U.S.-Israel tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-Israel treaty apart

The U.S.-Israel treaty, signed in 1975 and in effect since 1995, has rates well above most U.S. treaties and article numbers that follow no model. Dividends are 25% or 12.5%, interest 17.5% or 10%, royalties 10% or 15%. Its personal services rules are generous to the U.S. side: contractors are taxed after 183 days in the tax year with no fixed-base test, employees only if their pay is taxed in Israel, and performers once they earn more than $400 a day. U.S. Social Security paid to Israeli residents is exempt in both countries.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 1995. Protocols in effect from: none listed. IRS country code IS.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-Israel treaty as a payer

Documents and dates

The convention was signed on November 20, 1975 and amended by protocols of May 30, 1980 and January 26, 1993. The Senate consented in 1981, but the treaty did not enter into force until a disagreement over exchange of information was resolved by the 1993 protocol; the IRS tables give January 1, 1995 as the general effective date. The base technical explanation describes the pre-1993 text in several places, so the 1993 protocol and its own technical explanation should be read alongside it.

Article map

The numbering differs from every model treaty: residence is Article 3, source rules Article 4, business profits Article 8, dividends 12, interest 13, royalties 14, branch tax 14-A, capital gains 15, independent services 16, employees 17, performers 18, loan-out services 19, pensions 20, Social Security 21, teachers 23, students 24 and limitation on benefits 25. There is no other income article.

Residence and the remittance basis

An Israeli company is any body Israel taxes as a resident, which can include a company incorporated elsewhere. Partnerships, estates and trusts are residents only to the extent their income is taxed in Israel as a resident's (Art. 3(1)). A new immigrant (an oleh) is deemed to have his centre of vital interests in Israel for the tie-breaker. A dual-resident company gets no benefits as a recipient until the competent authorities decide, though dividends, interest and royalties it pays still get treaty rates. Under Article 6(6), where a person is taxed only on income remitted to the residence country, the reduced U.S. rate applies only to the amount remitted in the year it accrues or the first three months of the next year.

Limitation on benefits

Article 25 works in reverse of most U.S. treaties: it lists disqualifying tests and then safe harbors. A resident is disqualified if 50% or more of it (by vote or value for a company) is owned by individuals who are neither residents nor citizens of either country taxed on worldwide income, or if 50% or more of its gross income goes to pay liabilities, such as interest and royalties, to such third-country persons. Individuals, governments, companies whose principal shares trade substantially on a recognized exchange (including the Tel Aviv Stock Exchange), nonprofits and pension funds with most beneficiaries entitled to benefits, and income connected with an active business in Israel are protected regardless. A class of shares tracking U.S. income that is mostly held by outsiders loses benefits on that income.

Dividends

The general rate is 25%. A company gets 12.5% only if it owned at least 10% of the payer's voting stock for the part of the payer's year before the payment and the whole of the prior year, and no more than 25% of the payer's prior-year gross income was interest and dividends (other than interest from banking, insurance or finance businesses and income from 50%-owned subsidiaries) (Art. 12(2)). Dividends paid out of income from an Israeli approved enterprise carry 15% instead. RIC dividends are 25%, never 12.5%; REIT dividends get 25% only for an individual holding less than 10%, and otherwise the statutory 30% applies (Art. 12(3)). The 1976 letter of submittal describes different U.S. rates; the treaty text and technical explanation control.

Interest and royalties

Interest is capped at 17.5%, or 10% on interest from a loan granted by a bank, savings institution, insurance company or the like (Art. 13(2)(a)). The 10% rate depends on who made the loan; it is not a rate for Israeli bank depositors. Interest owned by either government or an untaxed instrumentality (the Bank of Israel, for example), and interest on loans guaranteed or insured by the lender's own government, are exempt. A recipient may elect to be taxed on net interest as business profits. REMIC excess inclusions get no reduction (Art. 13(8)). The treaty has no portfolio or deposit interest exemption of its own, but the Code's exemptions still apply (Art. 6(2)).

Royalties for copyrights of literary, artistic or scientific works, including films and radio or TV films and tapes, are capped at 10%; patents, designs, models, plans, secret processes, trademarks and similar property at 15% (Art. 14). Royalties are U.S.-source only to the extent the property is used in the U.S. Equipment rent is business profits, and film rental is expressly moved out of business profits into the 10% royalty category (Art. 8(5)).

Business profits and permanent establishment

A construction site, or supervision connected with it, and substantial equipment kept in the country, become a permanent establishment after more than six months. A deemed permanent establishment arises from selling goods in the U.S. that were substantially processed here or bought here and not substantially processed abroad (Art. 5(4)). The U.S. branch tax on an Israeli company is capped at 12.5% on the dividend equivalent amount and 5% on excess interest (Art. 14-A). Article 19 lets the U.S. tax, without a permanent establishment, amounts an Israeli company receives for furnishing a designated individual's services (an entertainer, for example) where the individual is paid by someone not taxed on it.

