Israeli Withholding Tax on Payments to Non-Residents: Rates, Treaties & Exemptions

For foreign investors holding Israeli company shares, overseas technology companies licensing IP to Israeli clients, or non-resident lenders receiving interest from Israeli borrowers, Israeli withholding tax is often the first — and most surprising — brush with the Israeli tax system. Many assume that because they live abroad and have no Israeli income tax filing obligation, Israel simply cannot reach their receipts. That assumption is wrong.

Israel taxes income at its source. If the income arises from an Israeli company, an Israeli asset, or a service consumed in Israel, the ITA treats it as Israeli-source income and expects the paying party to deduct tax before sending anything abroad. The obligation falls on the Israeli payer, not the foreign recipient. An Israeli company that transfers a dividend abroad without withholding faces penalties and interest on the shortfall, so payers default to the full statutory rate unless they have documentation justifying a lower one.

Getting this right — or wrong — can move the needle by tens of thousands of shekels on a single transaction.

1. How Israeli Withholding Tax Works

Israeli withholding tax (nikui mekorot) is a collection mechanism under Part Ten of the Income Tax Ordinance 1961. The payer of income — the Israeli company, borrower, or licensee — is designated as a "withholding agent" (mesalem) and is personally liable to deduct tax at source and remit it to the ITA within 30 days of the payment date, under Section 170 of the ITO.

Two categories of payer face this obligation most often:

• Israeli companies distributing dividends, paying interest on shareholder loans or bonds, or paying royalties to foreign licensors.
• Israeli businesses paying service fees or consulting fees to foreign companies or individuals for work that has an Israeli nexus.

For capital gains — such as when a non-resident sells Israeli real estate or shares in an Israeli company — the withholding obligation typically falls on the Israeli attorney or acquirer handling the transaction, who deducts the applicable gains tax before distributing the net sale proceeds.

The legal consequence is asymmetric: the foreign recipient receives a net payment and has no immediate enforcement contact with the ITA. But if the payer under-withholds, the ITA assesses the payer, and the payer may not be able to recover the shortfall from a recipient who has already received and spent the money. That is why Israeli payers almost always default to the highest applicable rate unless they have solid documentation supporting a lower one.

2. Standard Israeli Withholding Tax Rates by Income Type

The rates below apply in the absence of a tax treaty or an ITA certificate. These are what an Israeli payer must apply by default.

These rates apply to the gross payment — the full amount before any expenses. A non-resident company receiving NIS 1,000,000 in dividends from an Israeli subsidiary faces NIS 250,000 in withholding, leaving NIS 750,000 transferable abroad.

3. Treaty Reductions: What Key Countries Pay

Israel's network of double tax treaties (amanot kimum kaful) covers over 60 countries. These treaties set maximum withholding rates on dividends, interest, and royalties that override the domestic Israeli rates — provided the recipient qualifies as a tax resident of the treaty country and meets any additional conditions such as minimum shareholding thresholds for reduced dividend rates.

The table below shows the rates under Israel's main bilateral treaties. Where two rates appear for dividends, the lower rate applies when the corporate recipient holds a minimum qualifying stake (typically 10–25%, varying by treaty).

Israel adopted the OECD Multilateral Instrument (MLI) in 2019, which modified several existing treaties by inserting the Principal Purpose Test (PPT), an anti-avoidance rule that denies treaty benefits when obtaining those benefits was one of the main purposes of an arrangement. Verify the current treaty text, including any MLI modifications, before relying on a specific rate.

4. How to Apply Treaty Rates: Documentation and Process

Treaty rates do not apply automatically. The Israeli payer bears the legal risk if they apply a reduced rate without adequate documentation. If the ITA later finds the recipient did not qualify, the full domestic rate is assessed against the Israeli company — not against the foreign recipient who already received the money.

Documentation required for self-applied treaty rates

For regular, recurring payments — periodic royalties, ongoing interest — the Israeli payer can apply the treaty rate directly if they hold the following on file:

1. A certificate of tax residence from the recipient's home country tax authority for the current or immediately preceding year. For US residents: IRS Form 6166. For UK residents: an HMRC residence letter on official letterhead. For EU residents: the equivalent document from the national tax authority.
2. An apostille on the certificate from the issuing country's designated authority (for Hague Convention countries). Non-Hague countries require a different authentication route — check with an Israeli attorney.
3. A certified Hebrew translation of the certificate, prepared by a certified Israeli translator (metargem musmach).
4. A beneficial ownership declaration — a signed statement by the recipient confirming they are the economic owner of the income and that no back-to-back arrangement passes the benefit to a resident of a non-treaty country.

The Israeli company keeps originals on file. The documentation must be renewed annually — a 2025 certificate does not cover 2026 payments. The payer risks assessment if they continue applying a reduced rate using stale documentation.

When to seek advance ITA confirmation

For large one-off payments — a substantial dividend, a sale of private company shares, a significant royalty arrangement — it is safer to obtain advance confirmation from the ITA rather than relying on self-assessment. The ITA can issue either a binding advance ruling (hachlatah meknenet) or a Section 167(b) certificate specifying the rate the payer must apply. Both provide certainty and eliminate the risk of a later assessment.

