When an Israeli entity pays a foreign resident for income generated in Israel, the Income Tax Ordinance generally requires it to withhold tax at source, often at the maximum rate prescribed by law. In today’s global economy, this withholding may result in over-taxation or double taxation. To prevent this and make use of the benefits available under the international tax treaties to which Israel is a party, a formal application must be submitted to the Assessing Officer to obtain an exemption or approval for a reduced tax rate.
For this purpose, the Israel Tax Authority offers two main routes: submitting Form 114 or submitting Form 114a. Although both forms serve the same purpose, there are material differences between them, particularly in relation to the reporting strategy and the identity of the party requesting the relief.
Division of Responsibility: Who Submits the Application?
The key difference between the forms lies in who approaches the Israel Tax Authority in practice:
Form 114
The payer route – under this route, the Israeli paying company takes responsibility for handling the administrative process with the Israel Tax Authority on behalf of the foreign resident. This is an efficient solution where there is full transparency between the parties and the payer is willing to invest the time required to arrange the reduced withholding.
Form 114a
The foreign resident’s direct route – this route allows the foreign payee to apply directly to the Assessing Officer, without the payer being involved in the application process. This option is critical in two main scenarios: first, where the Israeli payer is unavailable or unwilling to handle the tax issue for the other party. Second, where the foreign resident wishes to maintain confidentiality and avoid disclosing sensitive commercial, financial, or personal information to the Israeli paying company.
It is important to note that the disclosure requirements under Form 114a are stricter and more extensive. They require evidence that the conditions of the applicable tax treaty are met, such as the absence of a permanent establishment in Israel, beneficial ownership of the income, and certification by a foreign tax authority.
Who Is This Process Relevant For?
Applications for reduced withholding tax at source are relevant to a wide range of income streams, from dividends and interest to royalties and payments for services.
We would like to dispel a common misconception: these tax arrangements are not reserved only for international companies or independent service providers. In our experience, these procedures are equally important for foreign resident employees who are entitled to payments, special bonuses, or equity-based compensation from an Israeli employer, and who may be exposed to excessive withholding tax at source that should be lawfully minimized.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, as well as experience at leading firms and law offices, bringing together both legal and economic perspectives. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear, practical language. We also work with a professional network of accounting firms and law offices around the world, enabling us to provide comprehensive support in cross-border matters.
If you are a foreign resident, an international company, or an employee receiving payment from an Israeli entity, advance tax planning is the key to preventing unnecessary financial loss. Our international department is experienced in navigating the complexities of tax treaties and managing complex procedures before the Assessing Officer.
We provide a full end-to-end service, from selecting the right reporting strategy, through submitting applications and verifying documents, to providing practical solutions for arranging actual tax payment, even without an Israeli bank account.
FAQ
What documents is a foreign resident required to attach when independently submitting Form 114a?
In addition to carefully completing the details of the income and the grounds for the requested relief, the application must be supported by verifying documents. These usually include a certified true copy of the passport, agreements evidencing the nature of the transaction or work, and a formal, up-to-date certificate of residency signed by the tax authorities in the applicant’s home country.
What happens if it is determined that the foreign resident must pay tax, but they do not have a bank account in Israel?
This is a familiar bureaucratic obstacle. The Ministry of Finance does not accept direct payments from foreign bank accounts, which makes it difficult for foreign residents to settle their tax liability even after a reduced tax rate has been determined. To resolve this, the involvement of a professional representative in Israel is required. Such a representative can arrange an alternative and approved payment mechanism with the authorities, without the need to open a local commercial bank account.
