01.11.2012

A draft treaty for the avoidance of double taxation has been signed between Israel and Malta, and a draft treaty for the avoidance of double taxation has been initialed between Israel and Panama. The treaties will enter into effect on completion of ratification proceedings in the two countries – which could take a year or two.

Draft Israel-Malta Treaty:

The treaty signed with Malta includes a clause for the exchange of information between the tax authorities of both countries, based on the model treaty of the OECD.

According to the draft Treaty, Malta includes the Island of Malta, the Island of Gozo and other islands of the Maltese archipelago. The tax withholding rates in the country where the payment is made (the country of origin) have been set at 5% of interest payments and 0%-15% of dividends. The 0% rate applies to dividends paid by an Israeli company if the recipient is a company which holds at least 10% of the Israeli payer‘s capital. With regard to royalties and capital gains, taxation will be only in the seller‘s country of residence. However, capital gains from a sale of shares in real estate investment company of one country may be taxed in that country. A company carrying out a construction or installation project in the other country will be charged tax in that country only if the project‘s duration is over 12 months.

The Maltese ‘‘imputation‘‘ tax system has a few quirks. A Maltese company generally pays 35% corporate tax on its profit in Malta. But when dividends are paid to the shareholders, these shareholders are entitled to claim a refund of 6/7ths of the Maltese tax paid by the company, resulting in an effective Maltese tax rate of 5%. Distributions made from profits derived from passive income such as interest and royalties, entitle the shareholder to claim a refund of 5/7ths of the tax paid by the company resulting in an effective Maltese tax rate of 10%.

Maltese holding companies may also qualify for a participation exemption with regard to certain dividends or capital gains. For a Maltese resident company to hold a ‘‘participating holding‘‘ in a company incorporated abroad, it must hold at least 10% of the equity shares in the non-resident company. To qualify for the participation exemption, the foreign subsidiary must satisfy one of three criteria: be resident in the EU; be subject to foreign tax of at least 15%; and not derive more than 50% of its income from passive interest or royalties. In addition, royalties derived by companies from registered patents in respect of qualifying inventions may be exempt in Malta.

The draft Malta-Israel tax treaty says that ‘‘tax paid in Malta‘‘ can be credited in Israel by an Israeli resident, but it is not clear whether that refers to tax before or after refunds…

Draft Israel-Panama Treaty
The treaty initialed with Panama also includes a clause for the exchange of information between the tax authorities of both countries, based on the model treaty of the OECD. The tax withholding rates in the country where the payment is made (the country of origin) have been set at 15% of interest, dividends and royalty payment. A company carrying out a construction project in the other country will be charged tax in that country only if the project‘s duration is over nine months.

What Does It All Mean?

Director of State Revenue Department in the Israeli Ministry of Finance, Frida Israeli, has said, ‘‘the treaties have been signed as part of the Ministry of Finance‘s policy of expanding the network of treaties signed by Israel, which grant relief against double taxation stemming from investments on the one hand, and enable the exchange of information between the countries‘ tax authorities on the other.‘‘
In reality, Malta and Panama operate beneficial tax regimes, whereas Israel operates a regular tax regime and provides double tax relief under domestic Israeli tax law.

So the name of the game is exchange of information. If Israeli or foreign residents get involved in devious tax planning via Malta or Panama, Israeli tax officials will soon have the ability to request information from their counterparts in those countries, once the respective treaties become effective.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.