PROTOCOL AMENDING THE 1975 INCOME TAX CONVENTION WITH ISRAEL MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING 　　A PROTOCOL AMENDING 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. THE PROTOCOL WAS SIGNED AT WASHINGTON ON MAY 30, 1980, WITH THREE RELATED EXCHANGES OF NOTES LETTER OF SUBMITTAL (PROTOCOL 1) DEPARTMENT OF STATE, Washington, June 13, 1980. 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, a Protocol Amending 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. The Protocol was signed at Washington on May 30, 1980. Also submitted for transmission to the Senate are three related exchanges of notes. 　　The Convention was transmitted to the Senate on February 11, 1976, but, at the request of the Department of the Treasury, Senate consideration of the Convention was delayed until certain technical problems in the text had been resolved. The Protocol resolves these problems by making certain amendments to the Convention. For example, Article 10 (Grants) is modified to conform more closely to United States and Israeli law with regard to the treatment of Israeli grants to United States investors. 　　The Protocol modifies the withholding tax rates applicable to dividends paid by a subsidiary to a parent corporation by providing that dividends paid out of income benefitting from Israeli tax holiday provisions will be subject to a 15 percent withholding rate rather than the 12.5 percent rate otherwise provided for subsidiary dividends. 　　The Protocol adds a new article dealing with charitable contributions. This article provides that, for United States tax purposes, a United States citizen or resident may claim as a charitable contribution donations to qualifying Israeli charities amounting to 25 percent of the taxpayer's Israeli source income.An Israeli resident may similarly claim as a charitable contribution donations to qualifying United States charities. 　　The Convention provides that Israeli compulsory loans will be treated as taxes for United States foreign tax credit purposes, with appropriate adjustments at the time the loan is repaid. The Protocol modifies that rule to limit the credit to corporations which become subject to compulsory loans prior to April 1, 1977. 　　The three related notes set forth certain understandings reached between the two Governments as follows: 　　1. Exchange of information shall be made in accordance with Article 29 of the Convention. It is understood, however, that at present Israel is not yet able to exchange income tax information on a routine basis but that it is prepared to provide such information as soon as it has developed the necessary capability for the acquisition and compilation of tax information. 　　2. The two Governments will take steps to avoid duplication in the certification of eligible recipients of the charitable contributions described in Article 15-A of the Convention. 　　3. The United States is not able to accept the inclusion in the Protocol of provisions to create incentives to promote the flow of investment to Israel. However, the United States Government would be prepared to reopen discussions on the subject should circumstances change. 　　The Protocol will enter into force upon the expiration of thirty days following the date on which instruments of ratification are exchanged and shall thereupon have effect in accordance with Article 31 of the Convention. 　　A technical memorandum explaining in detail the provisions of the Protocol is being prepared by the Department of the Treasury and will be submitted to the Senate Committee on Foreign Relations. 　　The Department of the Treasury, with the cooperation of the Department of State, was primarily responsible for the negotiation of the Protocol. It has the approval of both Departments. Respectfully submitted, EDMUND S. MUSKIE. LETTER OF TRANSMITTAL (PROTOCOL 1) THE WHITE HOUSE, July 3, 1980. To the Senate of the United States: 　　I transmit herewith, for Senate advice and consent to ratification, a Protocol Amending the Convention between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, signed at Washington on November 20, 1975. The Protocol was signed at Washington on May 30, 1980. I also transmit three related exchanges of notes and the report of the Department of State with respect to the Protocol. 　　Consideration of the Convention by the Senate has been delayed pending the correction of certain technical problems in its text. The Protocol accomplishes this by making certain amendments to the Convention. For example, Article 10 (Grants) is modified to conform more closely to United States and Israeli law with regard to the treatment of Israeli grants to United States investors. 　　