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International Taxation Print

In the era of globalization when international transactions are becoming increasingly widespread, the issue of international taxation takes on particular importance. In the modern business world, joint ventures between countries are on the rise and borders between countries are disappearing.  Still, international business cooperation largely depends on the international taxation aspects of each business activity. Therefore, when a number of countries are involved in an international transaction, this calls for examining the tax laws of the countries concerned as well as the treaties between those countries. In Israel, the principles of international taxation are set forth in the Income Tax Ordinance (New Version), 5721-1961 (hereinafter:  the "Ordinance"), including the rules and regulations by virtue thereof and the tax treaties which Israel signed with various other countries.

The international tax laws of most countries throughout the world are based on one of two taxation methods - territorial taxation and personal taxation - or a combination of both. According to the territorial tax system, income will be taxed by the country in which it was produced, regardless of the residency of the person who produced it. According to the personal tax regime, on the other hand, income is taxed depending on the residency of the person who produced it, regardless of the country in which it was produced. On January 1, 2003, the income tax reform went into effect as part of Amendment 132 of the Ordinance, whereby Israel adopted the personal taxation system. With that said, alongside personal taxation which taxes each resident of Israel on the income he produces, whether the source of the income is in Israel or abroad, Israel continues to apply the territorial taxation system which taxes a foreign resident on income he produced in Israel. That is to say, Israel's international tax laws are based on a combination of personal taxation applying to residents of Israel and on territorial taxation applying to foreign residents, while the tax is usually collected from the foreign resident by deducting withholding tax.

Place where income is produced is determined according to the type of income and based on the rules set out in section 4A of the Ordinance. Thus, for example, with respect to business income, the place where the income was produced will be the place where the income-yielding activity takes place. In contrast, in the case of dividends, the place where the income was produced will be the domicile of the body of persons paying the dividend. Another example is income from rent or usage fees of an asset (with the exception of an intangible asset) which will be taxed where the asset is used.

Details on the definition of residency