IsraelLawIndia-Israel Double Tax Treaty: Guide for Indian Investors and IT Professionals
India and Israel share an expanding economic relationship, with bilateral trade exceeding USD 7 billion annually and deepening technology ties across cybersecurity, agriculture, and software. Indian IT majors — and an increasingly active Indian diaspora community in Israel — operate across both jurisdictions simultaneously. For anyone on both sides of that economic relationship, the India-Israel DTAA is the legal instrument that determines who taxes what, at what rate, and what documentation is needed to access the lower rates.
Without the treaty, an Indian company receiving dividends from its Israeli subsidiary would face Israeli withholding at the domestic rate of 25–30% and then pay Indian corporate tax on the same income. The DTAA breaks that loop: it limits Israeli withholding to 10% and provides a credit mechanism so the same profit is not taxed twice. The difference between the domestic rate and the treaty rate can represent hundreds of thousands of shekels on a single distribution.
1. Treaty Overview
The Agreement for the Avoidance of Double Taxation between India and the State of Israel was signed on June 2, 1996 and entered into force on January 18, 1998. It closely follows the OECD Model Convention but includes several India-specific modifications — most notably a separate article on Fees for Technical Services, which does not appear in the standard OECD model and has significant implications for the Indian IT sector.
The treaty covers taxes on income imposed by both countries. On the Israeli side, this means *mas hachnasa* (income tax), *mas chevrot* (corporate tax), and *mas shevach* (capital gains tax). On the Indian side, it covers income tax under the Income Tax Act, 1961, including surcharges.
Key rates and rules in the India-Israel DTAA:
- Dividends: 10% maximum withholding at source
- Interest: 10% maximum withholding at source
- Royalties: 10% maximum withholding at source
- Fees for Technical Services: 10–15% source-country tax (India-specific article)
- Capital gains on Israeli real property: Taxed by Israel under domestic law
- Employment income: 183-day rule determines taxing country
- Elimination of double taxation: Credit method (both countries credit tax paid in the other)
2. Dividend Withholding Rates
Article 10 of the India-Israel DTAA caps withholding on dividends at 10% regardless of the size of the Indian shareholder's stake. Some other Israeli treaties apply a lower rate for substantial holdings (for example, 5% when the shareholder holds 25% or more), but the India-Israel treaty uses a single flat rate.
The 10% cap applies when the beneficial owner of the dividend is a resident of India. Indian holding companies that receive Israeli dividends and immediately pass them through to non-Indian ultimate investors may face scrutiny from the ITA over whether the Indian entity is the true beneficial owner — or merely a conduit. Shell structures that lack substance are increasingly challenged under both the DTAA's beneficial-ownership requirement and the Multilateral Instrument's Principal Purpose Test.
On the Indian side, dividends from Israeli subsidiaries are taxed in the hands of the Indian shareholder under the current regime (the Dividend Distribution Tax was abolished from April 2020). The Indian company includes the Israeli dividend in gross income and claims a credit for Israeli withholding under Section 90 of the Income Tax Act, 1961, read together with the treaty's elimination-of-double-taxation article.
3. Interest and Royalties
Articles 11 and 12 both impose a 10% ceiling on withholding at source. For interest, this covers bonds, loans, deposits, and debentures. Israeli companies that borrow from Indian banks or related-party lenders in India benefit from this cap: Israel's domestic withholding on interest to non-residents can reach 25–35% depending on the instrument, so the treaty saving is material on large intercompany loan facilities.
For royalties, the 10% cap covers payments for patents, trademarks, know-how, and copyrights. Software licenses present a recurring classification question: are they royalties under Article 12, or business income under Article 7? The ITA generally treats a non-exclusive software license that does not enable the licensee to exploit the copyright commercially as a service payment rather than a royalty. Indian companies licensing software to Israeli clients — and Israeli companies paying for Indian technology — should obtain a professional opinion before applying the 10% royalty rate automatically, because an incorrect classification can create unexpected withholding obligations.
