New Tax Treaty Makes It Harder for Israelis to Avoid Reporting German Income

Agreement comes into force at beginning of 2015, also states that Holocaust survivors are exempt from taxes on compensation.

Ilan Assayag

While war was raging between Israel and Hamas, Finance Minister Yair Lapid made a low-profile trip to Germany this month, officially designated as a chance to discuss diplomatic, security and economic issues.

In a meeting with German Finance Minister Wolfgang Schäuble, the two signed a revised double-tax treaty. The agreement amends the original 1962 document and changes instituted in 1977, bringing it into line with the standard promoted by the Organization for Economic Co-operation and Development.

The new agreement also significantly lowers rates for withholding taxes and taxes on dividends.

Anat Shavit, an attorney who heads the tax practice at Fischer Behar Chen Well Orion & Co. in Tel Aviv, said the new treaty explicitly states for the first time that compensation to victims of the Nazis is exempt from tax both in Israel and Germany.

“Until now, it was exempt but not formally, so there were questions surrounding it that have not been settled officially,” she said.

But the agreement, which formally comes into being at the start of 2015, contains other changes that will increase tax transparency and affect larger numbers of Israelis. In particular, the agreement calls for exchanging information between the two countries’ tax authorities.

As a result, the Israel Tax Authority can ask its German counterpart for information that might help it discover violations of Israeli tax law – and vice versa. This is part of its drive in cracking down on “black” capital.

“With provisions regarding procedures for voluntary disclosure, which will be released soon, Israel is tightening and strengthening its ability to reveal information on Israelis holding capital outside the country and not reporting it” to the tax authorities, said Shavit.

The Israel Tax Authority recently sent out more than 100,000 letters requiring capital declarations from Israeli citizens, including disclosing their income and assets in Israel and abroad. The new agreement with Germany will enable tax inspectors to verify whether information they provide in relation to Germany is correct, and whether they have been failing to report it.

Germany attracts a good deal of real-estate investment from Israelis, not all of whom disclose their holding to the Israeli tax man. Now, however, the Tax Authority can ask for reports on Israeli nationals who have acquired property in the country.

An Israeli who rents an apartment he owns overseas is liable for Israeli tax. Under section 122A of the tax code, anyone earning income from rent overseas is liable to a 15% tax without any allowance for expenses or for tax paid to the host country.

However, another option is to pay tax on rental income under the marginal tax, which entitles the taxpayer to deduct certain expenses, including taxes paid to German authorities based on the taxpayer’s total income derived in Germany.

“The new double-tax prevention treaty with Germany creates greater challenges for those who want to work in Germany without reporting to the Israel Tax Authority,” said Shavit. “Beyond the information on real estate, [the authorities] will have access to information on the bank accounts of Israelis in Germany liable for tax as if the account were in Israel.”