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Pensions for Olim: The impact of the new tax treaty between Israel and the United Kingdom

As part of the Israeli Ministry of Finance’s policy to sign new tax treaties with central governments of countries that are members of the OECD, a new treaty was signed last year between Israel and England in order to avoid double taxing.  The original treaty was signed in 1962 and had not been amended since 1970.  This blog will look at the impact that the new treaty has on pensions taken by Olim.

Within the framework of the treaty, it was agreed that new Olim who choose to immigrate from England to Israel will be given a benefit as, for the first time, the British Government has undertaken that no tax on pensions accorded to new immigrants would be levied. Article XI of the agreement states “Subject to the provisions of paragraph (1) of Article X, pensions and other similar remuneration paid to an individual who is resident of one of the territories, shall be taxable only in that territory.” 

Significantly, the protocol does not include a ‘subject to tax’ clause which would avoid double non-taxation (meaning that a contracting state can reclaim its taxing right when the other state does not make use of its taxing rights allocated to them by the provision of a treaty). This change will be beneficial to Olim and ‘returning residents’ who enjoy the 10 year tax exemptions and receive a UK pension. This is a surprising development, as all of Israel’s recent Tax Treaties (e.g. with Canada and Germany) include certain provisions, which can be interpreted to suggest that these treaties do not apply in the case of new immigrants.

In conclusion, the revised treaty states that under certain conditions, pension payments will be taxable only in the recipient’s country of residence. This is a significant change to the previous treaty, which required, as a condition for exemption in the source country, that the pension payments be subject to tax in the country of residence. Accordingly, under the new treaty, Olim will benefit from exempt pension payments both in Israel and in the UK. The new protocol in force is a positive change which will strengthen the business and trade relationship between Israel and the UK. For any questions regarding pensions or any other taxes affected by the new treaty please don’t hesitate to contact us at FKGB Accounting Ltd.