How an Australian Shareholder Recovered NIS 180,000 in Over-Withheld Israeli Dividend Tax

Result: NIS 180,000 of over-withheld Israeli dividend tax refunded after the rate was corrected from 30% to the 15% treaty cap · Timeline: 9 months · Challenge: Israeli company withheld at the full domestic rate · Authority: Israel Tax Authority · Financial Impact: NIS 180,000

Background

A retired engineer in Melbourne had backed an Israeli technology company a decade earlier and ended up holding 15% of its shares. The company turned profitable, and in 2024 its board declared its first real dividend. His slice came to NIS 1,200,000 gross. When the payment landed in his Israeli brokerage account, it was light by NIS 360,000. The company had withheld 30% at source and remitted it to the Israel Tax Authority.

He assumed that was simply the Israeli rate and that he would claim it all back against his Australian tax. His Australian accountant told him otherwise: the Australian Taxation Office would only credit Israeli tax up to the rate the treaty actually allows, and anything withheld above that was money he would lose unless he reclaimed it in Israel. That gap was real, and it was large.

The Challenge

Two rules were pulling in different directions. Under Israeli domestic law, a dividend paid to a "substantial shareholder", meaning someone holding 10% or more, is taxed at 30% under Section 125B of the Income Tax Ordinance 1961, and the company is obliged to withhold it at source before paying out. Our client held 15%, so the company applied 30% by the book.

The other rule was the Convention between Australia and Israel for the Elimination of Double Taxation, signed in 2019 and in force for income years from 1 January 2020. Article 10 of that treaty caps the tax the source country may take on a dividend at 15% where the beneficial owner is a resident of the other country, and at 5% in the case of certain corporate holdings. Our client was an Australian-resident individual and beneficial owner of the shares, so the ceiling that applied to him was 15%. The company had taken double that.

The treaty rate is not automatic at the till. An Israeli company withholding on a dividend will apply the domestic rate unless it has been handed a withholding-reduction certificate from the Israel Tax Authority in advance, or unless the shareholder reclaims the excess afterward. Nobody had arranged a certificate before this distribution, so the only road left was a refund claim. That meant proving, to an Israeli assessing officer, that our client was genuinely an Australian tax resident, genuinely the beneficial owner of the shares, and genuinely entitled to the treaty.

For a non-resident, the proof points are the awkward part. The assessing officer wanted an Australian certificate of residency, evidence the shares were not held on behalf of someone else, and a paper trail tying the withheld NIS 360,000 to this specific shareholder and this specific distribution.

In Practice: Under Article 10 of the Australia-Israel tax treaty, read with Section 125B of the Income Tax Ordinance 1961, the Israeli dividend rate for our client fell from 30% to 15%, a difference of NIS 180,000 on a NIS 1.2M dividend. A treaty refund claim filed with the Israel Tax Authority assessing office, supported by an ATO residency certificate, takes roughly 6 to 9 months to pay out once the file is complete.

What We Did

We acted under a power of attorney signed in Melbourne, so the client did not have to deal with the Israeli tax office directly or travel.

The first job was the residency certificate. We had the client request a certificate of residency from the Australian Taxation Office confirming he was an Australian tax resident for the relevant year and a resident for treaty purposes. That document is the spine of any treaty claim, and Israeli assessing officers will not move without it.

Next, the withholding evidence. We obtained from the company its withholding confirmation (ishur nikui mas bamakor) showing the gross dividend, the 30% deducted, and the remittance to the Tax Authority. We paired it with the brokerage statement showing the net amount actually received, so the numbers reconciled to the shekel.

Then beneficial ownership. Because treaty relief is denied where the recipient is a conduit holding for someone else, we filed the company's shareholder register and the original investment documents to show the client had held the shares in his own name and for his own account for ten years.

With that package assembled, we filed the refund claim with the assessing officer, citing Article 10 of the treaty and the 15% ceiling, and requesting repayment of the 15 percentage points withheld in excess. The officer raised one query, about whether the client also held shares through any Australian entity, which we answered with a short declaration. The refund was approved.

In Practice: Section 160 of the Income Tax Ordinance 1961 entitles a taxpayer to a refund of tax over-withheld, with interest and indexation (ribit ve-hatzmada) running from the end of the tax year. On our client's NIS 180,000 refund, the indexation and interest added a little over NIS 6,000 by the time the Israel Tax Authority paid, nine months after we filed.

The Outcome

The Israel Tax Authority refunded NIS 180,000, plus roughly NIS 6,000 in statutory interest and indexation, into the client's account. The effective Israeli tax on the dividend dropped to the 15% the treaty always allowed.

The Australian side then fell into place. With Israeli tax now sitting at the correct 15%, the foreign income tax offset (FITO) the client claimed on his Australian return matched the Israeli tax actually borne, with no stranded excess. Had we not reclaimed the over-withholding, the extra NIS 180,000 would have been Israeli tax that Australia simply would not credit, a permanent loss on a single dividend.

The whole matter ran nine months, entirely from Melbourne. We have since arranged a pre-distribution withholding-reduction certificate for the client's future dividends, so the company will withhold at 15% at source and there will be nothing to reclaim next time.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. The Australian foreign income tax offset only matches the treaty rate, not whatever an Israeli company happens to withhold. If the company withholds 30% and the treaty allows 15%, the ATO credits 15% and the rest is lost unless you reclaim it in Israel. Our overview of the Australia-Israel tax treaty explains how the offset interacts with the Israeli rate.
2. Treaty rates are not applied automatically when a dividend is paid. An Israeli company defaults to the domestic rate unless it holds a withholding-reduction certificate from the Tax Authority. Sort the certificate out before the distribution, or budget for a refund claim afterward.
3. An ATO certificate of residency is the document that makes or breaks the claim. Without it, the assessing officer will not grant treaty relief, full stop.
4. Beneficial ownership has to be shown, not assumed. Treaty relief is denied to conduits, so be ready to prove you hold the shares in your own name and for your own account.
5. Refunds carry interest and indexation. The delay is frustrating, but Section 160 of the Income Tax Ordinance means the Tax Authority pays you for the wait.

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Facing a Similar Situation?

If an Israeli company has withheld tax on a dividend, interest, or royalty paid to you abroad, the rate may well be higher than your treaty allows, and the excess is reclaimable. Getting it back, or securing a reduced rate before the next payment, can be handled remotely.

Contact us for a confidential consultation about your Israeli legal matter.