The Protocol also modifies the withholding rates applicable to dividends paid by a subsidiary to a parent corporation and adds a new article dealing with charitable contributions. 　　It is most desirable that this Protocol, together with the Convention, be considered by the Senate as soon as possible and that the Senate give advice and consent to ratification of both instruments. JIMMY CARTER. 　　PROTOCOL AMENDING 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 　　The Government of the United States of America and the Government of the State of Israel, desiring to conclude a Protocol to amend the Convention with respect to taxes on income signed at Washington on November 20, 1975 (hereinafter referred to as "the Convention") have agreed as follows: ARTICLE I 　　1. Subparagraph (a) of paragraph (1) of Article 1 (Taxes Covered) of the Convention shall be deleted and replaced by the following: 　　"(a) In the case of the United States the Federal income taxes imposed by the Internal Revenue Code, and the tax on insurance premiums paid to foreign insurers (but only to the extent that the relevant risk is not reinsured, directly or indirectly, with a person not entitled to relief from such tax), and" 　　2. Clauses (iv) and (v) of subparagraph (b) of paragraph (1) of Article 1 (Taxes Covered) of the Convention shall be deleted and replaced by the following: 　　"(iv) The tax on profits levied on banking institutions and insurance companies under the Value Added Tax Law, and 　　"(v) Compulsory loans made with respect to taxable years ending before April 1, 1988 with respect to corporations that became subject thereto before April 1, 1977." ARTICLE II 　　Paragraph (3) of Article 3 (Fiscal Residence) of the Convention shall be deleted and replaced by the following: 　　"(3) A corporation which is both a United States corporation within the meaning of paragraph (1) (f) (i) of Article 2 (General Definitions) and an Israeli corporation within the meaning of paragraph (1) (f) (ii) of such Article 2 shall be considered to be outside the scope of this Convention except for purposes of paragraph (1) of Article 4 (Source of Income), Article 27 (Nondiscrimination), Article 29 (Exchange of Information), and Article 31 (Entry Into Force)." ARTICLE III 　　1. Subparagraph (a) of paragraph (4) of Article 6 (General Rules of Taxation) of the Convention shall be deleted and replaced by the following: 　　"(a) The benefits conferred by a Contracting State under Articles 10 (Grants), 15-A (Charitable Contributions), 21 (Social Security Payments), 26 (Relief From Double Taxation), 27 (Nondiscrimination), and 28 (Mutual Agreement Procedure); and" 　　2. Paragraph (5) of Article 6 (General Rules of Taxation) of the Convention shall be deleted and replaced by the following: 　　"(5) The United States may impose its personal holding company tax and its accumulated earnings tax notwithstanding any provision of this Convention. However, an Israeli corporation shall be exempt from the United States personal holding company tax in any taxable year unless residents or citizens of the United States own, directly or indirectly, within the meaning of Section 544 of the Internal Revenue Code, 10 percent or more in value of the outstanding stock of the corporation at any time during the taxable year. An Israeli corporation shall be exempt from the United States accumulated earnings tax in any taxable year unless at least 25 percent of the voting stock of such corporation is owned by citizens or residents of the United States." 　　3. Paragraph (6) of Article 6 (General Rules of Taxation) of the Convention shall he renumbered as paragraph (7) and a new paragraph (6) shall be added, to read as follows: 　　"(6) Where under any provision of this Convention income arising in one of the Contracting States is relieved from tax in that Contracting State and, under the law in force in the other Contracting State a person, in respect of said income, is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State, and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned Contracting State shall apply only to so much of the income as is remitted to or received in the other Contracting State during the year such income accrues." ARTICLE IV 　　Paragraph (3) of Article 7 (Income From Real Property) of the Convention shall be deleted and replaced by the following: 　　"(3) Gains from the alienation of shares of a company the property of which consists, directly or indirectly, principally of immovable property situated in a Contracting State may be taxed by that State." ARTICLE V 　　The following new paragraph (8) shall he added to Article 8 (Business Profits): 　　"(8) The United States tax on insurance premiums paid to foreign insurers shall not be imposed on insurance or reinsurance premiums which are the receipts of a business of insurance carried on by a