Israel & Germany update tax treaty
On 21 August 2014, the Israeli Finance Minister and his German counterpart signed a revised double tax treaty between Israel and Germany.
The revised double tax treaty, which is based on the OECD’s model for international agreements for the avoidance of double taxation, will facilitate international investment activities between Israel and Germany. The revised double tax treaty still needs to be ratified in both countries. Subject to ratification by the end of 2014, the revised double tax treaty will, as a rule, enter into force on 1 January 2015.
The revised double tax treaty contains in particular the following amendments:
- Reduction of withholding tax rate on dividends from 25% to 5% (subject to direct shareholding of at least 10%) or 10% (in other cases).
- Reduction of withholding tax rate on interest from 25% to 5% (however, under German domestic tax law, no withholding tax is levied if loan is not profit-participating and not secured by German real properties or ships).
- Elimination of source state’s right to tax royalties.
- Capital gains relating to the sale of shares in companies holding (directly or indirectly) predominantly real properties can be taxed in the state where the real properties are located (however, in most cases no taxation under German domestic tax law).
- Extended exchange of information on tax matters between Israeli and German tax authorities.
In the past, a large number of Israeli investments into Germany have been structured by interposing an entity in a third country (e.g., The Netherlands, Luxembourg or Cyprus). In case of structuring future investments into Germany, a direct investment from Israel to German can be in some cases an alternative. Depending on the special circumstances, interposing an entity in a third country can still be advantageous from a German tax perspective (e.g., optimization of profit repatriation, mitigation of German trade taxes, avoidance of German permanent establishment).