IsraelLawGermany-Israel Double Tax Treaty: A Complete Guide for German Investors, Olim, and Expats
Germany is home to approximately 90,000–100,000 Jews and maintains one of the most active bilateral economic relationships with Israel in Europe, spanning high-tech investment, pharmaceutical trade, manufacturing, and academic cooperation. For German shareholders in Israeli companies, German lenders to Israeli subsidiaries, Israelis earning German pension income, and Germans considering aliyah, the Germany-Israel DTA is the document that determines which country collects tax first and how much.
Without the treaty, an Israeli company paying a dividend to a German shareholder withholds at the Israeli domestic rate of 25–30%, leaving the German recipient to claim a foreign tax credit (*Anrechnung ausländischer Steuern*) on their German return under § 34c EStG — with no guarantee of full relief. The DTA imposes binding caps that both tax administrations must respect, and backs them with a mutual agreement procedure when they disagree. For a significant intercompany dividend or loan portfolio, accessing the treaty rate rather than the domestic rate can represent a saving of hundreds of thousands of shekels on a single payment cycle.
1. Treaty Overview
The Convention between the Federal Republic of Germany and the State of Israel for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital was signed in Jerusalem on June 9, 1966, and entered into force on January 11, 1977. It replaced an earlier provisional agreement and has been in continuous operation for nearly five decades, making it one of Israel's longest-standing bilateral tax treaties.
On the Israeli side, the treaty covers *mas hachnasa* (income tax), *mas chevrot* (corporate tax), and *mas shevach* (capital gains tax) under the Income Tax Ordinance [New Version], 5721-1961. On the German side, it covers *Einkommensteuer* (income tax), *Körperschaftsteuer* (corporate tax), *Gewerbesteuer* (trade tax), and the solidarity surcharge (*Solidaritätszuschlag*). Both countries have signed the OECD Multilateral Instrument (MLI), which adds modern anti-avoidance rules — most importantly the Principal Purpose Test (PPT) — on top of the bilateral agreement. Structures designed primarily to route income through either country in order to access treaty rates warrant review against the MLI before implementation.
Key rates under the Germany-Israel DTA at a glance:
- Dividends: 5% (qualifying corporate shareholders holding at least 25% of the Israeli company's capital) / 15% (all other cases)
- Interest: 15% maximum withholding at source
- Royalties: 5% for industrial, commercial, or scientific equipment; 10% for other royalties (patents, trademarks, know-how, copyrights)
- Capital gains on Israeli real property: Taxed by Israel under domestic law
- Employment income: 183-day rule determines the taxing country
- Elimination of double taxation: Credit method in both countries
2. Dividend Withholding Rates
Article 10 of the DTA provides two tiers of withholding on dividends paid by Israeli companies to German residents:
- 5%: Where the beneficial owner is a company that directly holds at least 25% of the capital of the Israeli company paying the dividend
- 15%: In all other cases, including dividends paid to German individuals, partnerships (*Personengesellschaften*), and corporate shareholders with a holding below the 25% threshold
The 25% threshold distinguishes the Germany-Israel treaty from some more modern Israeli DTAs, which use a lower qualifying threshold (10% is the OECD Model standard). German investors holding minority stakes below 25% in Israeli companies pay 15% rather than 5% treaty withholding, even if their holding would qualify for preferential treatment under Germany's domestic participation exemption (*Schachtelprivileg*).
On the German side, dividends received from foreign companies by German corporate shareholders generally benefit from a 95% exemption under § 8b KStG, meaning only 5% of the dividend is treated as taxable income and subject to German Körperschaftsteuer. German individual shareholders holding Israeli shares outside a business context are subject to *Abgeltungsteuer* (the flat 25% capital yield tax, plus the 5.5% solidarity surcharge, plus church tax where applicable), with a credit for the Israeli withholding tax paid. German individuals who hold their Israeli shares through a domestic bank depot should confirm that the bank correctly processes the foreign tax credit under § 32d(5) EStG, as automatic crediting of non-EU withholding taxes is not always applied without a manual application.
3. Interest and Royalties
Article 11 caps withholding on interest at 15%. This covers bonds, bank deposits, loans, and debentures. German companies or banks that lend to Israeli subsidiaries or Israeli borrowers face a 15% Israeli withholding ceiling rather than the domestic Israeli rate on interest paid to non-resident entities (which can reach 25% depending on the instrument). German parent companies that fund Israeli subsidiaries through intercompany loans — common in the tech and pharma sectors — benefit from the treaty cap when the Israeli subsidiary makes interest payments upstream.
Article 12 provides two royalty tiers. Payments for the use of industrial, commercial, or scientific equipment are capped at 5%; payments for all other categories of royalties — patents, trademarks, designs, secret formulas, copyrights, and know-how — are capped at 10%. Software licensing agreements are a frequent classification dispute between the ITA and Israeli payers: the ITA tends to characterize non-exclusive software licenses as royalties subject to withholding, while payers often prefer to classify the same payment as a service fee (generally not subject to Israeli withholding unless the service provider has a permanent establishment in Israel). Any mismatch between what the German licensor reports and what the Israeli payer withholds creates potential liability for the Israeli company. A written ruling from the ITA before the first payment is the most reliable way to resolve the classification question.
