This has culminated in two very fundamental agreements being agreed in the past few weeks.
Both have yet to come into force but have been agreed in principle between the two countries.
They have been introduced to encourage trade and investment, and of course tax plays a major role within this.
New protocol to UK : Israel Double Tax Treaty – signed on 17 January (yet to come into force)
The new Protocol provides for a reduction of Israeli withholding tax on dividends and interest payments made to the UK, and a reduction of UK withholding tax on payments of interest to Israel.
It also provides a key benefit for many people based in Israel with UK pension income.
Withholding tax changes
It reduces the rate of withholding tax on dividends from Israel to the UK from 15% (as currently provided for in the UK/Israel Double Tax Treaty) to:
- 0% on holdings by pension schemes;
- 5% for companies (other than a partnership or a real estate investment trust) which hold at least 10% of the share capital of the subsidiary, throughout a 365-day period that includes the date of payment of the dividend.
It also reduces the rate of withholding tax on interest payments from Israel to the UK from 15% to 10%, with a further reduction to:
- 0% on payments to governments, local authorities, central banks or pension schemes, or on bonds traded on a UK Stock Exchange;
- 5% on payments to banks.
In terms of the UK, the same reduction in terms of withholding tax on interest payments to Israel will now apply.
There is an initial reduction on withholding tax on interest payments from the UK to Israel from 15% to 10%, with a further reduction to:
- 0% on payments to governments, local authorities, central banks or pension schemes, or on bonds traded on an Israeli Stock Exchange;
- 5% on payments to banks.
The UK dividend withholding tax rate to Israel is currently already 0%, and therefore this cannot be reduced.
There will also be no Israeli/UK withholding tax on royalties (royalties will be taxable only in the recipient’s state of residence).
Tax on UK pensions
As well as the obvious benefits of reduced rates of withholding tax of payments made between the two countries, there is a slightly more hidden benefit in connection with taxes on UK pensions.
Currently, UK pension income needs to be taxed either in Israel or in the UK. The UK does not allow the 10-year Aliyah exemption, and insists that pension income must be taxed somewhere.
The new tax treaty, as detailed above, will change this. Due to the 10-year exemption, for the first 10 years after Aliyah, UK pension income will no longer need to be taxed by either country.
Please note that the new treaty has been signed but not yet ratified – this is expected early next year.
This new Protocol clearly makes investment from UK corporates into Israeli companies, and to a lesser extent, but still relevant, Israeli investment into UK companies, more attractive than it ever has been before.
Israel has finalised a post-Brexit deal with the UK – agreement in principle on 24 January 2019 – not yet signed
Trade between the UK and Israel passed the $10 billion mark for the first time last year.
From June 2016 to May 2017, 32 new Israeli companies entered the British market. They invested $199 million and created 888 new jobs. This was an increase on the previous year where 25 Israeli companies entered the UK with an investment of $149 million and created 787 jobs.
The specific details of the agreement are unknown at this moment in time, but this, together with the new protocol detailed above, clearly show a strengthening of the trade relationship between the two countries.
Farley Kaye FCA
Managing Partner
For more information please contact Farley:
farley.kaye@fkgb.co.uk
052 627 7472
