On September 21, 2016 the Government of Canada and the Government of the State of Israel signed a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Hereafter: the new DTA).

Although the new DTA has been signed, it has not entered into force yet. For the new DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.

 

When entering into force the new DTA will replace the existing Convention between Canada and the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital, done at Ottawa on July 21, 1975.

 

Below we will discuss a selection of provisions included in the new DTA of which we think they might interest our readers.

 

Taxes covered

Based on Article 2, Paragraph 3 of the new DTA (“Taxes Covered”), the existing taxes to which this Convention shall apply are in particular:

(a)   in the case of Israel:

(i)     the income tax and company tax (including tax on capital gains);

(ii)    the tax imposed on gains from the alienation of property according to the Real Estate Taxation Law; and

(b)   in the case of Canada, the taxes imposed by the Government of Canada under the Income Tax Act.

 

Article 2, Paragraph 4 subsequently arranges that the new DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes.

 

Residency

Article 4, Paragraph 3 of the new DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1 of Article 4 of the new DTA a person other than an individual is a resident of both Contracting States, the competent authorities shall endeavour to determine by mutual agreement the Contracting State of which such person shall be considered to be a resident for the purposes of this Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.

 

Permanent establishment

Article 5, Paragraph 3 of the new DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

 

With respect to permanent establishments Article 7, Paragraph 3 of the new DTA (“Business Profits”) contains a so-called appropriate adjustment clause which reads as follows:

Where, in accordance with paragraph 2, a Contracting State adjusts the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting States and taxes accordingly profits of the enterprise that have been charged to tax in the other State, the other State shall, to the extent necessary to eliminate double taxation on these profits, make an appropriate adjustment to the amount of the tax charged on those profits. In determining such adjustment, the competent authorities of the Contracting States shall if necessary consult each other.

 

Immovable property

Article 6, Paragraph 1 of the new DTA (“Income from Immovable Property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.

 

With respect to immovable property Article 13, Paragraph 1 of the new DTA (“Capital Gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property situated in the other Contracting State may be taxed in that other State.

 

Article 13, Paragraph 2 of the new DTA subsequently arranges that gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State.

 

Article 13, Paragraph 4 of the new DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of:

(a)   shares, deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other State (at the time of the alienation or at any time during the twelve preceding months); or

(b)   an interest in a partnership, trust or other entity, deriving more than 50 per cent of its value directly or indirectly from immovable property situated in that other State (at the time of the alienation or at any time during the twelve preceding months);

may be taxed in that other State.

 

Associated enterprises

Article 9, Paragraph 2 of the new DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.

 

Article 9, Paragraph 3 of the new DTA contains a so-called statute of limitation clause which reads as follows:

A Contracting State shall not change the profits of an enterprise in the circumstances referred to in paragraph 1 after the expiry of the time limits provided in its domestic laws and, in any case, after eight years from the end of the year in which the profits which would be subject to such change would have accrued to an enterprise of that State.”

 

Article 9, Paragraph 4 of the new DTA subsequently arranges that the provisions of Article 9 paragraphs 2 and 3 of the new DTA shall not apply in the case of fraud or wilful default.

 

Dividends

Article 10, Paragraph 2 of the new DTA (“Dividends and Distributions by a Real Estate Investment Fund”) maximizes the withholding tax that a Source State is allowed to withhold over dividends to:

(a)   5 per cent of the gross amount of the dividends if the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends;

(b)   15 per cent of the gross amount of the dividends in all other cases.

 

Article 10, Paragraph 4 of the new DTA arranges that notwithstanding the provisions of Article 10, Paragraph 2 of the new DTA, dividends arising in a Contracting State and beneficially owned by an organization that was constituted and is operated in the other Contracting State exclusively to administer or provide benefits under one or more recognized pension plans shall be exempt from tax in the first-mentioned State if:

(a)   the organization is the beneficial owner of the shares on which the dividends are paid, holds those shares as an investment and is either generally exempt from tax in the other State or its income is not subject to tax in the other State;

(b)   the organization does not hold directly or indirectly more than 10 per cent of the capital or 10 per cent of the voting power of the company paying the dividends; and

(c)   each recognized pension plan provides benefits primarily to individuals who are residents of the other Contracting State.

 

Article 10, Paragraph 5 of the new DTA arranges that notwithstanding any other provision of this Convention, distributions made by a real estate investment fund which is a resident of Israel to a resident of Canada may be taxed in Canada. However, such distributions may also be taxed in Israel and according to the laws of Israel, but if the beneficial owner of these distributions is a resident of Canada and holds directly less than 10 per cent of the capital of that real estate investment fund, the tax so charged shall not exceed 15 per cent of the gross amount of the distributions.