4. Capital Gains on Israeli Property
Article 13 of the DTA follows the OECD Model: gains from the disposal of immovable property (*mas shevach*) situated in Israel are taxable by Israel, regardless of whether the seller is a German resident. A German investor who sells an Israeli apartment, commercial property, or land pays Israeli capital gains tax under the Land Taxation Law (*Chok Misui Mekarkein*), 5723-1963, administered by the Israel Tax Authority's *Misui Mekarkein* (real estate tax) division, even if they have never been physically present in Israel during the year of sale.
The treaty also includes an immovable-property-rich company rule: shares in a company deriving their value principally from Israeli real property may be taxed by Israel even when the seller is a German resident. This catches structures where German families hold Israeli residential or commercial property through a holding company. For sales of ordinary Israeli company shares (not property-rich), taxing rights pass to Germany as the residence country. Germany then taxes the gain under the Abgeltungsteuer regime (25% + solidarity surcharge for shares held personally) or the § 8b KStG rules (95% exemption for corporate shareholders) and grants a credit for any Israeli capital gains tax paid.
5. German Exit Tax and Emigration to Israel
Germany imposes a deemed-disposal exit tax under § 6 of the *Außensteuergesetz* (AStG, the Foreign Tax Act) when a German resident who holds significant shares in a corporation relocates abroad and thereby loses Germany's right to tax any future gain on those shares. The exit tax applies when the departing resident has been a German tax resident for at least seven of the previous twelve years and holds at least 1% of a corporation's share capital.
On the date of departure, Germany deems the shares to have been sold at fair market value and assesses income tax (*Einkommensteuer* or *Körperschaftsteuer*) on the resulting notional gain under the Abgeltungsteuer or regular income tax rates. For Germans moving to a member state of the European Union or the European Economic Area (EEA), payment of the exit tax can be deferred without interest until the shares are actually sold. Israel is neither an EU nor an EEA member, so Germans relocating to Israel who trigger § 6 AStG must pay the exit tax in full within one month of filing their final German return, unless a specific payment arrangement is agreed with the German *Finanzamt*.
On the Israeli side, Germans who make aliyah benefit from the 10-year new-immigrant tax exemption under Section 14 of Israel's Income Tax Ordinance. For the first decade of Israeli residency, foreign-source income (including German dividends, German pension income, and German rental income) is generally exempt from Israeli income tax. This creates a planning window: if the German exit tax can be managed in the year of departure, the subsequent decade offers a low-tax environment in Israel for income derived from the remaining German asset base.
6. Employment Income and the 183-Day Rule
Article 15 of the DTA governs salaries and wages. The default rule is that income earned for work performed in Israel is taxable by Israel. A German employee sent to Israel on a temporary assignment pays only German tax when three conditions are all satisfied:
- The employee is present in Israel for no more than 183 days in any 12-month period beginning or ending in the Israeli tax year (January 1 to December 31);
- The salary is paid by, or on behalf of, an employer who is not a resident of Israel; and
- The salary cost is not borne by a permanent establishment that the German employer has in Israel.
Once the 183-day threshold is crossed, Israel taxes the salary from day one, not merely from day 184. German employees on extended Israeli postings should register with the ITA and arrange Israeli payroll withholding (*memas mekorot*) before the 183-day mark is reached, not after. Failure to register on time typically results in penalties for late registration and interest on late payment of the withheld amounts. The German employer may also become liable as a foreign employer for Israeli *Bituach Leumi* (National Insurance) contributions if the employee crosses the residency threshold.
Germany and Israel maintain a bilateral Social Security Convention (signed in Bad Godesberg on December 17, 1973, in force since May 1, 1975) that prevents dual social insurance contributions in most cross-border employment situations. Under the convention, an employee posted from Germany to Israel for up to 24 months (extendable by mutual agreement) remains subject to German social insurance and is exempt from Israeli *Bituach Leumi* contributions for the covered period. The posting employer must obtain an A1-equivalent certificate (German form D/IL 101) from the *Deutsche Rentenversicherung* before the assignment begins.
7. How to Claim Treaty Benefits
Reduced withholding rates under the DTA are not self-executing under Israeli domestic law. A formal reduced-withholding certificate (*nikui memas mekorot*) from the ITA under Section 170 of the Income Tax Ordinance [New Version], 5721-1961 is required before the lower rate can be applied by the Israeli payer. Payments made before the certificate is issued are subject to full domestic withholding; recovering the excess through a refund claim typically takes 12–24 months, with no interest paid to the applicant on the overpaid amount.
Israeli process (German residents receiving Israeli-source income)
- Obtain a Tax Residency Certificate (TRC) from the German *Bundeszentralamt für Steuern* (BZSt). German residents apply for a TRC through the BZSt's online portal or via their local *Finanzamt*. The BZSt issues a signed certificate confirming German tax residency and naming the applicable treaty. A new TRC is required each calendar year; the BZSt processes most applications within two to four weeks.
