US-Israel Tax Treaty: A Practical Guide for American Expats, Olim, and Investors

More than 200,000 Americans live in Israel, and hundreds of thousands more hold Israeli investments, receive Israeli dividends, or earn income from Israeli real estate. Every one of them is operating at the intersection of two tax systems that do not automatically align. The US-Israel Tax Treaty is the legal instrument that governs that intersection — reducing withholding rates, establishing which country gets first taxing rights, and providing the mechanism for crediting tax paid in one country against liability in the other.

Understanding the treaty is not optional. Israel's Israel Tax Authority (ITA) has been increasing enforcement against non-resident US income earners since 2022, and the IRS has simultaneously tightened scrutiny of Americans with foreign accounts and income through FBAR, FATCA, and Form 8938 reporting requirements. The two enforcement systems are converging, and the treaty is both your main protection and — if misunderstood — your main compliance risk.

This guide covers the treaty's operative provisions, how each one works in practice, how to claim treaty benefits in Israel, the critical savings clause limitation, the unresolved social security gap, and the specific steps US citizens and investors need to take to stay compliant under both systems.

1. The Treaty at a Glance

The formal name is the Convention Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income. It was signed on November 20, 1975, and entered into force on December 30, 1994. A Technical Explanation, which the US Treasury Department published to clarify the treaty's intended operation, is available from the IRS and remains the authoritative interpretive document for US-side disputes.

Israel's ratifying legislation incorporated the treaty into domestic law. The ITA treats it as directly applicable under the principle established in Israeli case law that international tax treaties take precedence over domestic statute where there is a conflict, provided the treaty provision is clear and self-executing.

The treaty's main operative articles are:

• Article 6 — Saving clause (US right to tax its citizens)
• Article 10 — Dividends
• Article 11 — Interest
• Article 12 — Royalties
• Article 13 — Capital gains
• Article 17 — Pensions and annuities
• Article 18 — Social security
• Article 23 — Relief from double taxation (foreign tax credit)
• Article 26 — Mutual agreement procedure (MAP)

2. The Savings Clause — Why Americans Still Pay Full US Tax

Article 6 of the US-Israel Treaty contains the saving clause: the United States reserves the right to tax its citizens and residents as if the treaty had not entered into force. This is standard US treaty policy. It means that an American citizen living in Israel — even one who would otherwise qualify as an Israeli tax resident under the Center of Life test in Section 1 of the Income Tax Ordinance — cannot use the treaty to reduce or eliminate their US tax bill on income that the treaty nominally assigns to Israel.

In practical terms: a US citizen who lives in Israel, earns a salary from an Israeli employer, and pays Israeli income tax at rates up to 50% cannot rely on the treaty to be exempt from US tax on that salary. They must file a US federal return (Form 1040), declare the Israeli income, and then claim either:

• The Foreign Tax Credit (Form 1116) — a dollar-for-dollar credit for Israeli income tax paid, up to the US tax owed on that income; or
• The Foreign Earned Income Exclusion under Section 911 of the Internal Revenue Code — which excludes up to $126,500 of foreign earned income from US taxable income for 2024 (indexed annually).

Most Americans in Israel use the foreign tax credit because Israel's marginal rates frequently exceed US rates, generating excess credits. Those with lower Israeli income sometimes prefer the exclusion. An attorney or CPA with dual-system expertise is essential here — the choice is not reversible year-to-year without IRS consent.

3. Dividends From Israeli Companies (Article 10)

Israel's domestic withholding rate on dividends paid to non-residents is 25% under Section 170(a) of the Income Tax Ordinance. For US residents and citizens, Article 10 of the treaty caps this at two reduced rates:

• 12.5% when the beneficial owner of the dividends owns at least 10% of the voting power of the Israeli company paying the dividend — the so-called "qualifying shareholder" rate
• 25% in all other cases (matching the domestic rate, so no reduction for portfolio investors)

The treaty rate applies only to the "beneficial owner" of the dividend — the actual economic owner. Payments through conduit arrangements or nominees do not qualify. Additionally, the reduced 12.5% rate requires the 10% ownership threshold to be met throughout the full dividend tax period (generally the fiscal year in which the dividend is declared).

