Treaty Shopping Shot Down

The term “treaty shopping” means using a company which just happens to be incorporated in a country which has a favorable tax treaty with another country, such as Israel.

In a recent District Court, a BVI (British Virgins Island) company with a branch in Israel was owned by a BVI parent company which in turn had various shareholders (Berggruen Holding Ltd vs. Gush Dan Assessing Officer Civil Appeal 36609-02-01-22 of 28.3.23).

Facts of the Case:

The Israeli branch operation was financed by a loan of nearly NIS 160 million from the BVI parent company, In June 2009 the BVI parent company assigned the loan to an affiliated company in Luxembourg. The Israeli branch operation paid virtually no interest on the loan before 2015. In 2015 it paid accumulated interest and tried to invoke Israel’s tax treaty to reduce the Israeli withholding tax on interest to 10% instead of 23%-25% (generally) had the interest been paid directly to the BVI parent company.

The ITA argued there was no commercial reason for interposing a Luxembourg lending company apart from improper tax reduction.

The taxpayer countered in court that Israel’s general antiavoidance rule against artificial or fictitious transactions (ITO Section 86) places the onus of proof on the ITA.

The Verdict:

The District Court concurred that the burden of proof of an artificial or fictitious transaction indeed lies with the ITA – but only after the taxpayer answers some important questions. Which company ultimately bore the loan risks and rewards– the Luxembourg company or the BVI parent company? Was there a back-to-back arrangement between them?


We don’t yet know the outcome, but treaty shopping is liable to be challenged.

Next step:

Please contact us to discuss any of the above matters further, or any other matter.

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

[email protected]

(c) Leon Harris 28.5.23

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