On the 1.1.2008 the double taxation treaty between Israel and Croatia was enacted.
The treaty is based on the model treaty of the OECD and set forth source deduction rates as follows:
- Interest – The tax deduction shall be 10%, however Interest in cases of a Bank loan shall be 5%.
- Dividend – assuming that rightful receiver of the dividend is a corporation which owns at least 25% of the dividend paying corporate the deduction rate shall be 5%. If the corporate owns at least 10% of the dividend paying corporate and the dividend is paid from profits taxable in Israel and are lower than the corporate tax rate then the deduction rate is 10%. In all other matters the deduction rate shall be 15%.
- Royalties – deduction rate is 5%.
- Capital Gains – assuming that the seller of shares held for a duration of one year prior to the selling at least 10% of the voting rights than the deduction rate shall be 25%. Capital gain from selling shares that at least half of their value is in Real Estate in a different country will be taxed in the other country.
Construction projects or installation shall be considered as permanent institution as long as they are located at the same country for over 12 months period.
Corporate residency – In case of a double residency fear the determining will be based upon the actual place of corporate management.
The treaty has several orders which are different from the OECD model Treaty:
- Like the model treaty. A term that has not been defined by the treaty will be interpreted according to the local law. In regards to Israel the law includes, rules, regulations, administrative instruction and cases.
- Regarding price transferring, when a country taxes a project which was taxed also by the other country, the country must (if justifiable) make a tax adjustment in order to prevent double taxation on the project profits.
- The treaty provides an exempt from source tax deduction on Interest regarding interest on the selling of industrial, commercial science or commodity equipment with credit. Also on Interest on state loans or those which were made, approved, insured or guaranteed by an insurance institute or transactions funding by the state.
- Independent service provider – an individual providing professional services will be taxed at his country of residence unless the individual has a fixed base of operations at the other country.
It should be noted, that unlike the UN treaty, the article does not clarify whether or not staying over 183 days a year will be considered as a base of operations. Furthermore the model treaty, this article has been erased and the income is taxed as part of business profits.
- Real Estate profit – the first taxation right is for the country where the real estate resides.
- Regarding athletes and artistes if their visit was funded by the country of residency than the taxation privilege belongs to it.
- Deduction method applies to both countries.
- The treaty does not include articles regarding assistance in tax collection unlike the Model treaty.
- The benefits in the treaty are given only to those who are the rightful receiver of the payments.
- Regarding misuse of the treaty, it is clarify in the Protocol to the treaty that both countries can apply the internal law to prevent avoiding or tax avoidance. (in Israel article 86 to the tax ordinance).