The new double taxation treaty between Germany and Israel

New tax treaty between Germany and Israel is expected to ease investors, companies and individuals on bilateral management of business.

Israel has tax treaties with more than 50 foreign countries. The main purpose of tax treaty is to precede economic relationship between both countries by eliminating fiscal obstacles and strengthen collaboration between them.

Recent update regarding the updated tax treaty between Germany and Israel was signed in August 2014 and is expected to be effective during 2015. Israel and Germany has a deep history of mutual collaboration, the first tax treaty was signed in 1962 in Germany, and then in 1977 was updated by leaders of both countries in Jerusalem. The need in the new treaty was born following an accelerated globalization processes due to improved communication and shortening distances between Israel and Europe. Moreover, Israeli economics meets international standards according to global changes and has transformed from developing to developed country.

The main changes in the new tax treaty between Israel and Germany addresses a variety of issues such as adjustment of terms in accordance with the Model Tax Treaty of the OECD, reduction of tax rates and addition of few economic issues which become relevant at new economic global reality.

The main facilitation and improvements in new tax treaty relates to the following:

  • Withholding tax on dividends has the most substantial change in the new tax treaty. The change relates to reduction of the withholding tax rate from 25% according to the previous treaty to 10% in most cases under the new treaty, and even 5% if the beneficial owner is the company that holds at least 10% of the capital of the company paying the dividends.
  • The same is regarding the withholding tax on royalties which is expected to decrease from 5% to zero and on interest – from 15% to 5% according to the new treaty between Germany and Israel. Regarding the real estate investment companies, up to 15% withholding tax will be applied in most cases.
  • The new tax treaty provides exemption from capital gain taxes payment in country of origin, based on the Model Tax Treaty of the OECD; unless the capital gain is derived from real estate transaction.
  • Pensions, annuities and similar payments are expected to be tax-free in contrast to previous tax treaties of 1962 and 1977. This characterizes the new treaty as humanity and social treaty.
  • Information exchange between Germany and Israel regarding “Dirty” capital disclosure will be more efficient by the new treaty which is based on the Model Tax Treaty of the OECD. The new treaty also includes issues of elimination of double taxation, a non-discrimination clause and mutual agreement procedure.

The new treaty relates to additional issues such as individuals residence definition and permanent establishment, taxation specification, government involvement and deals with specific type of industries such as art, sports, shipping, air transportation and more.

In conclusion, the new treaty prevents double taxation between both countries, develops trade and provides certainty to German and Israeli citizens and companies. Withholding tax reduction will ease on companies and individuals to develop new strategies and attract new investments in both countries.