The U.S.-Israel Tax Treaty, Bearing Two Protocols, Moves Toward Ratification

Abstract

Due to the Lack of A Tax-Sparing Provision, the Treaty Does Not Reduce Taxes For U.S. Investors, and For Many, Operating Through A Branch Will Continue to be the Best Option. Israel and the U.S. began negotiations on a tax treaty almost 30 years ago. Two treaties signed in the 1960s never entered into force, however, since they were not ratified. The current Treaty finds its roots in 1975, when its first version was signed, though again not ratified.1 Five years later, the U.S. and Israel signed a protocol amending the original draft, which again was not ratified. One of the main reasons for this long process was Israel’s fear that signing a treaty with a disclosure of information clause might deter U.S. investment in Israel. In 1985, however, Israel and the U.S. signed a free trade area agreement to remove customs and non-customs barriers to trade between the two countries. This created an absurd situation where, on the one hand, there was an agreement encouraging trade without borders, but on the other hand, there was no treaty to eliminate double taxation. In addition, in the last few years, the U.S. made strong efforts to increase tax collection from foreign companies and individuals doing business in the U.S. These developments made it more important for the parties to sign a tax treaty. On 1/26/93, the parties signed a second protocol amending the original draft, signed on 11/20/75, as amended by the first protocol signed on 5/30/80. Though the treaty has still not been ratified, the Israeli tax commission has indicated that ratification is imminent. The principal issues involve whether the treaty will solve problems that American investors encounter in Israel and those Israeli investors face in the U.S.