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Israeli Double Tax Treaties Net to Preventing Double Taxation and Non–Taxation

Most of Israeli double Tax Treaties provisions (the “Tax Treaty”) adopt the provisions of the Model Tax Convention on Income and Capital of the OECD (the Model Treaty").

As such Article 7(1) of the Tax Treaties in principle determines that profits of an enterprise of a contracting State shall be taxable only in that State, unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein.

According to Article 5 (1) of the Tax Treaty, a "permanent establishment" is defined as a fixed place of business through which the business of an enterprise is carried on.

Article 5 (2) of the Tax Treaty points out that the term "permanent establishment" includes especially, inter alia, a place of management, a branch and an office. According to Article 5 (3) of the Tax Treaty, the said term also includes the furnishing of services through employees or other personnel engaged by the enterprise for that purpose, if such services continue within the country for more than 6 months within any 12 months period.

Article 5 (4) of the Tax Treaty names a number of business activities which are treated as exceptions to the general definition of "permanent establishment", even if they are carried on through a fixed place of business. The common feature of these activities is that they are, in general, preparatory or auxiliary activities. According to the accepted commentary of bilateral tax treaties (the "OECD Commentary"), the decisive criterion that distinguishes between preparatory or auxiliary activities and other activities is whether or not they form an essential and significant part of the activity of the enterprise as a whole. Generally speaking, a fixed place of business whose general purpose is identical to that of the whole enterprise does not exercise a preparatory or auxiliary activity.

According to Article 5 (5) of the Tax Treaty, when a person is acting on behalf of an enterprise in the other contracting state, and has the authority to conclude contracts and/or to negotiate on behalf of the enterprise (i.e. a "dependent agent"), that enterprise shall be deemed to have a permanent establishment in that State.

Article 5 (6) of the Tax Treaty adds that Article 5 (5) shall not apply where the person acting on behalf of the enterprise carries on business in the other contracting state in the ordinary course of that business.

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