GENERAL EFFECTIVE DATE UNDER ARTICLE 31: 1 JANUARY 1995 TABLE OF ARTICLES Article 1---------------------------------Taxes Covered Article 2---------------------------------General Definitions Article 3---------------------------------Fiscal Residence Article 4---------------------------------Source of Income Article 5---------------------------------Permanent Establishment Article 6---------------------------------General Rules of Taxation Article 7---------------------------------Income from Real Property Article 8---------------------------------Business Profits Article 9---------------------------------Shipping and Air Transport Article 10-------------------------------Grants Article 11-------------------------------Related Persons Article 12-------------------------------Dividends Article 13-------------------------------Interest Article 14-------------------------------Royalties Article 15-------------------------------Capital Gains Article 16-------------------------------Independent Personal Services Article 17-------------------------------Dependent Personal Services Article 18-------------------------------Public Entertainers Article 19-------------------------------Amounts Received for Furnishing Personal Services of Others Article 20-------------------------------Private Pensions and Annuities Article 21-------------------------------Social Security Payments Article 22-------------------------------Governmental Functions Article 23-------------------------------Teachers Article 24-------------------------------Students and Trainees Article 25-------------------------------Investment or Holding Companies Article 26-------------------------------Relief from Double Taxation Article 27-------------------------------Non-Discrimination Article 28-------------------------------Mutual Agreement Procedure Article 29-------------------------------Exchange of Information Article 30-------------------------------Diplomatic and Consular Officers Article 31-------------------------------Entry into Force Article 32-------------------------------Termination Letter of Submittal--------------------of 23 January, 1976 Letter of Transmittal------------------of 11 February, 1976 Protocol 1-------------------------------of 30 May, 1980 Notes of Exchange (Protocol 1)-----of 30 May, 1980 Letter of Submittal (Protocol 1)-----of 13 June, 1980 Letter of Transmittal (Protocol 1)---of 3 July, 1980 Protocol 2-------------------------------of 26 January, 1993 Notes of Exchange (Protocol 2)-----of 26 January, 1993 Letter of Submittal (Protocol 2)-----of 17 June, 1993 Letter of Transmittal (Protocol 2)---of 19 October, 1993 The "Saving Clause"------------------Paragraph 3 of Article 6 　　　　　　TAX CONVENTION WITH THE STATE OF ISRAEL 　　　　　　　　　　　　　　MESSAGE 　　　　　　　　　　　　　　FROM 　　　　　THE PRESIDENT OF THE UNITED STATES 　　　　　　　　　　　　　TRANSMITTING 　　THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF 　　AMERICA AND THE GOVERNMENT OF THE STATE OF ISRAEL WITH RESPECT TO 　　TAXES ON IN COME, SIGNED AT WASHINGTON ON NOVEMBER 20, 1975 　　　　　　　　　　　　LETTER OF SUBMITTAL 　　　　　　　　　　　　　　　　　　　　　　DEPARTMENT OF STATE, 　　　　　　　　　　　　　　　　　　　　　　Washington, January 23, 1976. The PRESIDENT, The White House. 　　THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, 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, signed at Washington on November 20, 1975. Also I have the honor to recommend that you request the withdrawal from the Senate of the Convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income between the Government of the United States of America and the Government of Israel which was signed at Washington on June 29, 1965, (Executive F. 89th Congress, 1st Session) but which never received the Senate's advice and consent to ratification. There is presently no treaty on this subject in force between the United States and Israel. 　　The proposed treaty with Israel of November 20, 1975, is similar in many essential respects to other recent United States income tax treaties. However, there are several novel provisions, which are described below. In general, these special provisions reflect Israel's status as a developing country and would not be considered as precedents for treaties with other industrial countries. 　　Article 10 (Grants) contains rules not found in previous American tax treaties. The article provides that if Israel makes a cash grant to an American investor, and the grant is not in payment for goods or services and is not measured by the amount of profits or tax liability, the United States will treat the grant as a nontaxable contribution to capital. This merely confirms by treaty the treatment which would generally apply in these circumstances under United States law. 　　