Israel – United States Tax Treaty

Business activity in the United States

The United States has one of the strongest economies in the world. After World War II, the United States economy has, for the most part, steadily flourished. Between the years 2020-2023, despite the covid pandemic, the economic output of the USA was estimated at a value of approximately 103 trillion dollars. In addition, the United States’ GDP ranks 1st in the world at $23.3 trillion as of 2023 and 9th in GDP per capita.

The United States’ economy is able to thrive due to the country’s skilled workforce, stable political system, and overall innovative mindset. In addition, the United States leverages both the Atlantic and Pacific oceans for worldwide trade which is a major advantage for cost efficient shipping. Some of the leading economic sectors include Healthcare, Technology, Construction, Retail, Non-durable Manufacturing, and Agriculture.

Bilateral agreements between the United States and Israel

Double Taxation Treaty

A bilateral tax treaty on avoidance of double taxation is an agreement signed between two countries aimed at avoiding double taxation and promoting economic cooperation between the two countries. The convention establishes rules for the taxation of various types of income, including dividends, interest, royalties, and capital gains. It also provides mechanisms for resolving disputes and exchanging information between tax authorities of the United States and Israel.

The bilateral tax treaty between the United States and Israel was signed on the 20^th of November 1975 and went into force on the 1^st of January 1995.

To read the agreement in English click here.

Applicability of the MLI

The Multilateral Agreement (MLI) is an automatic mechanism for modifying bilateral tax treaties. To apply it, both countries must sign the multilateral agreement and ratify its application in their domestic law.
While Israel signed the MIL in 2017 and the agreement went into force in 2019, the United States hasn’t signed the MLI.

Residency for tax purposes in the United States

Residence of an individual

According to the tax treaty between the United States and Israel, the criteria for determining the residency of an individual for tax purposes are as follows:

1. Permanent Home: An individual will be considered a resident of the United States if they have a permanent home available to them in the country. The determination of a permanent home depends on factors such as ownership or rental of a dwelling, family residence, and personal and economic ties.

2. Habitual Abode: If an individual has a habitual abode in both the United States and Israel, they will be considered a resident of the country where they have a closer personal and economic relationship.

3. Nationality: An individual who is a national or citizen of both the United States and Israel will be considered a resident of the country in which they have a permanent home. If they have a permanent home in both countries, their status will be determined by a mutual agreement of both states.

To read about how an individual is considered a tax resident of Israel, click here.

Residency of a company

Under the US domestic law, an entity will be considered a tax resident if it is incorporated under the laws of the United States

According to the domestic law in Israel, an entity will be considered a tax resident if it is incorporated according to the laws of Israel or if the entity was incorporated outside of Israel, but the control and management of the entity is carried out from Israel.

According to the tax treaty between the United States and Israel in the event that, according to the internal tax laws of both of the countries the entity is considered a tax resident of that country, the countries must reach a mutual agreements regarding the entity’s country of residence.

To learn about how a company is considered a resident of Israel click here.

The tax system in the United States

The United States Tax Authority is called Internal Revenue Service (IRS).

Income taxation: 10% – 37%

Taxation of companies and branches: 30%/21%

VAT: there is no VAT in the US but there is sales tax which is very similar, the range of the sales tax is 2.9%-7.25%

Capital gains tax: 0%, 15%, or 20%

Withholding Tax

Inheritance tax and estate tax in the United States

There is no federal inheritance tax in the United States, however there are 6 states that impose a state inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania). This tax ranges from only 1% up to 16% in certain states.

Additionally, there is a federal estate tax ranging from 18 to 40%, and some states have an estate tax on the state level.

Relocation

The United States is the home to the largest Jewish population in the world, outside of Israel, with notable communities in central places like New York City, Los Angeles, South Florida, San Francisc and more. There are numerous Jewish organizations, community centers and synagogues all throughout the US.

A lot of people across the globe want to move to the US, this is due to the opportunities it offers. From abundant chances for career growth to the ability to explore diverse industries and work with globally leading companies. This, among others, allows the US to attract talented individuals from all over the world.

