Israel – UK Tax Treaty

Business Activity in the United Kingdom

The UK hosts one of the most diverse economies in the world. For years, financial services have been a cornerstone of the economy, with London standing as a global financial center. This sector contributed roughly 8% to the 2021 GDP through various banking methods, personal and commercial insurance, and asset management. Manufacturing is another major sector; according to the World Bank, manufacturing accounts for 9% of the country’s GDP. Manufacturing encompasses a variety of industries; however, the UK specializes and is well known for its automotive and aerospace industries with popular companies such as Jaguar, Land Rover, and Airbus making an international presence.

The technology sector in the UK is valued at over £1 trillion now making it the third largest technology sector in the world only trailing the United States and China. This industry includes products related to fintech, AI, cybersecurity, and more. England thrives in technology hubs such as London's Tech City, Manchester, Cambridge, and Edinburgh.

Consequently, the UK is recognized as the 5^th largest economy in the world according to its nominal GDP and continues to be a pivotal piece in worldwide trade.

Bilateral Agreements Between the United Kingdom and Israel

Several agreements were signed between Israel and the United Kingdom:

1. Convention on Social Security (Social Security)
2. Free Trade Area Agreement (FTA)
3. Double Taxation Treaty (DTA)

Social Security Agreement Between Israel and the United Kingdom

In 1957, a social security treaty between Israel and the United Kingdom was signed. The convention regulates the social security rights and obligations of individuals who relocate from Israel to the United Kingdom and vice versa.

To read the agreement in English click here.

Free Trade Agreement Between Israel – United Kingdom

A free trade agreement is designed to lower or, in some cases, eliminate tariffs on goods within specified trading regions. It removes import regulations and dismantles barriers, fostering easier access to goods, services, and government contracts. Additionally, the agreement includes provisions that offer legal protections for investments and intellectual property.

The United Kingdom and Israel signed a free trade agreement on February 18, 2019, ahead of the UK's exit from the European Union. This agreement was designed to ensure that trade between the two countries would continue without disruptions after Brexit. It largely mirrors the trade provisions that were in place while the UK was a member of the EU.

The agreement entered into force on January 1, 2021, after the end of the transition period for the UK's withdrawal from the EU.

The full document detailing the convention can be found here.

Convention on the Prevention of Double Taxation Between Israel and the United Kingdom

The agreement between the Governments of Israel and the United Kingdom regarding the avoidance of double taxation entered into force in 1962. On 16 September 2019, an amending protocol to the treaty was signed due to Brexit, which entered into force on 31 December 2019.

To read the agreement in English click here.

Applicability of the MLI

Both the United Kingdom and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.

Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. United Kingdom affixed its signature to the MLI on the 7th of June 2017, and its provisions became effective as of the 1^st of October 2018.

Although Israel and the United Kingdom both signed the convention in 2017, the convention will not apply to the existing bilateral treaty. This is attributed to the fact that neither country listed the other in the reservation clause submitted to the OECD.

The full original agreement can be found on the Ministry of Finance website.

Residency for Tax Purposes in the United Kingdom

Residence of an Individual

In the UK, tax residency is determined by the Statutory Residence Test (SRT) introduced in 2013. It assesses an individual's tax residency based on their physical presence, ties to the country, and specific circumstances. Currently, there are three main tests: Automatic Residence, Non-Automatic Residence, and Sufficient Ties Test.

An individual will qualify for the Automatic Residence if at least one of the following criteria is met:

• The individual spends in the UK at least 183 days in a tax year;
• The individual has only one home and that home is in the UK (or has a UK home and an overseas home and spends less than 30 days of the tax year in the overseas home).

Works full-time in the UK for a period of 365 days.

The Automatic Overseas Test applies if an individual spends fewer than 16 days in the UK, making them a non-UK tax resident.

The Sufficient Ties Test applies if an individual spends between 16 and 182 days in the UK, considering factors like family connections, accommodation availability, work commitments, and past UK presence.

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

Residency of a Company

For tax purposes, a company's residency in the UK depends on its place of incorporation. UK-incorporated companies are automatically considered UK tax residents, taxed on their worldwide income and gains. Companies incorporated outside the UK follow the "Place of Effective Management" (POEM) concept. If key management and control decisions are made in the UK, the company is a UK tax resident. If such decisions are made outside the UK, the company is a non-UK tax resident, subject to UK taxation on UK-sourced income and specific UK-related activities. Similarly, companies incorporated abroad are considered UK tax residents if their central management and control are located in the United Kingdom. In other words, if the place where the company’s top-level decisions and overall strategic direction are made, rather than routine operational choices, is in the UK, the company will be regarded as a UK tax resident.

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

The Tax System in the United Kingdom

The country's Tax Authority is called Her Majesty's Revenue and Customs (HMRC).

Income Taxation: Personal Income Tax in the United Kingdom is levied between 20% to 45%. However, the law stipulates that a personal allowance of up to £ 12,570 is exempt from taxation.

Corporate Tax: 25%

VAT: 20% (some goods and services have a lower rate of 5%)

Capital Gains Tax: Range between 18% to 28%

Withholding Tax

Inheritance Tax and Estate Tax in the United Kingdom

Inheritance Tax (IHT) is levied at 40%, generally charged on the estates of individuals following their deaths and on gifts made by individuals during their lives. The inheritance and gifts are bound by the Potentially Exempt Transfers (PET) criterion, which is based on the seven-year rule. According to this rule, transfers made more than seven years before the donor's death are exempt from IHT. However, if the donor dies within seven years of making the gift, it becomes liable to IHT. In the case the seven-year rule is not met, the monetary value of the gift will be added to the deceased's estate, resulting in a new total value subject to Inheritance Tax (IHT). This value will only be taxed if it exceeds the nil rate band (NRB) set at GBP 325,000.

