By Allon Ledder

26 July 2019

On 28 March 2019, after 30 years (!) of negotiating, Australia and Israel finally signed a tax treaty for the elimination of double taxation.

This tax treaty should translate into a boost in business between the two countries as there will be greater certainty of the tax implications of transactions and less risk that tax will need to be paid twice.

Why did it take so long?

Australia and Israel both already have a number of tax treaties with other countries, and many of those treaties seem to be drafted in a fairly standard way. So why did it take so many years for the two countries to reach an agreement?

There are actually quite a number of complex issues that need to be resolved before two countries can enter into a tax treaty. For example residents of a country have to pay tax in that country (as we all know very well). But it is not always so simple to determine whether a person is a resident of a country, especially if they spend significant time living in other countries. Different countries have different tests for determining whether an individual is a resident for tax purposes. Australia has a 183-day test. This means that if the individual in question is present in Australia for half the income year (whether continuously or with breaks) then they will be an Australian resident. Israel has a fuzzier definition – an individual is deemed to be a resident of Israel for tax purposes if their “centre of living is in Israel, taking into account the person’s family, economic and social links”. Given the different tests, a person could in theory be a resident of both countries!

The tax treaty has to deal with issues such as this and work how to resolve inconsistencies.

What are some of the benefits of the tax treaty?

As well as eliminating the risk of double taxation, there will be significant savings in withholding tax. For example, if an Australian subsidiary is paying dividends to its Israeli parent, they would currently need to pay 30% withholding tax. Under the new treaty, this will drop to 5%.

Until now, if a parent company in one of the countries wished to set up a subsidiary in the other country, it would typically structure this through an interposed entity in a third country which has a tax treaty with both Israel and Australia. Under the new treaty there will no longer be the need for such complexity.

Don’t get too excited just yet!

Even though the treaty has been agreed and signed, it is still not in effect. That will require both of the countries to go through their own domestic procedures to formally adopt the treaty and put it into practice. This is just an administrative process and there is no doubt that it will take place. However, it is difficult to know how long it will take. Officials are reluctant to give a date but it seems that we will still need to wait a number of months before we can enjoy the new regime.

Meanwhile, companies and individuals can start planning how they will take advantage of the benefits that will soon be available to them.

 

Tisher Liner FC Law has Australian lawyers in both Australia and Israel. If you are an Australian with interests in Israel or vice versa, please contact us to discuss how we can assist you.

 

Disclaimer
The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.

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