What withholding tax rate applies to royalties paid from an Israeli franchisee to a foreign franchisor?

Israel levies a standard 25% withholding tax (WHT) on royalty payments made to non-residents under the Income Tax Ordinance. Where a double taxation treaty applies — and Israel has treaties with over 50 countries — the rate is typically reduced to 5–15%. Under the Israel-UK treaty (Article 12), for example, the WHT rate on royalties is 15%. The Israeli franchisee is personally responsible for withholding the tax from each royalty payment and remitting it to the Israel Tax Authority within 15 days of the end of the month of payment, per Regulation 2 of the Income Tax Withholding Regulations. Failure to withhold exposes the franchisee to personal liability for the unpaid tax plus interest and penalties.

To illustrate: a franchise turning over NIS 5 million per year paying 6% royalties generates NIS 300,000 in annual royalties. At the 15% UK treaty rate, the Israeli franchisee withholds NIS 45,000 and remits it to the Israel Tax Authority, netting the foreign franchisor NIS 255,000 — which the franchisor claims as a foreign tax credit at home. Related-party arrangements (affiliated franchisor and franchisee) also trigger transfer pricing scrutiny under Section 85A of the Income Tax Ordinance; the ITA may challenge a royalty rate it considers above arm's length and issue an assessment for the difference. For more detail, see Franchise Law in Israel: A Complete Guide for Foreign Franchisors and Franchisees.