For US investors in Israeli startups and private companies who hold 10% or more of the shares, the 12.5% treaty rate instead of the standard 25% represents a significant saving on distributions. On a NIS 500,000 dividend, that is a NIS 62,500 difference in Israeli withholding alone.

4. Interest Income (Article 11)

Israel's domestic withholding rate on interest paid to non-residents varies. For foreign-currency bank deposits, interest is typically exempt under the non-resident exemption in Section 9(13) of the Income Tax Ordinance. For shekel deposits and private loans, the standard rate is 25–35%.

Article 11 of the US-Israel Treaty sets a treaty cap of:

• 17.5% for most interest payments between Israeli payers and US residents
• 10% for interest paid to a bank or financial institution (including savings institutions and insurance companies), where the recipient is engaged in a genuine financial business

The treaty rate does not apply to interest that is economically equivalent to a profit distribution (i.e., contingent interest tied to company profits), which remains subject to the dividend rules of Article 10.

For US lenders making private loans to Israeli borrowers — a common scenario in startup financing through convertible notes and SAFEs — the 17.5% treaty rate on imputed interest (which the ITA calculates under Section 3(i) of the Income Tax Ordinance when loans are below-market) reduces the Israeli withholding obligation significantly.

5. Royalties From Israeli Sources (Article 12)

Article 12 of the treaty sets treaty caps on Israeli withholding for royalties paid by Israeli entities to US residents:

• 10% for royalties for the use of, or right to use, copyrights of literary, dramatic, musical, or artistic works (excluding motion picture films and works recorded for radio or television broadcasting)
• 15% for patents, know-how, trademarks, designs or models, plans, secret formulas or processes, computer software, and industrial, commercial, or scientific equipment

Israel's domestic withholding rate on royalties to non-residents is generally 25–30% under Section 170 of the Income Tax Ordinance, making the treaty reduction substantial — especially for US-based technology licensors supplying Israeli companies. For a NIS 1 million annual software license payment, the difference between 30% and 15% is NIS 150,000 in retained cash.

Israeli high-tech companies frequently pay royalties to foreign IP-holding parents or sub-licensors. US corporate parents licensing technology to Israeli subsidiaries should ensure treaty rates are applied at source — the Israeli subsidiary is responsible for withholding and remitting the correct amount to the ITA.

6. Capital Gains — and the Real Property Company Trap (Article 13)

Capital gains is where the treaty produces some of its most significant results — and some of its most consequential traps for US investors in Israeli companies.

The general rule under Article 13 is that capital gains from the disposal of property are taxable only in the country of residence of the seller. So a US resident who sells shares in an Israeli company would, under the treaty's general rule, pay US capital gains tax but no Israeli tax.

Israel's domestic exemption under Section 97(b) of the Income Tax Ordinance independently exempts many non-resident share sellers from Israeli capital gains tax, subject to conditions (not owning more than 10% of the company, and the company not being a "real property company"). The treaty and the domestic exemption generally point in the same direction for portfolio investors.

The critical exception: Real Property Companies (*Igud Mekarkein*)

Article 13 of the treaty — consistent with the OECD standard — contains an exception for immovable property. Gains from the disposal of shares in a company whose value is principally derived from immovable property located in Israel are taxable in Israel, not just in the US. This aligns with Israel's domestic definition of an igud mekarkein (real property company) under Section 50(a) of the Land Taxation Law (*Mas Shevach*) 5723-1963.

The practical implication: a US investor who buys shares in an Israeli company that holds significant Israeli real estate — a developer, a real estate fund, or a company whose main asset is an Israeli building — cannot rely on Article 13 or Section 97(b) to avoid Israeli capital gains tax when selling those shares. Israel has first taxing rights, and the ITA will seek to collect.

7. Pensions, Annuities, and the Critical Social Security Question

Article 17 of the US-Israel Treaty provides that pensions, annuities, and other similar remuneration paid in consideration of past employment are taxable only in the country of residence of the recipient. This means:

• A US citizen living in the US who receives a pension from a former Israeli employer: taxable only in the US (not in Israel)
• A US citizen who makes Aliyah and receives a US private pension (401(k), IRA distributions, corporate pension): during their 10-year Oleh exemption period under Section 14(a) of the Income Tax Ordinance, this income is exempt from Israeli tax regardless of the treaty — the domestic exemption is more generous
• After the Oleh exemption expires: the treaty's Article 17 provides that residence-state-only taxation applies, but US pensions paid to Israeli residents are increasingly scrutinized by the ITA as potentially taxable in Israel

Article 18 addresses social security benefits specifically. Social security benefits paid by one contracting state to a resident of the other state are taxable only in the state that pays them. This means US Social Security payments to a US citizen living in Israel are taxable only in the US (at the applicable federal rate of 0–85% of benefits, depending on total income), and Israel cannot tax them. This is a meaningful protection for Olim who retire in Israel on US Social Security income.