4. Fees for Technical Services
The most India-specific feature of the DTAA is a standalone article on Fees for Technical Services. Most Israeli tax treaties follow the OECD model, under which service payments are classified as business income (Article 7) and taxed only where the service provider has a permanent establishment in the source country. The India-Israel treaty departs from this: it allows the source country to tax "managerial, technical, or consultancy services" even when the provider has no Israeli office, permanent establishment, or employees on Israeli soil.
What this means for Indian IT companies:
- An Indian software house providing custom development to Israeli clients may be subject to Israeli withholding on its invoices, even if all the work is performed from Bangalore
- The treaty rate (10–15%) caps that withholding, but the Israeli client must first obtain an ITA authorization to apply the reduced rate
- Indian companies without an Israeli presence are often surprised by this obligation; the FTS article was designed precisely to allow source-country taxation in exactly that scenario
The line between an FTS payment and a royalty matters for the applicable rate and for which article applies. SaaS subscriptions, cloud services, and software maintenance contracts can fall under either characterization depending on the facts. Where significant sums are involved, a tax opinion on classification before the first payment is a worthwhile investment.
5. Capital Gains on Israeli Property
Article 13 of the treaty follows the standard pattern: gains from the disposal of immovable property (*mas shevach*) situated in Israel are taxed by Israel. Gains from the sale of shares in most companies are taxed only in the seller's country of residence. There is an important exception for "property-rich" companies: shares in a company whose primary assets consist of Israeli real property may be taxed by Israel even when the seller is an Indian resident.
For Indian investors holding Israeli real estate directly, Israel's capital gains rules apply in full. The tax breaks down between inflation-adjusted gain (*shevach amiti*) and nominal gain (*shevach afasiyati*), each taxed at different rates. The DTAA does not modify these domestic rates; it confirms Israel's taxing right and permits India to credit the Israeli tax against Indian tax on the same gain.
Indian venture investors who hold shares in Israeli hi-tech startups should note that where a company's primary asset is intellectual property or cash rather than land or buildings, the capital gains article generally allocates taxing rights to India. This can produce planning opportunities — but also compliance obligations in India that are often overlooked when a startup exit generates a significant return.
6. Tax Residency and Tie-Breaker Rules
The DTAA applies only to persons who are residents of India, Israel, or both. Article 4 establishes tie-breaker rules for the situation where an individual qualifies as a tax resident of both countries simultaneously — for example, an Indian national who has lived in Israel long enough to become an Israeli tax resident without formally ceasing to be an Indian resident.
The tie-breaker rules apply in sequence:
- Permanent home: Resident of the country where a permanent home is available
- Centre of vital interests: If homes exist in both countries, resident of the country where personal and economic ties are closer
- Habitual abode: If the centre of vital interests is inconclusive, resident where the person ordinarily lives
- Nationality: If habitual abode is split, resident of the country whose nationality the person holds
- Mutual agreement: If still unresolved, the ITA and India's Central Board of Direct Taxes (CBDT) settle the matter bilaterally
For Indian nationals who have made *aliyah* and permanently relocated to Israel, the tie-breaker arises less frequently because Israeli residency coupled with departure from India typically severs Indian tax residency through India's own rules. For professionals on fixed-term assignments, however, the question of where wages are taxed can turn on apparently minor factual details such as whether the employee maintained an apartment in India during the Israeli posting.
7. Employment Income and Indian IT Professionals
Article 15 of the DTAA governs salary and wages. The general rule is that salary earned for work performed in Israel is taxable by Israel. There is a three-condition exemption for short-term employees:
- The employee is present in Israel for no more than 183 days in the relevant tax year
- The salary is paid by, or on behalf of, an employer who is not an Israeli resident
- The salary cost is not borne by a permanent establishment that the employer has in Israel
When all three conditions are satisfied, only India taxes the income. When the employee crosses the 183-day threshold — or when the Israeli client effectively reimburses the Indian employer for the salary, which can make the Israeli client the "economic employer" under Israeli guidelines — Israel acquires the right to tax from day one, not just from day 184.
