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The Singapore Ministry of Finance has announced that following the completion of ratification formalities, the new income tax treaty between Singapore and Israel, signed on 19 May 2005, will enter into force as of 6 December 2005. The new treaty generally applies from 1 January 2006. From this date, the new treaty generally replaces the Singapore-Isreal income tax treaty of 27 September 1971. — Orbitax Tax News & Alerts

The maximum rates of withholding tax are:

-   10% on dividends in general, and 5% if the beneficial owner holds directly at least 10% of the capital of the company paying dividends. Dividends paid to the government (as defined) of the other state are exempt. In any case, Singapore does not currently impose withholding tax on dividends;
-   7% on interest. Interest paid to the government (as defined) of the other state is exempt; and
-   5% on royalties. In addition, royalties are taxed at a maximum rate of 20% in the state in which the recipient is resident.

Deviations from the OECD Model include that a permanent establishment includes a building site, a construction, assembly or installation project or connected supervisory activities which continue for more than 6 months, and the furnishing of services, including consultancy services, for a total period of more than 183 days in any calendar year.

Both states are allowed to apply domestic anti-abuse provisions and deny the benefits of the treaty where they are of the opinion that the granting of such benefits would constitute an abuse of the treaty.

Both states generally provide for the credit method to avoid double taxation. A credit for tax on underlying profits is given where the recipient company owns at least 10% of the share capital of the company paying the dividends. In addition, Israel exempts dividends from its tax base where the recipient Israeli company owns at least 25% of the share capital of the Singaporean company, provided the dividends are paid on or before 1 January 2008 or the date the treaty enters into effect, whichever is later.