: Zero: for interest derived by government bodies (including government investment funds) and central banks; 5%: for interest derived by recognised pension funds, Australian residents carrying out complying superannuation activities and unrelated financial institutions; and 10%: for all other interest; and
– Royalties may be taxed in the source (of the royalty) country up to a limit of 5 per cent of the gross royalty.
The Australia-Israel Tax Treaty (Treaty) is a welcome step in encouraging the further growth of bilateral trade and the deepening of business and economic ties between the two countries. The Treaty is expected to come into effect in late 2019/early 2020 once both governments have taken the necessary steps to fully ratify the Treaty. We hope that this will remove obstacles in the Australian-Israel trade and promote the thriving business relationship between these two great countries.