resident of Israel whether or not that business is carried on through a permanent establishment in the United States (but only to the extent that the relevant risk is not reinsured, directly or indirectly, with a person not entitled to relief from such tax)." ARTICLE VI 　　Paragraph (1) of Article 9 (Shipping and Air Transport) of the Convention shall be deleted and replaced by the following: 　　"(1) Notwithstanding Article 8 (Business Profits) and Article 15 (Capital Gains): Where a resident of a Contracting State derives income from the operation in international traffic of ships or aircraft, or gains from the sale, exchange, or other disposition of ships or aircraft used in international traffic by such resident, the other Contracting State shall exempt such income or gains from taxation." ARTICLE VII 　　Paragraph (1) of Article 10 (Grants) of the Convention shall he deleted and replaced by the following: 　　"(1) For the purpose of computing United States tax, if Israel, a political subdivision thereof, or any agency of either makes a qualifying cash grant to a resident of the United States, the amount of such grant shall be included in the gross income of such resident, unless the resident elects to exclude it from gross income. If the resident elects to exclude it from gross income, then- 　　"(a) if the resident is a corporation the amount of such grant shall be treated as a contribution to its capital, 　　"(b) the resident shall be deemed to have contributed the amount of such grant to the Israeli corporation designated by the terms of the grant, 　　"(c) the resident's basis for the stock of the Israeli corporation shall not be increased by the amount deemed contributed under subparagraph (b), and 　　"(d) the basis of property of the Israeli corporation shall be reduced by the amount of the deemed contribution under subparagraph (b) in accordance with rules prescribed by the Secretary of the Treasury of the United States." ARTICLE VIII 　　1. Subparagraph (b) of paragraph (2) of Article 12 (Dividends) of the Convention shall be deleted and replaced by the following: 　　"(b) When a corporation is the recipient of a dividend from a paying corporation of income derived during any period for which the paying corporation is not entitled to the reduced tax rate applicable to an approved enterprise under Israel's Encouragement of Capital Investments Law (1959), 12.5 percent of the gross amount of the dividend paid, but only if- 　　"(i) During the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation, and 　　"(ii) Not more than 25 percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50 percent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received)." 　　2. The following new subparagraph (c) of paragraph (2) shall be added to Article 12 (Dividends) of the Convention: 　　"(c) When a corporation is the recipient of a dividend from a paying corporation of income derived during any period for which the paying corporation is entitled to the reduced tax rate applicable to an approved enterprise under Israel's Encouragement of Capital Investments Law (1959), 15 percent of the gross amount of the dividend paid, but only if the conditions of subparagraph (b) (i) and (ii) are met." ARTICLE IX 　　Subparagraph (b) of paragraph (1) of Article 15 (Capital Gains) of the Convention shall be deleted and replaced by the following: 　　"(b) The gain is from the sale, exchange or other disposition of property described in subparagraph (2) (c) of Article 14 (Royalties)." ARTICLE X 　　The following new Article shall be added as Article 15-A (Charitable Contributions): 　　　　　　　　　　　　"ARTICLE 15-A 　　　　　　　　"Charitable Contributions 　　"(1) In the computation of taxable income of a citizen or a resident of the United States for any taxable year under the revenue laws of the United States, there shall be treated as a charitable contribution under such revenue laws contributions to any organization created or organized under the laws of Israel (and constituting a charitable organization for the purpose of the income tax laws of Israel) if and to the extent such contributions would have been treated as charitable contributions had such organization been created or organized under the laws of the United States; provided, however, that this paragraph shall not apply to contributions in any taxable year in excess of 25 percent of taxable income for such year (in the case of a corporation) or of adjusted gross income for such year (in the case of an individual) from sources in Israel. 　　