The Romanian Economy
During the economic crisis of 2008, the Romanian economy suffered a severe blow. In the last decade, the Romanian government has encouraged foreign investments and put a lot of money into the real estate and tourism industries. Today, the Romanian economy is growing rapidly compared to the rest of Europe and in 2017, the growth surpassed even China.
The Israeli Economy
Israel has a developed free-market economy and is ranked 35th in the world on ease of doing business (via the World Bank). Israel’s nickname of “start-up nation” is due to its tremendous number of startups, second in the world only to the United States, whose population is over thirty times bigger than Israel’s. Israel also has the 3rd largest number of NASDAQ listed companies, after America and China, both of whom have populations tremendously larger than Israel’s. The main economic sectors of Israel are technology and manufacturing. Interestingly, Israel also has a burgeoning diamond industry, one of the biggest in the world, amounting to almost a quarter of all Israel’s exports. Israel’s main trading partner is the United States; they purchase over 28% of Israel’s exports and sell over 11% of Israel’s imports. Israel is a member of the OECD and has signed free trade agreements with the European Union, United States, and others.
Romania – Israel Relations
Diplomatic relations between Israel and Romania were established in 1948. Romania maintains an embassy in Tel Aviv and Israel maintains an embassy in Bucharest. As a member of the European Union, Romanian citizens can travel visa free to Israel. Likewise, Israeli citizens can travel visa free to Romania.
Relations were even maintained during Romania’s affiliation with the Soviet bloc. After the fall of communism, relations warmed more and the volume of tourists coming to Israel increased significantly. During the past three decades, the volume of joint trade between Israel and Romania increased and many Israeli companies have begun to build offices and invest in Romania. The Ministry of Economics holds economic annexes and economic cooperation agreements have been signed between the two countries.
Nimrod Yaron in Romania
Our firm has extensive relationships in Romania, both with accountants and lawyers; this allows us to assist clients in various business activities in Romania. These include setting up companies in Romania, opening Romanian bank accounts, and dealing with Romanian tax systems. Specific information on real estate investments in Romania can be found on our Overseas Real Estate Investments page.
Agreements that have been signed between Israel and Romania
1. Agreement to encourage and protect investments
2. Convention on social security
3. Double taxation convention
Investment Encouragement and Protection Agreement
On 27/7/2003, the amendment to the Investment Encouragement and Protection Agreement, originally signed in 1992, entered into force. A copy of the agreement in English can be found on the Ministry of Finance website.
National Insurance Israel – Romania
In 2013, a convention on social insurance between Israel and Romania entered into force. The purpose was to prevent a situation of double social security between the two countries. A document detailing the convention can be found on the website of the National Insurance Institute.
Double Taxation Convention between Israel and Romania
The original tax treaty between Israel and Romania was signed in 1997 and entered into force on 1/1/1999.
The full double taxation treaty between Israel and Romania can be found here.
MLI Applicability
Both Israel and Romania signed the Multilateral Treaty (MLI) in 2017, but while Israel ratified the treaty so that it went into force on 1/1/2019, Romania has not yet ratified it. Once the Romanian government ratifies the treaty, the MLI will automatically change the treaty between Israel and Romania. The MLI treaty between Israel and Romania can be found here.
Israel Branch Income Tax
If a foreign company has a branch in Israel, it is liable for tax at the standard corporate rate on Israeli income.
Corporate income tax rate: 23%
Capital gains tax rate: 23%
Branch tax rate: 23%
Withholding tax (%)
Dividends: 0/15/20/25/30 (a)
Interest: 0/23
(a) The 0% rate generally applies to Israeli parent companies’ distributions. Reduced withholding rates of 15% and 20% may apply because of the Encouragement of Capital Investments Law.
Israel Corporate Income Tax
Companies that have offices in Israel must pay Israeli tax on their worldwide income. Nonresident companies must pay Israeli tax on income accrued or derived in Israel, unless an applicable tax treaty proves otherwise.
A company will be considered resident in Israel if:
· It is incorporated in Israel
· Its business is controlled and managed in Israel
Corporate tax rates (effective 1/1/2018)
· Regular CIT rate: 23%
· 30% withholding tax on dividends paid to shareholders who own 10% or more of the company
· 25% withholding tax on dividends paid to shareholders who own less than 10% of the company
Israel Encouragement of Capital Investments Law
The encouragement of capital investments law is an Israeli incentive that reduces major tax and offers exemptions. The law has the following objectives:
· To achieve amplified growth targets in the business sector
· To improve Israeli industries’ competitiveness internationally
· To create employment and development opportunities in weaker economic areas
Israel – Romania Corporate Withholding Taxes
Under domestic tax law in Israel, withholding taxes on payments from Israeli income are deducted at the CIT rate from all income payments abroad unless a tax certificate is obtained from the Israel Tax Authority. That certificate needs to authorize withholding-exempt remittances or a reduced tax rate in accordance with an applicable tax treaty.
The table below provides withholding tax rates for payments of dividends, interest, and royalties to residents of Romania.
Israel – Romania Tax Agreements | Withholding tax (%) | ||
Dividends | Interest | Royalties | |
15 | 5/10 (a) | 10 | |
Non-Treaty Tax Rates | 25/30 | 23 | 23 |
(a) 5% where paid in connection with the sale on credit of any industrial, commercial, or scientific equipment, or sale on credit of any merchandise by one enterprise to another enterprise, or on any loan of whatever kind granted by a bank.
Tax treaties are agreements between two countries designed to prevent a resident of one state from double taxation. Meaning, paying tax in the country where he made income or profits, as well as the country where he resides. Tax treaties are usually constructed in order to incentivize foreign investments and international trade, as well as establishing the legal policies regarding international tax laws.
For many years most countries had designed their bilateral tax treaties according to the UN tax treaty model, even tho it wasn’t mandatory.
The UN model emphasizes the rights of the ‘origin country’ in which the profits were made to tax them over the resident’s country. These claims are made by developing countries seeking to make profits in taxes from investment and business activities made in their jurisdiction.
The rules agreed upon in the bilateral agreements are added to the internal tax legislation of each country. When there is a contradiction between the internal tax laws and the treaty, the directives of the treaty prevail. In cases where the treaty directives are harsher than the internal laws (usually common with old treaties), the internal legislation is preferred.
Since January 2019 many bilateral tax treaties have been modified by the OECD’s MLI agreement, signed by more than 90 countries so far. The agreement was designed as part of the international effort against tax avoidance and tax treaties abuse.
It’s highly recommended to consult with international tax experts in order to get a comprehensive and professional legal status regarding taxation on every country. Our firm has highly professional lawyers and accountants, all are experts in international tax laws.
Our website is full of information regarding every bilateral tax treaty signed by Israel. Click on the relevant country to get more information about the treaty and other tax-related aspects.