 

Article 10, Paragraph 10 of the new DTA contains an anti-abuse clause which reads as follows:

A resident of a Contracting State shall not be entitled to any benefits provided under this Article in respect of a dividend if one of the main purposes of any person concerned with an assignment or a transfer of the dividend, or with the creation, assignment, acquisition or transfer of the shares or other rights in respect of which the dividend is paid, or with the establishment, acquisition or maintenance of the person that is the beneficial owner of the dividend, is for that resident to obtain the benefits of this Article.

 

Interest

If the beneficial owner of the interest is a resident of the other Contracting Party, Article 11, Paragraph 2 of the new DTA (“Interest”) maximizes the withholding tax that a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.

 

Article 11, Paragraph 3 of the new DTA arranges that notwithstanding the provisions of paragraph 2:

(a)   interest arising in a Contracting State and beneficially owned by the Government of the other Contracting State, or any political subdivision or local authority thereof, or by the Central Bank of that other State, shall be exempt from tax in the first-mentioned State;

(b)   interest arising in a Contracting State and paid in respect of indebtedness of the Government of that State, or any political subdivision or local authority thereof, or the Central Bank of that State shall be taxable only in the other State if the interest is beneficially owned by a resident of that other State;

(c)   interest arising in Israel and paid to a resident of Canada shall be taxable only in Canada if it is paid in respect of a loan made, guaranteed or insured by Export Development Canada and the beneficial owner of the interest is dealing at arm's length with the payer;

(d)   interest arising in Canada and paid to a resident of Israel shall be taxable only in Israel if it is paid in respect of a loan made, guaranteed or insured by Ashra – The Israel Export Insurance Corporation Ltd. and the beneficial owner of the interest is dealing at arm's length with the payer;

(e)   interest arising in a Contracting State and beneficially owned by an organization that was constituted and is operated in the other Contracting State exclusively to administer or provide benefits under one or more recognized pension plans shall be exempt from tax in the first-mentioned State if: 

(i)     the organization is the beneficial owner of the interest and is either generally exempt from tax in the other State or its income is not subject to tax in the other State;

(ii)   each recognized pension plan provides benefits primarily to individuals who are resident of the other Contracting State; and

(iii)  the organization does not hold directly or indirectly more than 10 per cent of the capital or 10 per cent of the voting power of the company paying the interest;

(f)    the tax charged by a Contracting State on interest arising in that State and paid to a resident of the other Contracting State shall not exceed 5 per cent of the gross amount of the interest if the beneficial owner of the interest is a financial institution and is dealing at arm's length with the payer. For the purposes of this subparagraph, the term "financial institution" means a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance.

 

Article 11, Paragraph 5 of the new DTA subsequently arranges that Subparagraph 3(f) shall not apply to interest, all or any portion of which is contingent or dependent on the use of or production from property or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a company.

 

Article 11, Paragraph 10 of the new DTA contains an anti-abuse clause which reads as follows:

A resident of a Contracting State shall not be entitled to any benefits provided under this Article in respect of interest if one of the main purposes of any person concerned with an assignment or a transfer of the interest, or with the creation, assignment, acquisition or transfer of the debt-claim or other rights in respect of which the interest is paid, or with the establishment, acquisition or maintenance of the person that is the beneficial owner of the interest, is for that resident to obtain the benefits of this Article.

 

Royalties

If the beneficial owner of the royalties is a resident of the other Contracting Party, Article 12, Paragraph 2 of the new DTA (“Royalties”) maximizes the withholding tax that a Source State is allowed to withhold over such royalties to 10 per cent of the gross amount of the royalties.

 

Article 12, Paragraph 3 of the new DTA subsequently arranges that notwithstanding the provisions of Article 12, Paragraph 2 of the new DTA:

(a)   copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical or other artistic work (but excluding royalties in respect of motion picture films and royalties in respect of works on film, videotape or other means of reproduction for use in connection with television broadcasting); and

(b)   royalties for the use of, or the right to use, computer software or any patent or for information concerning industrial, commercial or scientific experience (but not including any such royalty provided in connection with a rental or franchise agreement);

arising in a Contracting State and paid to a resident of the other Contracting State who is the beneficial owner of the royalties shall be taxable only in that other State.

 

Article 12, Paragraph 8 of the new DTA contains an anti-abuse clause which reads as follows:

A resident of a Contracting State shall not be entitled to any benefits provided under this Article in respect of a royalty if one of the main purposes of any person concerned with an assignment or a transfer of the royalty, or with the creation, assignment, acquisition or transfer of rights in respect of which the royalty is paid, or with the establishment, acquisition or maintenance of the person that is the beneficial owner of the royalty, is for that resident to obtain the benefits of this Article.

 

Other limitations

The new DTA contains an Article 25, which reads as follows:

Nothing in this Convention shall prevent a Contracting State from applying any provision of its laws which are designed to prevent avoidance or evasion of taxes.

 

Other

Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 23) and regarding the Exchange of Information (Article 24).

 

Click here to be forwarded to the text of the new DTA as available on the website of the Canadian Department of Finance.

 

Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.

 

 

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