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Israel-Portugal

2 July 2007

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Treaty between Israel and Portugal signed and details

The first-time income tax treaty and protocol between Israel and Portugal was signed on 26 September 2006. The treaty was ratified by Israel on 22 February 2007 but did not yet enter into force. The treaty will become effective as to withholding taxes 30 days after entry into force and as to other taxes from 1 January following the entry into force. The treaty was concluded in the Hebrew, Portuguese and English languages, each text having equal authenticity. In the case of divergence, however, the English text prevails. The treaty generally follows the OECD Model Convention.

The maximum rates of withholding tax are:

-   5% of the gross amount of dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends;
-   10% of the gross amount of dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends where that latter company is a resident of Israel and the dividends are paid out of profits which are subject to tax in Israel at a rate which is lower than the normal rate of Israeli company tax;
-   15% of the gross amount of the dividends in all other cases;
-   under the treaty, interest arising in a contracting state is exempt from tax in that state if it is paid in relation to any loan granted or guaranteed by the government of the other contracting state, including its political subdivisions and local authorities, the central bank of the other contracting state or if paid with relation to the insurance of international trade;
-   10% of the gross amount of interest in all other cases; and
-   10% of the gross amount of royalties.

Where a company (other than a partnership) which is a resident of Portugal receives dividends from a company which is a resident of Israel and which is not exempt from corporation tax in Israel, the treaty requires Portugal to provide for a deduction equal to 95% of such dividends included in the tax base of the company receiving dividends, provided that the latter company holds directly at least 25% of the capital of the company paying the dividends, and that the participation was held continuously for the preceding 2 years, or from the date of the incorporation of the company paying the dividends if that occurred later, but in this case only if the participation is held continuously throughout the same period.

Where a company which is a resident of Israel receives dividends from a company which is a resident of Portugal and in which it owns at least 25% of its shares, the credit shall take into account Portuguese tax payable by that company in respect of its income.

Arts. 10 (Dividends), 11 (Interest), and 12 (Royalties) contain an anti-treaty shopping provision. Arts. 11 and 12 also contain a presumption regarding the source of payment.

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