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Canada-Israel

28 December 2016

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Tax Treaty between Canada and Israel has Entered into Force

The new income tax treaty between Canada and Israel entered into force on 21 December 2016. The treaty, signed 21 September 2016, replaces the 1975 tax treaty between the two countries.

Taxes Covered

The treaty covers Canadian taxes imposed by the Government of Canada under the Income Tax Act. It covers Israeli income tax and company tax (including tax on capital gains), and tax on gains from the alienation of property according to the Real Estate Taxation Law.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement based on its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to claim any relief or exemption from tax provided by the treaty.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 15% (Distributions made by an Israeli real estate investment fund may be taxed in Canada and Israel, but the Israeli tax is limited to 15% if the beneficial owner is a company directly holding less than 10% of the fund's capital)
  • Interest - 5% if the beneficial owner is a financial institution dealing at arm's length with the payer, subject to certain limitations; otherwise 10%
  • Royalties - 0% for:
    • Copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical, or other artistic work (but excluding royalties in respect of motion picture films and royalties in respect of works on film, videotape, or other means of reproduction for use in connection with television broadcasting); and
    • Royalties for the use of, or the right to use, computer software or any patent or for information concerning industrial, commercial, or scientific experience (but not including any such royalty provided in connection with a rental or franchise agreement);
    • Otherwise 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or an interest in a partnership, trust, or other entity deriving more than 50% of their value directly or indirectly from immovable property situated in the other State at the time of the alienation or at any time during the twelve preceding months.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Limitation on Benefits

The beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 13 (Capital Gains) will not apply if obtaining the benefits of the Articles was one of the main purposes of any person concerned with the creation, assignment, or alienation of the shares, debt-claims, other rights or property in respect of which the income is paid or gains are realized. The limitation is included in each of those Articles.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Effective Date

The treaty generally applies from 1 January 2017, although Article 23 (Mutual Agreement Procedure) and Article 24 (Exchange of Information) apply from the date of the treaty's entry into force.

The 1975 tax treaty between the two countries ceases to have effect from the dates the new treaty is effective, and terminates on the last date.

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