The draft treaty also provides that Israel's compulsory loans are to be treated as taxes so that, under Article 26, the United States will allow a foreign tax credit for the loans, on condition that when the loans are repaid, they are to be treated as a refund of taxes with appropriate adjustments to U.S. tax liability at that time. 　　Though the draft treaty provides the normal general rule that capital gains are taxable in the state of residence and exempt in the state of the source of the income, there are several exceptions to this rule. The principal exception, not found in previous treaties, is that Israel may tax the gain of a U.S. resident on the sale of the shares of stock in an Israeli corporation if the resident owns more than 50 percent of the voting power of the Israeli corporation and a majority of that corporation's business assets are located in Israel. This is analogous to the treatment provided for gains on the sale of the assets of an Israeli branch owned directly by a U.S. resident. 　　With respect to dividend withholding rates an exception has been made to our normal policy of strict reciprocity. The maximum U.S. rate in general will be 15 percent with a 5 percent rate applicable where the Israeli recipient owns at least 10 percent of the voting stock of the paying corporation. For Israeli source dividends, the comparable maximum Israeli withholding rates will be 25 percent and 12.5 percent respectively. 　　The general withholding rate on interest will be l7.5 percent. This higher than normal rate was acceptable because of the further agreement that interest derived by a financial institution would be taxed at a maximum rate of 10 percent and interest derived, guaranteed or insured by a government or agency thereof would be exempt by the other state. 　　The maximum withholding rate on industrial royalties will be 15 percent while that on copyright or film royalties will be 10 percent. 　　The remaining provisions of the draft treaty dealing with the taxation of business profits, personal service income and administrative matters are patterned largely after other recent United States income tax treaties. 　　Attached to the treaty is a note of transmittal similar to the note presented at the signing of our treaty with Trinidad and Tobago, in which the United States agrees when appropriate and feasible to reopen discussions with Israel with a view toward reaching agreement on provisions which would minimize the conflicts between the United States tax system and incentives to foreign investors offered by the Israeli Government. 　　The Convention will enter into force thirty days after the date of exchange of instruments of ratification and then have effect as follows: with respect to the rate of withholding of tax, it shall have effect with regard to amounts paid on or after the first day of the second month following the date on which this Convention enters into force; with respect to other taxes, it shall have effect with regard to taxable years beginning on or after January 1 of the year following the date on which this Convention enters into force. Once entered into force. the Convention will remain in effect for a minimum of five years and in definitely thereafter subject to the right of either party to terminate it by giving six-month's notice for that purpose pursuant to the provisions of the Convention. 　　The Department of the Treasury, with the cooperation of the Department of State, was primarily responsible for the negotiation of this Convention. It has the approval of both Departments. Respectfully submitted, JOSEPH J. SISCO. Enclosure: Convention. LETTER OF TRANSMITTAL THE WHITE HOUSE, February 11, 1976. To the Senate of the United States: 　　I transmit herewith, for Senate advice and consent to ratification, the Convention signed at Washington on November 20, 1975, between the Government of the United States of America and the Government of the State of Israel with respect to taxes on income. Also I desire to withdraw from the Senate the Convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income between the Government of the United States of America and the Government of Israel which was signed at Washington on June 29, 1965 (Executive F. 89th Congress, 1st Session). 　　There is no convention on this subject presently in force between the United States and Israel. The Convention signed on November 20,1975, is similar in many essential respects to other recent United States income tax treaties. 　　I also transmit, for the information of the Senate, the report of the Department of State with respect to the Convention. 　　Conventions such as this one are an important element in promoting closer economic cooperation between the United States and other countries. I urge the Senate to act favorably on this Convention at an early date and to give its advice and consent to ratification. GERALD R. FORD. THE WHITE HOUSE.