Israeli Supreme Court Upholds Tax Treaties and OECD Model Tax Convention

Israeli Supreme Court Upholds Tax Treaties and OECD Model Tax Convention

The Israeli Supreme Court has now ruled that the foreign workers levy of up to 20% did not contradict Israel’s tax treaties nor the OECD model tax convention.

A group of manpower employment companies had claimed that the levy was imposed on salaries paid to foreign citizens, not Israelis, and was therefore discriminatory. The levy was repealed at the end of 2021, but was it legal in the first place? How did the Supreme Court reconcile the levy with Israel’s tax treaty obligations?

What was the foreign workers’ levy?

Israel imposed the foreign workers levy until the end of 2021 pursuant to Section 45 of the Economic Recovery Law (Program For Achieving Budgetary Goals & Economic Policy in the Years 2003 and 2004), 2003).

The levy no longer applied starting with the January 2022 payroll (Israeli Economic Recovery Law (Amendment 20) 2022, Book of Laws 2956).

The levy was intended to be a tax revenue raiser and a deterrent to employing foreign labor in Israel, especially cheap foreign labor.

The levy was a payroll tax in addition to income tax and national insurance. The levy was imposed on employers generally at the rate of 20%, but at 15% for foreign workers in industry, construction or certain restaurants and at 0% in agriculture.

What do Israel’s tax treaties say?

With regard to preventing tax discrimination, Israel’s tax treaties generally follow the OECD Model Tax Convention. Article 24 of the OECD Model Convention provides as follows: “Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances….”.

Israel currently has income tax treaties with 61 countries including the US, the UK, Australia, Canada, South Africa and UAE – see:

Facts of the case:

The Supreme Court discussed the apparent conflict between domestic law and Israel’s tax treaties in a case where employers hired employees from China, Moldova, Romania and Bulgaria (Dekel Foreign Workers Ltd, S.G.I Personal Manpower Services 2005 Ltd, civil appeal Cases 3687/20, 3926/20 of Oct 30, 2022 ). The Court specifically mentions Article 25(1) of the Israel-China tax treaty as an example of the treaty provisions in question in this case that follow Article 24 of the OECD Model Convention.

What the Supreme Court Ruled:

The Supreme Court analyzed the situation and the law in detail. In the end the Court ruled against the employing companies for a number of reasons.

First, the Court found the levy was imposed on Israeli employers, not the foreign employees themselves. The employers paid the levy (late) but did not try to shift the burden of levy onto the foreign workers by reducing their salaries. Even if the employers did pay lower salaries because of the levy, they “gained” twice over – by incurring reduced payroll expense and by sitting on the levy money (pending the appeal).

Furthermore, even if the employers did manage to shift the levy onto the foreign workers, there was no point in ruling against the levy and restoring it to the employers. The employers would be illegally enriched. This would be no remedy for the foreign workers if they were discriminated against. Moreover, such discrimination was unlikely as shifting the levy to the foreign workers was actually not allowed under Section 45(b) of the above Economic Recovery Law which said: “The levy shall not be deducted, directly or indirectly, from the salaries of the foreign workers”.

Therefore, the Court ruled that the tax treaty provisions did not prevent the levy being indirectly imposed on the foreign workers’ employer until the repeal of the levy.

The Court also found no reason to cancel lateness fines and interest imposed.


The foreign workers levy was repealed at the end of 2021. What is important is that the Supreme Court confirms Israel’s obligation to honor its tax treaties with other countries according to their terms. In this case the Supreme Court rejected the taxpayer’s interpretation of the treaty terms, giving its reasons for doing so. The Court said Israel’s treaties follow the OECD model convention and that it is undisputed that tax treaties override anything else stated in Israeli legislation (ITO Section 196).

This may yet serve as a precedent for other future cases regarding Israel’s tax treaties.

Next Step:

Contact [email protected]m if you have a question about claiming benefits under an Israeli tax treaty and/or under OECD recommendations, as Israel is an OECD member.

(c) 8.11.22

Join Our Newsletter

Your name Email address: