Withholding Tax on Royalties in Israel: A Complete Guide for Non-Residents

If you own intellectual property and license it to an Israeli company, the income that arrangement generates carries an Israeli tax dimension — one that many foreign IP holders encounter for the first time when they receive their first payment and find it short of what was agreed. The missing amount is Israeli withholding tax, and the Israeli payer was legally required to deduct it.

This guide is written for non-residents: foreign authors, software developers, patent holders, pharmaceutical and tech companies, filmmakers, and trademark owners who deal with Israeli licensees. It covers which payments count as royalties under Israeli law, what the standard withholding rates are, how to benefit from a tax treaty if one applies, and what the Israeli payer's obligations are. Understanding those obligations matters to you directly: if the payer fails to withhold correctly, the consequences fall on them — but they affect how and when you get paid.

1. Overview: Israel's Source-Based Tax on Non-Residents

Israel taxes non-residents on a source basis. Under Section 4A of the Income Tax Ordinance [New Version] 1961 (Pkudat Mas Hakhnasa), income has an Israeli source when it arises from property or rights used in Israel, or when it is paid by an Israeli resident. Royalty income generally meets one or both conditions: the IP is used in Israel by the licensee, and the payer is an Israeli company.

The collection mechanism is withholding at source (nikui mas bamkor), governed by Section 170 of the Ordinance. Rather than requiring the foreign IP holder to file an Israeli return and pay the tax themselves, the law places the obligation on the Israeli payer. When an Israeli publisher pays a US author a translation royalty, the publisher must withhold tax, remit it to the Israel Tax Authority (ITA), and report the transaction. The foreign recipient receives only the net amount.

This withholding mechanism applies to both ongoing royalty streams and one-time lump-sum licensing payments. It also catches payments labelled as "service fees" where the substance of the arrangement is actually a license of IP rights. The ITA looks at the economic reality of a transaction, not just how the parties named it in the contract.

Whether you face actual Israeli tax — and at what rate — depends on three things: what type of royalty you are receiving, whether a double taxation treaty applies between Israel and your country, and whether an ITA certificate has been obtained to confirm the reduced rate. The sections below address each in turn.

2. Which Royalties Are Taxable in Israel?

Not all IP-related payments are treated the same. Israeli tax law and the regulations enacted under Section 170 distinguish several categories, each with a different default withholding rate. Knowing which category your royalty falls into is the first step in working out your actual tax exposure.

Literary, artistic, and scientific copyright royalties

This category covers books, articles, music compositions, architectural drawings, and fine art. Under Israeli withholding regulations, payments to non-residents for copyright in these works carry a 0% withholding rate under domestic law. The carve-out does not apply to motion pictures, television productions, or works specifically licensed for radio or television broadcasting — those fall under the full 25%/23% rate.

Patents, know-how, and trade secrets

Royalties for patents (patent), industrial know-how, trade secrets, and confidential technical information carry the full domestic rate: 25% for individual non-residents or 23% for non-resident companies. These are the most common royalty types for technology and pharmaceutical companies licensing IP to Israeli manufacturers or distributors.

Trademarks and brand royalties

Franchise arrangements and pure trademark licenses are taxed at 25%/23% under domestic law. There is no domestic exemption comparable to the literary copyright carve-out.

Software licensing

Software royalties sit in a contested category. The ITA has generally treated payments for the right to use software — as distinct from a sale of a software copy — as royalties for know-how or a patent equivalent, subject to full withholding. This matters for companies receiving recurring software subscription fees from Israeli customers that may qualify as IP licensing rather than service fees.

Industrial and commercial equipment

Payments for the use of industrial, commercial, or scientific equipment are not strictly "royalties" but follow similar withholding rules. The applicable rate is 10% on 70% of the gross payment, which works out to an effective rate of 7%.

3. Domestic Withholding Tax Rates

When no tax treaty applies — or when the treaty rate equals or exceeds the domestic rate — the following withholding rates govern payments to non-residents under Israeli domestic law:

Royalty Category	Individual Non-Resident	Corporate Non-Resident
Literary, artistic, scientific copyright (excl. film/TV)	0%	0%
Film, TV, and broadcasting rights	25%	23%
Patent, know-how, trade secret	25%	23%
Trademark / brand license	25%	23%
Industrial/commercial equipment (leasing)	7% (effective)	7% (effective)

The 23% corporate rate tracks Israel's corporate tax rate, unchanged since 2018. The individual rate of 25% is a flat passive income rate applied to non-residents under the Ordinance. These domestic rates apply by default. An Israeli payer who has no ITA certificate directing a different rate, and where no treaty clearly authorises a lower one, must withhold at these rates or face personal liability for the shortfall.

One practical consequence of the 0% domestic rate on literary copyright royalties: an Israeli publisher paying a foreign author needs no special permission or certificate. The domestic law already permits payment without withholding. The payer must still report the payment to the ITA in the annual withholding report, even where the amount withheld is zero.

4. Reducing Your Rate Through Tax Treaties

Israel has double taxation treaties (amanaot mipel kefulah) with over 55 countries, including the United States, United Kingdom, Germany, France, the Netherlands, Canada, South Korea, and Japan. Each treaty contains a royalties article that caps the withholding rate Israel can apply to royalty payments made to residents of the treaty country. In most cases the treaty rate is substantially lower than the domestic 25%/23% rate.

Treaty benefits are not automatic. To claim a reduced withholding rate, you need to be the beneficial owner of the royalty income — not a conduit company channelling the payment to another party — and you must be a tax resident of the treaty country. The Israeli payer is responsible for verifying your entitlement. In practice, that means obtaining documentation from you before applying the lower rate, or applying for a formal ITA certificate.

Treaty rates for common royalty categories

United States (treaty signed 1975)

• Literary, artistic, or scientific copyright royalties: 0% WHT
• Patents and know-how: 10% WHT
• Film and television royalties: 10% WHT (reduced from 25% domestic)
• Industrial equipment: 10% on 70% of gross (effective 7%)

United Kingdom (treaty signed 1962, updated)

• Copyright royalties excluding films: 0% WHT
• Patent and know-how royalties: 15% WHT
• Film royalties: 15% WHT

Germany (treaty signed 1977)

• Patents and know-how: 5% WHT
• Copyright royalties: 0–5% depending on type

Netherlands, France, Canada

• Royalties generally: 5–10%, depending on the specific treaty article

If your country does not have a treaty with Israel, no treaty reduction is available and the domestic rates apply in full. Countries without Israeli treaties where IP holders often encounter this problem include several Gulf states, many African countries, and some Southeast Asian jurisdictions.

5. Obtaining an ITA Reduced-Rate Certificate

When a non-resident wants formal ITA confirmation of a reduced withholding rate — particularly for large or ongoing royalty streams — the standard route is applying to the Israel Tax Authority for a withholding exemption or reduced-rate certificate (ishur nikui mas).

When is a certificate needed?

A certificate is not required for the domestic 0% literary copyright category, nor is it legally required before applying a treaty rate where the payer has adequate documentation. In practice, most Israeli payers prefer a certificate for three reasons: it transfers the rate-determination responsibility to the ITA; it provides a clear paper trail if the payment is later audited; and it avoids disputes with the foreign recipient about what rate was correct. For payments above NIS 500,000, most Israeli tax advisers recommend obtaining a certificate rather than relying on informal treaty documentation.

The application process

The application is submitted to the relevant regional tax office (Pekid Shuma) that has jurisdiction over the Israeli payer. The request must include:

• A completed application form, available through the ITA's online portal at misim.gov.il
• A copy of the royalty or licensing agreement
• A certificate of tax residency issued by the foreign recipient's home tax authority (for US recipients, an IRS Form 6166 or equivalent; for UK recipients, an HMRC certificate of residence)
• Evidence that the foreign recipient is the beneficial owner of the royalty income
• Details of prior payments made under the same arrangement in previous years, if any

Timeline and validity

Processing times vary by regional office and by how complex the arrangement is. For a straightforward case — a single royalty agreement, a clear treaty, a standard beneficial ownership structure — the ITA typically processes applications within 45 to 90 calendar days. Structures involving holding companies, sub-licences, or multi-jurisdictional arrangements can take four to six months. The Pekid Shuma may request additional documents during the process, which resets the clock.

Certificates are typically valid for the calendar year in which they are issued and must be renewed annually. If the royalty amount, the scope of the IP, or the parties change, a new application is required. For stable arrangements with no anticipated changes, the ITA will consider issuing a multi-year certificate, usually covering up to three years.

6. Obligations of the Israeli Payer

Foreign IP holders benefit from understanding the Israeli payer's obligations, because those obligations define what can go wrong and what recourse exists when it does.

Withholding is not optional

An Israeli company that pays royalties to a non-resident without withholding is not excused by a contract clause that shifts the tax burden to the recipient, nor by the payer's belief that a treaty applies. The obligation under Section 170 is absolute: if the payer cannot demonstrate it had ITA authorisation to apply a reduced or zero rate, the ITA will assess the full domestic-rate tax against the payer. The payer cannot recover this from the foreign recipient after the fact unless the licensing agreement contains an explicit gross-up clause. Foreign IP holders licensing into Israel should ask for such a clause when negotiating new agreements.

Remittance deadline

Withheld amounts must reach the ITA by the 15th of the calendar month following the month in which the royalty payment was made. A payment made on March 25 triggers a remittance deadline of April 15. Late remittance attracts interest charges calculated at the ITA's statutory rate and may result in administrative penalties assessed by the Pekid Shuma.

Annual withholding report

Israeli payers file an annual Nikui Mas (withholding) report by February 28 of the year following the payment. This report lists every payment made to non-residents during the year, the withholding applied to each, and the basis for any reduced rate — treaty, certificate number, or domestic exemption. The ITA cross-references this report against Central Bank data on outbound international transfers, which means unreported or under-reported royalty payments are detectable.

Cross-reporting under FATCA and CRS

Israeli payers with US-person recipients are subject to FATCA reporting obligations; those dealing with recipients from CRS-participating countries face parallel OECD Common Reporting Standard obligations. This means the foreign IP holder's home tax authority may independently receive notice of the royalty payment. If you receive Israeli royalties and have not reported them at home, the Israeli payer's reporting creates a paper trail that your home tax authority is entitled to — and in many countries, legally required to receive.