- Apply to the ITA's International Tax Unit. Submit the BZSt TRC together with a declaration of beneficial ownership, a description of the income stream (dividends, interest, or royalties), the relevant agreement (e.g., the loan contract or shareholder register extract), and standard corporate identification to the ITA's International Tax Unit (*Yechida le'Mas Bein Leumi*) at the assessing office covering the Israeli payer's location (Tel Aviv 5 for major corporate matters).
- Wait for the ITA certificate. Processing takes four to eight weeks under normal conditions. March filing season backlogs can extend this to 12 weeks. Urgent escalation is possible for distributions with fixed payment dates but is not guaranteed.
- Present the certificate to the Israeli payer. The Israeli company withholds at the certified rate and issues a withholding certificate (*teudat nikui*) to the German recipient for use in the German foreign tax credit calculation.
German process (Israeli residents receiving German-source income)
Israeli residents receiving German dividends, interest, or royalties must obtain an Israeli Tax Residency Certificate from the ITA and submit it to the German payer or to the BZSt's refund process. Germany's domestic capital yield tax (*Kapitalertragsteuer*) on dividends is 25% plus the solidarity surcharge; the DTA caps this at 15% for individuals and 5% for qualifying corporate recipients. German banks typically withhold at the full domestic rate automatically; the Israeli recipient then files a refund application with the BZSt using the BZSt's standard form to recover the excess withholding. ITA Tax Residency Certificates take three to five weeks to obtain.
Frequently Asked Questions
Once a German citizen formally ceases German tax residency, the DTA applies to them as an Israeli resident rather than as a German resident. They use the treaty to access reduced German withholding rates on German-source income — for example, dividends from German companies they still hold or interest from German bank accounts. Germans who retain property in Germany or have not completed the formal German tax residency termination process (*Wohnsitzaufgabe*) at their *Finanzamt* may continue to be treated as German tax residents and must file German returns on their worldwide income. The DTA tie-breaker in Article 4 (permanent home, center of vital interests, habitual abode, then nationality) determines the primary residence country when both countries claim a person simultaneously.
Under § 6 AStG, Germany imposes a deemed-disposal tax on unrealized gains in privately held corporation shares when a German resident emigrates and thereby removes the gain from Germany's tax jurisdiction. The rules apply if the departing person has been a German tax resident for at least seven of the previous twelve years and holds at least 1% of any corporation's share capital. The full exit tax is due immediately for emigrants moving to non-EU/EEA countries, including Israel. Individuals with large unrealized gains in startup equity or family companies should model the exit tax liability and consider the timing of their departure carefully. Since Israel's 10-year new-immigrant tax exemption begins from the date of aliyah, planning the departure to maximize the exemption window while managing the German exit tax is often the central structuring question for German olim with significant share portfolios.
Under Article 18 of the DTA, pensions paid for past private-sector employment are taxable only in the country of residence. An Israeli resident receiving a German private pension (*betriebliche Altersversorgung* or *Riester-Rente*) generally pays Israeli income tax on the payments and is exempt from German withholding, provided they supply the German payer with an ITA Tax Residency Certificate and the payer files the appropriate exemption request with the BZSt. German statutory pensions from the *Deutsche Rentenversicherung* may be subject to different treaty treatment depending on the nature of the employment; Israeli new immigrants during the 10-year exemption period should verify with an Israeli tax attorney whether foreign pension income falls within the scope of the Section 14 exemption before assuming it arrives tax-free.
The 1973 Germany-Israel Social Security Convention covers pension insurance (*Rentenversicherung*), accident insurance (*Unfallversicherung*), and unemployment insurance (*Arbeitslosenversicherung*) — it does not cover health insurance (*Krankenversicherung*). Germans posted to Israel on short assignments who remain in the German statutory health insurance system (*gesetzliche Krankenversicherung*) should confirm that their *Krankenkasse* provides overseas coverage for the duration of the posting, as Israeli mandatory health insurance (*Bituach Briut*) registration obligations may also arise if the individual is in Israel for an extended period. Self-employed German citizens relocating permanently to Israel must register with the Israeli National Insurance Institute (NIl/Bituach Leumi) and the Health Ministry's health fund (*kupat holim*) separately from the social security convention.
Gains on Israeli company shares (not property-rich companies) sold by German individuals outside a business context are taxed in Germany under the Abgeltungsteuer at a flat 26.375% effective rate (25% base plus 5.5% solidarity surcharge). If the Israeli company did not withhold Israeli capital gains tax on the sale — which is typically the case for publicly traded or treaty-protected share disposals where Article 13 allocates taxing rights to Germany — the German Abgeltungsteuer applies without an offsetting credit. German investors in Israeli startups should review their shareholding structure before any liquidation event: if the Israeli company has real-estate-rich subsidiary assets, the DTA may give Israel additional taxing rights that reduce the expected net proceeds. Post-exit, the German return for the disposal year (Anlage KAP) must report the gain and include supporting documentation showing the Israeli tax treatment.