The Totalization Agreement Gap

The treaty's social security provisions deal with benefit taxation. They do not resolve the double-contribution problem. The US and Israel have never signed a social security totalization agreement — the type of bilateral treaty that coordinates which country's social security system a worker contributes to, preventing double payroll taxes. The US has such agreements with 30+ countries (including Germany, France, the UK, Canada, and Australia) but not Israel.

This means that an American citizen who moves to Israel, takes local employment, and contributes to Bituach Leumi (NII) under the National Insurance Law 5754-1994 is simultaneously obligated to contribute to US Social Security through self-employment tax if they are self-employed — there is no coordination. The combined effective rate can exceed 30% of earnings before income tax.

8. How to Claim Treaty Benefits in Israel — Step by Step

The treaty does not apply automatically. You must affirmatively claim treaty benefits through the correct procedural channel. The two main routes are:

Route 1: Reduced Withholding at Source (Section 167(b) Certificate)

Before payment is made, the US recipient requests a reduced withholding certificate from the ITA, which the Israeli payer then applies to all future payments. This is the cleanest mechanism — it avoids overpayment and the need to file a refund claim.

Steps:

1. File Form 2513 (Request for Reduced Withholding Tax) with the ITA International Taxation Division
2. Attach: US IRS certificate of tax residency (Form 6166, obtained from the IRS Philadelphia Service Center — allow 6–8 weeks), a statement identifying the payment type and applicable treaty article, proof of beneficial ownership
3. The ITA issues the Section 167(b) certificate, typically within 30–60 days, specifying the approved rate
4. Provide the certificate to the Israeli payer (company, bank, tenant, or royalty payer)
5. Renew the certificate annually — most certificates are valid for one calendar year

Route 2: File an Annual Return and Claim a Refund

If excess withholding has already been deducted, the US recipient files an Israeli annual tax return with the ITA claiming a refund of the overpaid amount. The ITA reviews the return, verifies the treaty entitlement, and issues a refund with CPI linkage under Section 159A of the Income Tax Ordinance. The 6-year statute of limitations under Section 160 applies — claims for overpaid tax in 2020 must be filed by December 31, 2026.

9. The Social Security Gap — Planning Around a Missing Agreement

The absence of a US-Israel totalization agreement is the single most significant gap in the treaty framework for Americans living and working in Israel. Without it, workers can face:

• Double NII + FICA contributions for the self-employed: Israeli self-employed individuals pay NII at rates of approximately 9.61–16.23% on income between NIS 6,331 and NIS 50,695 per month (2026 rates). US self-employed individuals simultaneously owe US self-employment tax (FICA) at 15.3% on net self-employment income up to the US Social Security wage base ($168,600 in 2024).
• Contribution credit gaps: NII contributions do not count toward US Social Security credits, and vice versa. An American who spends 15 years working only in Israel (earning only NII credits) and then returns to the US may not have 40 US Social Security credits needed for retirement benefits.

Practical planning strategies:

• Remain on a US payroll if possible: The 2026 Knesset law exempts NII for US citizens on US employer payrolls. If you work for a US company that can keep you on its payroll (with a Israeli work permit), you avoid NII double contribution.
• Use the corporate structure: Self-employed Americans in Israel often incorporate an Israeli company. The company pays NII on the owner's salary; the owner's dividends are not subject to NII. This reduces the NII base, though does not eliminate it.
• Accumulate US credits early: Work in the US for at least 10 years (40 credits) before making Aliyah, securing a minimum US Social Security entitlement at retirement regardless of subsequent Israeli employment.
• Track both systems: Create a Social Security account at ssa.gov and an NII account at btl.gov.il to monitor your credit accumulation in both systems. The NII provides retirement pension (*kitzva ziknah*) benefits separately from any US retirement income.

Frequently Asked Questions