On 21 August 2014 a new tax treaty between Israel and Germany was signed. The new treaty, which is based mainly on the model tax treaty of the OECD, introduces a number of favorable amendments (for the taxpayer) and improvements.
The main favorable amendments and improvements relate to the following:
A maximum withholding tax rate of 10% in general on dividends and 5% if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividend; a withholding tax rate of 15% on dividends from a real estate investment trust (“REIT“) if the beneficial owner holds directly less than 10% of the REIT paying the dividend. This is a substantial reduction of the withholding tax rates under the current treaty.
The new treaty provides for a maximum withholding tax on interest of 5% (subject to certain exceptions) as opposed to 15% under the current treaty and a zero withholding tax on royalties, instead of 5% under the current treaty.
With respect to capital gains, in the case where a resident of one country has become a resident of the other country, the former state may tax accrued capital gains attributable to the property at the time of change of residence.
An additional rule provides limitation of benefits to prevent abuse of the new treaty.
The new treaty deals with additional issues such as the definition of an individual’s residence and the definition of a permanent establishment, government involvement and more.