5. Withholding Tax on Service Fees Paid to Foreign Companies

The most contested withholding question for Israeli businesses is whether fees paid to a foreign service provider are subject to Israeli withholding tax at all. The answer turns on sourcing: does the service fee have an Israeli source?

Under Section 4A of the Income Tax Ordinance, income from services has an Israeli source when:

• The services are physically performed in Israel, or
• The services are performed abroad but consumed or used in Israel (the "destination principle"), or
• The income is derived from a permanent establishment of the foreign entity in Israel.

The ITA applies the destination principle broadly. A US software developer who has never visited Israel but writes code that an Israeli company deploys in its Israeli product is, in the ITA's view, delivering a service consumed in Israel. The fees have an Israeli source. Withholding applies.

This creates a real compliance problem. Many Israeli startups pay large annual amounts to foreign SaaS platforms, offshore developers, and international consultants without withholding — sometimes correctly (because the service has no Israeli nexus), sometimes incorrectly. The threshold for scrutiny has dropped as the ITA has automated cross-referencing of bank wire data against VAT and corporate filings.

When no withholding is required on service fees

Under ITA Circular 4/2004, withholding on service payments is not required in three circumstances:

• The foreign supplier has a permanent establishment in Israel and the fee is attributed to that PE (the PE pays Israeli corporate tax on net profits).
• The ITA has issued a Section 167(b) zero-rate certificate to the supplier confirming the service has no Israeli source.
• Total annual payments to the specific supplier fall below the de minimis threshold in the ITA's annual withholding regulations — historically NIS 50,000 to 75,000 per calendar year; confirm the current figure with an Israeli tax advisor before relying on it.

6. Applying for a Section 167(b) ITA Certificate

A Section 167(b) certificate from the ITA is the most authoritative way to resolve withholding uncertainty before payments are made. It is addressed to the Israeli payer, specifies the approved rate and the validity period (typically one or two years), and protects the payer from later assessment if the ITA changes its position on the applicable rate.

Who applies and where

Either the foreign recipient or the Israeli payer can apply. Submit the application to the ITA district office that serves the Israeli payer's registered address — not to the International Taxation Division in Tel Aviv, unless the application is for a formal advance ruling rather than a Section 167(b) certificate. District offices:

• Tel Aviv district: 125 Menachem Begin Road, Tel Aviv
• Jerusalem district: 1 Kanfei Nesharim Street, Jerusalem
• Haifa district: 15 Pal-Yam Avenue, Haifa
• Beer Sheva district: 1 HaNegev Street, Beer Sheva
• Netanya district: 18 HaAtzmaut Square, Netanya

The application package

Every Section 167(b) application must include:

1. A written request in Hebrew setting out: the nature of the income, the proposed rate, the treaty or statutory basis for the reduction, and the parties involved.
2. A copy of the underlying agreement (royalty licence, loan agreement, service contract).
3. The recipient's certificate of tax residence, apostilled and with a certified Hebrew translation.
4. A signed beneficial ownership declaration from the recipient.
5. For royalties and services: a description of how and where the IP is used or how the service is delivered, so the ITA can determine sourcing.
6. The recipient's foreign tax identification number and any Israeli tax file number if previously assigned.
7. ITA administrative fee of NIS 480 paid at submission.

7. Reclaiming Over-Withheld Tax from the ITA

When an Israeli payer withholds at the full domestic rate but the recipient was entitled to a lower treaty rate — or when tax was withheld on income that has no Israeli source — the foreign recipient can file a refund claim with the ITA. The legal basis is Section 160 of the Income Tax Ordinance, which sets a six-year limitation period from the end of the tax year in which the overpayment occurred.

Step 1: Obtain the withholding tax certificate

Before filing any refund claim, get a formal teudat nikui mekorot (withholding tax certificate) from the Israeli payer. This document — which the payer is legally required to issue — records the gross payment, the withholding date, the amount deducted, and the rate applied. Without it, the ITA will not process a refund.

Step 2: Register with the ITA if needed

If you have no Israeli tax file number (mispar tik mas hachnasa), you must register with the ITA before filing any return or refund application. Registration takes 2 to 4 weeks. Submit a copy of your foreign business registration or passport, the withholding certificate, and a description of your Israeli-source income to the district office corresponding to where the Israeli payer is located.

Step 3: File the refund claim

Two routes are available depending on the amount and complexity:

• Annual Israeli tax return (doch shanti): File a return for the relevant year through the ITA's Shaam online portal, reporting gross income, the amount withheld, and treaty entitlement. Refunds from filed returns are typically processed in 6 to 12 months.
• Dedicated refund application: For one-off situations, submit a simplified non-resident refund application directly to the ITA district office. This route is faster for straightforward cases but offers less flexibility if the ITA raises questions about sourcing or beneficial ownership.

Frequently Asked Questions