Israeli Withholding Tax
Section 170 of the Israeli Tax Ordinance (New Version), 5721-1961 (hereinafter: "the Ordinance”) that is titled "Duty of a person making payment to a non- resident”, provides the duty to deduct tax at source (withholding tax) from payments to a foreign resident.
Section 170 of the Israeli Tax Ordinance provides that whosoever pays to a person not resident in Israel chargeable income not being income from which tax has been deducted at source according to sections 161-164 of the Ordinance, must deduct tax from the income (withholding tax).
We thus see that in order for the duty to deduct tax at source to apply to a payment to a non-resident, according to section 170 of the Israeli Tax Ordinance, all of the following conditions must be fulfilled:
• Payment is actually made;
• The payment that is made is chargeable income in Israel;
• The payment is payable to a non-resident;
• No tax at source has been deducted from the income payable, according to sections 161-164 of the Israeli Tax Ordinance;
• It has not been proved to the satisfaction of the Assessing Officer that the tax has already been paid or it will be paid in some other manner.
The regular withholding tax rate on payments to foreign residents is 25%. In the case of payment to a foreign resident from a treaty country, a reduced withholding tax may apply.
It should be noted that Israeli bank transfer of payment to a foreign resident or foreign company may require a Withholding Tax Authorization. The reduced rate may be obtained following the procedure involving the filing of a special Form: Declaration with respect to payment to a Foreign Resident and a Request to a Reduced Withholding Tax Rate.
Israeli Tax Authority
The Israeli Tax Authority may question the Israeli payer and may ask clarifications as for the classification of payment, the beneficial ownership of the recipient and the terms of the international transaction.
ABOUT THE AUTHOR: Dr. Avi Nov, Adv.
Dr. Avi Nov Adv., specializes in Israeli and international taxation, and is involved in planning tax efficient structures for his Israeli and foreign clients. Dr. Nov advises on transactions and international ventures, as well as the establishment of low tax holding structures; the taxation of Israeli holding companies and the taxation of approved enterprises, withholding taxes for foreign residents; overseas investments; transfer pricing; change of residency and other matters. Another major focus relates to individuals and includes: international taxation; taxation of trusts; tax benefits for new immigrants and returning residents.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.