Lilach Asherov and Claire Shelemay review anticipated changes from the new protocol to the to the existing Israel-UK double taxation treaty

On 17 January 2019, a new protocol to the Israel-UK double taxation treaty1 was signed by Israeli and UK representatives (the Protocol).2 This update is a welcome breath of fresh air, given that the original treaty (the Treaty) was signed in 1962 and last amended in 1970.


Unlike the Treaty, the majority of articles set by the Protocol follow the OECD’s Model Tax Treaty, such as low- or zero-tax withholding rates at source for dividends,interest or royalties, and the deletion of art.XII of the Treaty pertaining to professional services. Moreover, the Protocol clearly reflects the intentions of both Israel and the UK to conform with recent developments put in place by OECD member countries, namely the base erosion and profit shifting (BEPS) project.

For example, art.1 of the Protocol reaffirms that both parties intend to prevent double taxation ‘without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance’, including treaty-shopping arrangements. Other examples are art.4, which introduces the ‘closely related enterprise’ concept with respect to a permanent establishment (PE), and art.10, which allows either state to tax gains derived from the alienation of shares (or comparable rights) if, at any time during the 365 days preceding the alienation, such shares derived more than 50 per cent of their value from immovable property in that state.


A key issue is how the amended Treaty will be applied to taxpayers who enjoy beneficial tax treatments. Article 19 of the Protocol (introducing new art.XXIA to the Treaty) addresses the issue of income or gains that are subject to tax in a country only when actually remitted to it, and provides that any relief under the Treaty allowed in the other country will apply only to so much of the income or gains as is taxed in the former.

This provision is crucial for UK persons who are UK resident but non-UK domiciled, as this status (subject to certain provisions) allows these taxpayers to elect to pay tax on the remittance basis.3 Israel offers a beneficial tax treatment for new and returning residents whereby their overseas income and gains are exempted from tax in Israel for a period of five or ten years, depending on their specific status. It appears that art.19 does not preclude the applicability of the Treaty with respect to the income or gains of such new or returning residents, despite the tax exemption. How this will work in practice remains to be seen.


The Protocol sets lower withholding tax rates for dividends and interest payments between Israel and the UK, unless these are connected with a PE. The Treaty sets a withholding rate of 15 per cent on all types of dividend.4 The Protocol will reduce the withholding rate to 5 per cent with respect to dividends paid to the beneficial owner, which is a company holding directly or indirectly at least 10 per cent of the share capital of the paying company.5 A withholding rate of 15 per cent applies in all other cases.

The UK currently does not withhold tax on dividends paid by domestic companies to non-UK shareholders. The current withholding rate in Israel is 25–30 per cent (not including surcharge, if applicable), so the new rate set in the Protocol will be particularly beneficial for UK-resident shareholders of Israeli companies that are eligible for tax exemption in the UK on dividends received. A 15 per cent withholding rate applies with respect to distributions from a UK/Israeli real estate investment trust.

The maximum rate of withholding tax on interest on bank loans will be 5 per cent of the gross amount of interest paid, and 10 per cent for other types of interest. The recipient of the interest may elect to be taxed at source on their net interest income (after allowable deductions) at the appropriate rate applied by that country. Royalties will only be taxable in the country of residence of the recipient (who is the beneficial owner). Where the payment is effectively connected with a PE carried by the recipient in the other state, this provision will not apply. Rather, the provisions of art. III (business profits) will apply.


The anticipated update to the Treaty is a positive development to incentivise further investment and trade between Israel and the UK. The post-Brexit trade agreement between Israel and the UK6 is another significant opportunity, and we expect the business and trade relationship between Israel and the UK to strengthen further.

  1. Available at

  2. The Protocol will enter into force after ratification procedures in both states are completed.

  3. New rules for non-UK domiciled taxpayers were introduced in the UK Finance (No.2) Act 2017, and these rules took retroactive effect from 6 April 2017.

  4. Provided such dividend is ‘subject to tax’ in the other state.

  5. These conditions must be met for at least one year at the date the dividend is paid.

  6. At the time of writing, this has been agreed in principle by the two countries.