Additionally, the United States provides a relatively high standard of living, including access to quality education, healthcare, and social benefits.

Relocating to the United States involves navigating several immigration processes and requirements. One common path is obtaining an employment-based visa, where individuals with specialized skills or job offers from U.S. employers may qualify for visa categories such as H-1B or L-1. Alternatively, individuals may explore options such as family-based visas, investment-based visas like the EB-5, or pursuing higher education in the U.S. and seeking work opportunities afterward.

Real estate taxation in the United States

Real estate taxation in the United States is rather complex due to the nature of state governments. Some of the real estate taxation factors include:

Property Tax: Property Tax: Property tax is imposed on both immovable assets, such as land and buildings, and movable assets, including vehicles and business equipment. This tax is predominantly governed and enforced at the local level, which results in considerable differences in tax rates, valuations, and regulations across various jurisdictions, including states, counties, cities, and school districts. Each local government establishes its own tax policies, which encompass tax rates, methods of assessment, and available exemptions..

Rental Income Taxation: Rental income is taxed as regular income and must be reported on an individual’s tax return. Certain related expenses may be deductible from this income.

Types of business entities in the United States

In the United States, there are several types of business entities that individuals or groups can choose from when starting a business. The most common types of business entities include:

1. Sole Proprietorship: A sole proprietorship is an unincorporated business owned and operated by a single individual. It is the simplest and most common form of business entity, where the owner has complete control over the business and assumes all the risks and liabilities.

2. Partnership: A partnership is a business structure in which two or more individuals share ownership and responsibilities. There are two primary types of partnerships: general partnerships, where partners have shared control and liability, and limited partnerships, where there is at least one general partner with unlimited liability and one or more limited partners with limited liability.

3. Limited Liability Company (LLC): An LLC is a flexible business structure that provides limited liability protection to its owners, known as members, depending on the state law there is a possibility for different liability types (limited/unlimited) for different members . It combines elements of both partnerships and corporations, allowing for pass-through taxation (profits and losses pass through to the members’ personal tax returns) while shielding personal assets from business liabilities.

4. Corporation: A corporation is a separate legal entity that is owned by shareholders. It offers limited liability protection to its owners, who are not personally liable for the corporation’s debts or obligations. Corporations have a more complex structure, with shareholders, directors, and officers. There are two types of corporations: C corporations, which face double taxation at both the corporate and individual level, and S corporations, which can pass corporate income, losses, deductions, and credits through to shareholders for tax purposes (similar to a partnership).

Transfer of Funds from Israel to the United States

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduce or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Incentive laws in the United States

In the United States, there are several incentive laws and provisions aimed at encouraging international business activities and reducing the tax burden on certain international transactions. Some of the key incentive laws related to international taxes include:

1. Foreign-Source Income Exclusion (FEIE): U.S. citizens and resident aliens who qualify can exclude a certain amount of their foreign-earned income and foreign housing exclusion from U.S. taxation.

2. Foreign Tax Credit: The U.S. tax system allows taxpayers to claim a credit or deduction for certain foreign taxes paid or accrued on foreign-source income. This credit, known as the Foreign Tax Credit (FTC), helps prevent the double taxation of income earned abroad by reducing the U.S. tax liability based on the amount of foreign tax paid.

3. Subpart F Income Deferral: The U.S. tax system includes rules under Subpart F that require certain types of passive income earned by controlled foreign corporations (CFCs) to be currently taxed to U.S. shareholders. However, there are deferral provisions that allow U.S. shareholders to defer taxes on certain types of income until it is repatriated to the United States.

4. Foreign-Derived Intangible Income (FDII) Deduction: The Tax Cuts and Jobs Act (TCJA) introduced the FDII deduction, which provides a reduced tax rate on income derived from the use of the company’s intellectual property, foreign – derived means the part of the income that is related to the export of goods and services. .

United States Double Tax Treaties