🇮🇱 Israel — 🇺🇸 United States

Tax Treaty / Double Tax Avoidance Agreement detail

The Israel–United States income tax treaty was signed on 20 November 1975 and amended by protocol on 26 January 1980. Ratification was delayed until 1994 due to US Senate concerns, with the treaty entering into force for taxable years beginning 1 January 1995 — an unusual gap of nearly two decades between signature and entry into force. The treaty provides tiered withholding rates: dividends are taxed at 12.5% for qualifying corporate shareholders meeting ownership thresholds, 15% for other portfolio dividends, and 25% in certain cases; interest at 10% for most payments and 17.5% in specific circumstances; royalties at 10% for industrial/commercial royalties and 15% for cultural royalties including film. Notable provisions address US software royalties and interact with Israel's Approved Enterprise and Preferred Enterprise tax regimes, which can reduce or eliminate Israeli corporate tax on qualifying income. A new, more modern treaty was negotiated through 2015–2024 but has not yet been ratified by the US Senate, meaning the aging 1975/1980 instrument remains the operative framework. The saving clause permits each country to tax its own citizens and residents regardless of treaty benefits — critically relevant to the approximately 600,000 US–Israeli dual citizens resident in Israel who remain subject to US worldwide taxation on Aliyah. Israel's 10-year foreign-source income exemption for new immigrants and returning residents (the 'Returning Resident' status) creates significant planning complexity when layered against US worldwide taxation for olim. No general totalization agreement exists between the two countries, though discussions have occurred historically, leaving Israeli-based US citizens exposed to potential dual social-insurance contributions. The foreign-earned-income exclusion under IRC §911 continues to apply to US citizens in Israel for non-passive earned income up to the annual threshold. A FATCA Model 1 IGA is in force, governing automatic exchange of financial account information. Both countries have signed the OECD Multilateral Instrument (MLI), with relevant provisions operative as of 2019. The tiebreaker mechanism follows OECD Model Article 4 sequencing. An arbitration mechanism was addressed in protocol negotiations but is not yet operational under the current treaty.