background image
The first-time income and capital tax treaty, signed on 13 December 2004, between Luxembourg and Israel was presented to the Luxembourg parliament for approval on 7 October 2005. Once the treaty has entered into force, it will generally apply retroactively from 1 January 2004. The treaty was concluded in the French, Hebrew and English language, each text having equal authenticity, and generally follows the OECDE Model Convention. — Orbitax Tax News & Alerts

The maximum withholding tax rates are:

15% on dividends, in general, 5% if the beneficial owner is a company (other than a partnership) that holds directly at least 10% of the capital of the company paying the dividends and 10% if the beneficial owner is a Luxembourg company that holds directly at least 10% of the capital of the Israeli company paying the dividends if the profits of the Israeli company were taxed at a special rate;
-   10% on interest, in general, and 5% on interest on loans approved by one of the states and paid by a bank of the other state. Exemptions apply to interest derived from specified loans guaranteed by the government of a state and interest derived in respect of an indebtedness arising as a consequence of the sale on credit of industrial commercial or scientific equipment or the sale on credit of merchandise; and
-   5 % on royalties. The definition of royalties includes software payments.

The treaty does not apply to Luxembourg 1929 holding companies (Art. 27).

Luxembourg provides for the exemption-with-progression and credit methods to avoid double taxation. However, Luxembourg does not apply the exemption-with progression-method to income and capital that is exempt in Israel or which is subject to the withholding tax for dividends, interest and royalties. Israel provides for the credit method to avoid double taxation.