Indian IT professionals on B/1 work permits should track their days carefully. Israel's income tax year runs January 1 to December 31, and the 183-day count is made within a single Israeli tax year. Presence of a spouse or children in Israel, and maintaining an apartment in Tel Aviv, can affect Israeli residency status independently of the day count and create full-year Israeli tax obligations even on someone nominally on a short-term assignment.
8. How to Claim Treaty Benefits
Reduced withholding rates under the DTAA are not self-executing. Israeli domestic law requires a formal reduced-withholding certificate (*nikui memas mekorot*) from the ITA under Section 170 of the Income Tax Ordinance [New Version], 5721-1961 before a lower rate can be applied.
Israeli process (Indian residents receiving Israeli-source income)
- Obtain a Tax Residency Certificate from India. The Indian recipient must obtain Form 10FB (Tax Residency Certificate) from India's Income Tax Department. This document certifies Indian tax residency and is a mandatory exhibit in the ITA application.
- Apply to the ITA's International Tax Department. Submit the Indian TRC together with a declaration of beneficial ownership and basic corporate documentation (certificate of incorporation, shareholding chart) to the ITA's International Tax Unit at the relevant assessing office.
- Wait for processing. The ITA typically issues the certificate within four to eight weeks. Payments made before the certificate is received are subject to full domestic withholding; recovery requires a separate refund application (*bakshat heshtachvut*) and can take considerably longer than the original application.
- Present the certificate to the Israeli payer. The Israeli company then withholds at the certified reduced rate (10%) rather than the domestic rate (25–30%).
Indian process (Israeli residents receiving Indian-source income)
Israeli residents receiving Indian-source dividends, interest, royalties, or FTS payments must obtain an Israeli TRC from the ITA and submit it to the Indian payer before payment. The Indian payer applies the treaty rate (10%) under Section 195 of the Income Tax Act instead of the higher domestic Tax Deducted at Source (TDS) rate. Late or missing TRC submission results in TDS at the domestic rate — a refund claim through Indian tax returns that typically takes 18 to 24 months to resolve.
Frequently Asked Questions
Treaty entitlement depends on tax residency, not citizenship. An Indian national who has permanently relocated to Israel and established Israeli tax residency is treated as an Israeli resident under the treaty. If they have severed Indian residency under Section 6 of India's Income Tax Act, the DTAA no longer applies to shield their Indian-source income. That income falls under Israeli domestic law, which generally grants new immigrants a 10-year exemption under Section 14 of Israel's Income Tax Ordinance.
Not automatically. If the payment qualifies as Fees for Technical Services under the DTAA's FTS article, the Israeli client may have a statutory obligation to withhold even though the Indian company has no Israeli office. The FTS article was designed precisely for this scenario. Indian companies should not assume that working remotely from India eliminates Israeli withholding obligations. Whether the treaty rate or the domestic rate applies depends on whether an ITA authorization has been obtained before the payment is made.
The interaction depends on residency. A new immigrant (*oleh chadash*) who acquires Israeli residency triggers Section 14's 10-year foreign-income exemption under Israeli domestic law — the DTAA is not needed for that. The treaty becomes relevant for income flowing from Israel to India, or once the exemption period ends. Indian nationals planning *aliyah* should also address whether full severance of Indian residency is achievable, since continuing Indian residency creates worldwide reporting obligations in India regardless of the Israeli exemption.
India signed and ratified the MLI, and it modifies many of India's bilateral treaties. Whether and which provisions of the India-Israel DTAA have been changed depends on the Covered Tax Agreement positions notified by each country. The Principal Purpose Test — allowing tax authorities to deny treaty benefits when obtaining them was the main purpose of a transaction — very likely applies. Any arrangement structured primarily to access DTAA rates should be reviewed against the MLI's anti-avoidance rules before implementation.
The ITA requires India's Form 10FB Tax Residency Certificate, a written declaration that the Indian company is the beneficial owner of the dividend, and standard corporate documents (certificate of incorporation, shareholding structure). For holding companies that pass dividends through to ultimate investors, the ITA may also request evidence of genuine substance: actual board decisions, employees, and business activities. Purely passive conduit structures are regularly challenged under both the DTAA's beneficial-ownership test and the MLI's principal purpose test.