Treaty Between Israel and Italy for the avoidance of double taxation

The treaty between the government of the State of Israel and the government of the Republic of Italy for the avoidance of double taxation and the prevention of fiscal evasion has been ratified in Jerusalem on 7 August 1998 to the presence of the Italian Ambassador and of the Prime Minister of Israel and came into force on 1 January 1999

The general principle of taxation is that income should be taxed in the country of residence. It is therefore crucial to define the meaning of the term “resident”.

“Resident of a Contracting State” means any person who, under the laws of the State, is liable to taxation therein by reason of his domicile, residence, place of management or any other similar criterion.

For enterprises, the relevant concept is that of “permanent establishment”; the term “permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on ; it should therefore not refer to activities such as storage or advertising..

There are specific rules for specific sources of income.

Income from immovable property:

they may be taxed in the country where they are situated, even if the beneficiary is a resident of the other Contracting State.

Business profits:

 generally speaking, the profits of an enterprise from a Contracting State may be taxed only in that State, unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. In this case the profits may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

Shipping and air transport:

 Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

Dividends

: Dividends paid by a company which is resident in a Contracting State to a resident of the other Contracting State may be taxed in that other State. However, they may also be taxed in the Contracting State of which the company paying the dividends is a resident, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:

-10% if the beneficial owner is a company which holds directly at least 25% of the capital of the country paying the dividends

-15% in all other cases

Israeli residents who receive dividends distributed by a company resident in Italy are entitled to a refund of the amount corresponding to the “maggiorazione di conguaglio” owed in respect of dividends subject to the deduction of withholding taxes

Interest:

 Interest arising in a Contrasting State and paid to a resident of the other Contacting State may be taxed in that other State. However, they may also be taxed in the Contracting State in which it arises , but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10%.

Royalties

: Royalties arising in a Contracting State and paid to a resident and paid to a resident of the other Contracting State may be taxed in that other State. However, such royalties may also be taxed in the Contracting State in which they arise, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 10%.

Capital Gains:

Generally speaking Capital Gains should only be taxed in the Contracting State of which the alienator is resident. However, gains from the alienation of immovable property, as well as from the alienation of shares or rights in a company whose property consists mainly of immovable property, may be taxed in the Contracting State in which this property is situated.

Gains that a resident of a Contracting State has derived from the alienation of shares or rights in a company of the other Contracting State may be taxed in that other State only if the resident of the first mentioned State owned directly or indirectly, at any time within the preceding 24 months, at least 10% of the voting power of the company.

Wages and Salaries:

 In general they are taxed in the country of residence. If the employment is exercised in the other Contracting State, the remuneration may also be taxed in the last mentioned State, unless the worker has been present in the other State for a period not exceeding in the aggregate 183 days in the fiscal year and the employer is not a resident of the other State.

There are specific rules concerning students, pensions and government services.

Taxation of capital:

 With the exception of immovable property and of movable property forming part of the permanent establishment of an enterprise in the other Contracting State, that may be taxed in the State where they are situated, capital of a resident of a Contracting State shall only be taxable in that State.

Whenever the possibility of double taxation arises, the following criteria should be applied:

If a resident of Italy derives items of income that may be taxed in Israel, those items are included in the taxable income for Italy.

In this case Italy shall deduct from the taxes so calculated the income tax already paid in Israel, but in an amount not exceeding that proportion of the aforesaid Italian tax that such items of income bear to the entire income.
No deduction will be granted if the item of income is subjected in Italy to a final withholding tax.
If a resident of Italy owns items of capital that may be taxed in Israel, the tax on capital paid in Israel shall be allowed as a credit against Italian tax.
If a resident of Israel derives profits, income or capital gains or owns capital that may be taxed in Italy, the tax
paid in Italy shall be allowed as a credit against the tax due in Israel.

No deduction will be granted if the item of income is subject in Israel to a final withholding tax.

The treaty contains specific dispositions regarding non-discrimination in the field of fiscal treatment, mutual agreement procedures, exchange of information between the competent authorities of the two Contracting States.