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New Israel-UK double tax protocol – new opportunities for Israeli and UK investors?

01 February 2019

A new protocol to the Israel-UK double taxation treaty has entered into force and takes effect in 2020. The new protocol provides more favourable tax rates for a number of Israeli investors in the UK, and UK investors in Israel. This has the potential to reduce the tax bill for corporate investors in particular, and opens the door for future tax-efficient investment between the two countries.

Speed read

A new protocol to the Israel-UK double taxation treaty has entered into force and takes effect in 2020. The new protocol provides more favourable tax rates for a number of Israeli investors in the UK, and UK investors in Israel. This has the potential to reduce the tax bill for corporate investors in particular, and opens the door for future tax-efficient investment between the two countries.

What is the purpose of the UK-Israel Double Taxation Convention?

The Israel-UK Double Taxation Convention ("the Treaty") was initially signed in 1962. It was designed to set the parameters of the two countries' tax treatment of income and gains that were potentially taxable in both countries. Broadly, the Treaty establishes how income, profit and gains of Israeli and UK individuals and businesses will be taxed under the Israeli and UK tax regimes and how the regimes of both countries should interact. The Treaty also provides for information to be exchanged between the countries' tax authorities.

While domestic tax rates fluctuate, the Treaty provides the framework for the mutual taxation regimes of Israel and the UK, and imposes rules on where profits should be taxed and the maximum rates of tax for certain types of income and gains. Generally it is important to be aware of any changes to a double taxation treaty from a long-term business and tax planning perspective.

What is the new Israel-UK double taxation protocol?

On 17 January 2019, Israel and the UK agreed the terms of a protocol amending the existing Treaty ("the Protocol"). The last amendment to the Treaty was in 1970, so the Protocol marks a significant update to the tax relationship between Israel and the UK. 

The provisions of the Protocol take effect:

  • In both countries, for taxes withheld at source on interest, royalties and dividends, in relation to amounts paid or credited on or after 1 January 2020;
  • In Israel, for income tax, from 1 January 2020; and
  • In the UK:
    - for corporation tax, from 1 April 2020; and
    - for income tax and capital gains tax, from 6 April 2020.

The Protocol comes at a time when, according to the UK Government, total trade in goods and services between the two countries increased by 2% in 2018, reaching £3.9 billion in the year to July 2018.

It is important for Israeli and UK-resident individuals and businesses investing or carrying on business in the other country, or thinking of doing so, to be aware of the new terms of the Protocol as it makes some significant long-term changes to the Israel-UK tax relationship, bringing additional benefits and opportunities. 

What does the Protocol change?

Reduced tax rate on cross-border distributions, interest and royalties

The Treaty currently provides that, if a person or company resident in the Israel or the UK receives dividends, interest or certain royalties from a resident in the other country, the payment can only be taxed by the country of the payer through withholding tax to a maximum of 15% of the amount of the income received. 

Subject to certain conditions, the Protocol reduces the maximum rate of withholding tax on dividends to 5% of the gross amount of the dividend paid to a shareholder in the other country. This offers a significant tax saving for investors. The conditions for the 5% rate of withholding tax to apply are that: 

  • the beneficial owner of the dividend is a company (not a partnership or real estate investment fund ("REIT"));
  • the shareholder directly owns at least 10% of the share capital; and 
  • these two conditions are met for at least 365 days at the date the dividend is paid. 

Where the conditions above are not met (e.g. the shareholder is an individual or where the share capital held is less than 10% of the total), the Protocol provides that the rate of withholding tax shall not exceed 15%, which is the existing Treaty rate. 

The Protocol also reduces the maximum rate of withholding tax on interest on bank loans to 5% of the gross amount of the interest paid, and on interest generally to 10%.  

The Protocol provides that royalties shall only be taxable in the country of receipt unless payment is made in connection with a permanent establishment. 

The Protocol also introduces specific rules for Israeli and UK REITs, providing that distributions from a REIT situated in one country to a person situated in the other country cannot be taxed at more than 15% in the country in which the REIT is situated (for investors in the UK receiving payments from Israeli REITs, this rule only applies where the investor holds less than 10% of the REIT capital). This means that payments made to an Israeli resident from their investment in a UK REIT cannot be subject to UK tax at a rate of more than 15%.

Taxation of indirect capital gains on immovable property

Currently, the Treaty provides that capital gains from the sale of unlisted shares in a company whose assets consist principally in immovable property may be taxed in the country where the property is situated. The Protocol provides that unlisted shares that derive over 50% of their value from property situated in either Israel or the UK (or did so at any time in the 365 days prior to their transfer) may be taxed in the country in which that property is situated. 


As well as attempting to decrease tax barriers between Israel and the UK, the Protocol also introduces a number of anti-avoidance provisions. In particular, the Protocol includes provisions designed to prevent the artificial avoidance of permanent establishment status by splitting up operations between different related entities. These specific provisions aggregate the activities of related companies, including where companies share ultimate beneficial owners. The Protocol also introduces provisions designed to counter profit shifting and general tax avoidance activities in line with the UK's commitment to do so as part of the OECD Base Erosion and Profit Shifting framework and strengthens provisions relating to the exchange of information between the tax authorities in Israel and the UK.

New remedies

Previously, the Convention did not provide any specific means of redress for a taxpayer. The Protocol provides that where a person in either country considers that the combined actions of the Israel and UK tax authorities result in that person not being taxed in accordance with the updated Convention, then, irrespective of any domestic law remedy, that taxpayer can make a formal appeal to either the Israeli or UK tax authority under the Convention. There are obligations on the respective tax authorities to endeavour to resolve issues by mutual agreement. 

Next Steps

Please contact Mathias Reif, Jon Stevens or your usual DWF contact if you would like to discuss the applicability of the Treaty or Protocol in more detail. 

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