UK law provides a relief tax instrument referred to as the taper relief to be applied to the new total estate value. It reduces the IHT payable based on the number of years since the gift was given:

• Less than 3 years: 100% of the tax is payable
• 3 to 4 years: 80% of the tax is payable
• 4 to 5 years: 60% of the tax is payable
• 5 to 6 years: 40% of the tax is payable
• 6 to 7 years: 20% of the tax is payable

Relocation

The United Kingdom is an appealing destination and has become increasingly popular; in 2022, approximately 1.2 million people migrated to the country. Relocation to London has primarily dominated the flow of movements to the country.

England is renowned for its esteemed educational institutions, such as the University of Cambridge and the University of Oxford, making it an enticing destination for students and researchers. In turn, many students choose to pursue a career in the UK post-graduation due to its opportunistic and diverse economy.

The UK also sees its fair share of wealthy individuals migrating to the country due to its competitive tax system, offering advantageous rates and incentives.

Currently, the United Kingdom is home to around 292,000 Jews, making it the fifth-largest Jewish population globally and the second-largest in Europe after France. The British Jewish community is diverse in religious, cultural, and socioeconomic backgrounds, playing a significant role in national identity and contributing widely across public life, including high-ranking positions in government, the civil service, judiciary, and military.

Real Estate Taxation in the United Kingdom

In the UK, real estate taxation involves several elements. Council Tax is imposed on residential properties based on valuation bands determined by property value as of specific dates.

The transfer tax in England, known as Stamp Duty Land Tax (SDLT), is generally applied to freehold property acquisitions, with rates based on the property's purchase price and differing for residential and commercial real estate. Rates increase progressively from 0% up to 12% for residential properties and up to 5% for non-residential or mixed-use properties. Scotland and Wales have their own property taxes (LBTT and LTT). Capital Gains Tax (CGT) is levied on the profit from selling assets, including real estate, with rates based on income and asset type.

Transfer of Funds from Israel to the United Kingdom

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant's approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in the United Kingdom

In the UK, there are several types of business entities that individuals and companies can choose from:

• Sole Trader: A sole trader is a self-employed individual who runs their business as an individual. They have complete control over the business and are personally responsible for its liabilities. This is the simplest and most common form of business entity in the UK.
• Partnership: A partnership is formed when two or more individuals (partners) carry on a business together with a view to making a profit. The partners share the profits and losses, and each partner is personally liable for the partnership's debts.
• Limited Liability Partnership (LLP): An LLP is a hybrid business entity that combines features of both a partnership and a limited company. It offers limited liability to its members, meaning they are not personally liable for the debts of the LLP. Each partner's liability is limited to their agreed contribution or investment in the LLP.
• Private Limited Company (Ltd): A Ltd (Limited) is a separate legal entity that provides limited liability to shareholders, protecting their personal assets from company debts. It offers stability, continuity, and ownership through shares, without exposing shareholders to personal liability.
• Public Limited Company (PLC): A public limited company is similar to a private limited company but can offer its shares to the public. It must have a minimum share capital and comply with additional regulations, such as issuing a prospectus before shares are offered to the public.
• Community Interest Company (CIC): A CIC is a special type of limited company that exists to benefit the community rather than private shareholders. It must use its assets and profits for the public good and meet certain community-oriented criteria.
• Limited Liability Company (LLC): While not a specific legal entity in the UK, the term "Limited Liability Company" is sometimes used to refer to a limited company (Ltd) or limited liability partnership (LLP).

Incentive Laws in the United Kingdom

The UK offers various incentive laws and programs to encourage economic growth, investment, and innovation. Some of the key incentive laws and schemes in the UK include:

1. Research and Development (R&D) Tax Credits: The R&D tax credit scheme allows companies to claim tax relief on qualifying R&D activities. It provides financial incentives to encourage research and development activities, supporting innovation and technological advancement.
2. Patent Box: The Patent Box is a tax incentive that allows companies to apply a reduced rate of corporate tax to profits earned from patented inventions. It aims to encourage innovation and the commercialization of intellectual property in the UK.
3. Enterprise Investment Scheme (EIS): The EIS is designed to encourage investment in small and medium-sized enterprises (SMEs). It provides tax benefits to individual investors who invest in qualifying EIS companies, including income tax relief, capital gains tax exemption, and inheritance tax relief.
4. Seed Enterprise Investment Scheme (SEIS): The SEIS is a similar scheme to the EIS but targeted at even smaller, early-stage companies. It offers generous tax incentives to individuals who invest in qualifying SEIS companies, including income tax relief and capital gains tax exemption.
5. Entrepreneurs' Relief: Entrepreneurs' Relief allows eligible individuals to pay a reduced rate of capital gains tax (10%) on the sale of all or part of their business. It is aimed at incentivizing entrepreneurship and rewarding business owners who sell their businesses.
6. Enhanced Capital Allowances (ECAs): ECAs provide accelerated tax relief for qualifying capital expenditure on energy-saving and environmentally beneficial technologies. It encourages businesses to invest in energy-efficient equipment and technologies.
7. Regional Development Grants: The UK government offers grants and incentives to support regional development and investment in specific areas or sectors. These grants aim to stimulate economic growth, create jobs, and support businesses in underdeveloped regions.
8. Freeports: Freeports are designated areas that enjoy special customs and tax benefits to attract investment and promote trade. The UK government has established several freeports across the country to encourage economic activity, job creation, and innovation.

United Kingdom Double Tax Treaties