"(2) In the computation of tax liability of a resident of Israel for any taxation year under the income tax laws of Israel, there shall be treated as charitable contributions eligible for credit or deduction, as the case may be, under such income tax laws, gifts to any organization constituting a charitable organization for the purpose of the revenue laws of the United States, if and to the extent such contributions would have been treated as charitable contributions had such organization been a charitable organization for the purpose of the income tax laws of Israel; provided, however, that this paragraph shall not apply to contributions in any taxation year in excess of 25 percent of taxable income for such year from sources in the United States." ARTICLE XI 　　Article 17 (Dependent Personal Services) of the Convention shall be deleted and replaced by the following: "ARTICLE 17 "Dependent Personal Services 　　"(1) Except as provided in Articles 22 (Governmental Functions), 23 (Teachers), and 24 (Students and Trainees), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation or company, may be taxed by that Contracting State. Except as provided by paragraph (2) and in Articles 20 (Private Pensions and Annuities), 22 (Governmental Functions), 23 (Teachers), and 24 (Students and Trainees), such remuneration derived from sources within the other Contracting State may also be taxed by that other Contracting State. 　　"(2) Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if- 　　"(a) He is present in that other Contracting State for a period or periods aggregating less than 183 days in the taxable year; and 　　"(b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and 　　"(c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State; and 　　"(d) The remuneration is subject to tax in the first-mentioned Contracting State. "(3) Notwithstanding paragraphs (1) and (2), remuneration derived by an employee of a resident of　one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in international traffic by a resident of that Contracting State may he taxed by that Contracting State." ARTICLE XII 　　Clauses (i) and (ii) of subparagraph (a) of paragraph (1) of Article 19 (Amounts Received for Furnishing Personal Services of Others) of the Convention shall be deleted and replaced by the following: 　　"(a) (i) The person for whom the services were furnished designated the person or persons who would render the services, whether or not he had the legal right to do so and whether or not the designation was made formally; 　　"(ii) The person for whom the services were furnished had the right to designate　the person or persons who would render the services; or" 　　　　　　　　　　　　ARTICLE XIII 　　Clause (ii) of paragraph (2) of Article 26 (Relief From Double Taxation) of the Convention shall he deleted and replaced by the following: 　　"(ii) Upon repayment or recoupment of the principal of the loan, the amount of the value in United States dollars received shall be treated as a refund for the year the loan was made of taxes paid to Israel for such year equal to the basis for such loan, and the amount of such credit against tax shall he recomputed notwithstanding the operation of any law or rule of law;" ARTICLE XIV 　　Subparagraphs (c) and (d) of paragraph (2) of Article 28 (Mutual Agreement Procedure) of the Convention shall be deleted and replaced by the following: 　　"(c) To the same determination of the source of particular items of income; 　　"(d) To the same characterization of particular items of income; or 　　"(e) To the mode of application of Articles 15-A (Charitable Contributions) and 29 (Exchange of Information)." ARTICLE XV 　　Paragraph (1) of Article 29 (Exchange of Information) of the Convention shall he deleted and replaced by the following: 　　"(1) The competent authorities of the Contracting States shall exchange such information as is pertinent to carrying out the provisions of this Convention or preventing fraud or fiscal evasion in relation to the taxes which are the subject of this Convention. Any information so exchanged shall he treated as secret and shall not he disclosed to any persons or authorities other than those concerned with the assessment, including judicial determination, or collection of the taxes which are the subject of the Convention." ARTICLE XVI 　　1. This Protocol shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible. 　　2. This Protocol shall enter into force immediately after the expiration of thirty days following the date on which the instruments of ratification are exchanged and shall thereupon have effect in accordance with Article 31 of the Convention. 　　IN WITNESS WHEREOF, the undersigned, duly authorized thereto by their respective Governments, have signed this Protocol. 　　DONE at Washington, in duplicate, in the English and Hebrew languages, the two texts having equal authenticity, this 30th day of May 1980. For the Government of the United States of America: HAROLD H. SAUNDERS. For the Government of the State of Israel: EPHRAIM EVRON.