Personal services

Independent services are taxable in the U.S. only if the individual is present 183 days or more in the tax year (Art. 16); there is no fixed-base test. An employee is exempt only if present less than 183 days in the tax year, employed by an Israeli resident or an Israeli permanent establishment, the pay is not borne by a U.S. permanent establishment, and the pay is subject to tax in Israel (Art. 17(2)). The IRS table states the limit as 182 days. Treaty-exempt wages may still be subject to Social Security tax, which the treaty does not cover. Performers and athletes are taxable on everything once gross income exceeds $400 for each day present to perform; the technical explanation spreads a fixed fee over performance and rehearsal days (Art. 18).

Pensions and Social Security

Private pensions, annuities and alimony are taxable only in the country of residence (Art. 20); the pension definition covers periodic payments. Social Security and other public pensions paid by one country to a resident of the other are exempt in both countries (Art. 21), even for U.S. citizens. U.S. Social Security paid to an Israeli resident is therefore not withheld on.

Teachers and students

Teachers and researchers invited to teach or research at a university or recognized institution are exempt for up to two years from arrival; the first two years stay exempt if the stay runs longer (Art. 23). Students and grant recipients are exempt for up to five tax years on gifts from abroad, grants and up to $3,000 a year of service income. Employees of an Israeli resident visiting to gain experience or study are exempt on up to $7,500 over 12 consecutive months, and participants in U.S. government programs on up to $10,000 for one year (Art. 24). Only one provision can be used per year, and Articles 23 and 24(1) together are limited to five years.

Other income and gains

With no other income article, U.S.-source income the treaty does not cover gets no reduction. Gains are exempt except on real property (including FIRPTA interests), permanent establishment assets, contingent royalty gains, and gains of an individual present 183 days or more in the year.

Where payers get it wrong

• Using 15% and 5% for dividends. The treaty rates are 25% and 12.5%, and the 12.5% rate needs a full prior year of ownership and a passive-income test on the payer.
• Giving the 10% bank rate to depositors. It applies to interest on loans granted by banks and insurers. Check the Code's deposit and portfolio exemptions first.
• Applying model-treaty service tests. Days are counted in the tax year, there is no fixed-base test, the employee's pay must be taxed in Israel, and performers are taxed above $400 a day.
• Treating all royalties alike. Copyright and film royalties are 10%, industrial royalties 15%, and equipment rent is business profits.
• Withholding on U.S. Social Security. It is exempt in both countries under Article 21.

Read from the treaty documents: Convention of Nov. 20, 1975; Protocols of May 30, 1980 and Jan. 26, 1993 and exchanges of notes; Treasury Technical Explanations of the Convention and the 1993 Protocol. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the Israel treaty's LOB provision is Article 25).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• f Includes alimony.
• u If enterprise earns income from leasing of equipment in the conduct of a trade or business, covered by Business Profits article (net tax). If passive income from the leasing of equipment, and not in Royalty article, covered by the Other Income article, if any. In Pakistan payment for TV broadcasting rights are covered by the Royalty article but not rental income from motion picture films.
• w The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or a real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is an individual holding less than a 10% interest (25% in the case of Portugal, Thailand, and Tunisia) in the REIT.
• z An exemption from tax or a reduced rate of tax may apply to interest that is paid to the government of a Contracting State or a political subdivision or local authority thereof. An exemption or reduced rate may also apply to certain other types of interest, including interest paid to certain banks or other financial institutions, interest derived on loans guaranteed or insured by the government of a Contracting State, and interest arising in connection with commercial credit for goods or services. Please refer to the interest article of the relevant treaty for specific information. Income Tax Treaties

Notes to the services table (IRS Table 2)

• 2 Applies only if training or experience is received from a person other than alien's employer.
• 4 Does not apply to compensation for research work primarily for private benefit.
• 5 Grant must be from a nonprofit organization. In many cases, the exemption also applies to amounts from either the U.S. or foreign government. For Indonesia and the Netherlands, the exemption also applies if the amount is awarded under a technical assistance program entered into by the United States or the foreign government, or its political subdivisions or local authorities.
• 16 Exemption applies only if the compensation is subject to tax in the country of residence.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 37 If the compensation exceeds $400 per day, the entertainer may be taxed on the full amount. If the individual receives a fixed amount for more than one performance, the amount is prorated over the number of days the individual performs the services (including rehearsals).
• 39 Exemption does not apply if, during the immediately preceding period, the individual claimed the benefits of Article 24(1).
• 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

Other treaty countries

Australia · Austria · Bangladesh · Barbados · Belgium · Bulgaria · Canada · Chile · China · Commonwealth of Independent States · Cyprus · Czech Republic · Denmark · Egypt · Estonia · Finland · France · Germany · Greece · Iceland · India · Indonesia · Ireland · Italy · Jamaica · Japan · Kazakhstan · Latvia · Lithuania · Luxembourg · Malta · Mexico · Morocco · Netherlands · New Zealand · Norway · Pakistan · Philippines · Poland · Portugal · Romania · Slovak Republic · Slovenia · South Africa · South Korea · Spain · Sri Lanka · Sweden · Switzerland · Thailand · Trinidad and Tobago · Tunisia · Turkey · Ukraine · United Kingdom · Venezuela