What does the France-Israel tax treaty mean for French non-residents with Israeli income?

France has more direct flight connections to Israel than almost any other Western European country, and several hundred thousand French nationals maintain regular Israeli financial connections — property, inheritance, investments, and business interests. Despite this, the France-Israel double taxation convention remains poorly understood even among French accountants who have never handled Israeli-source income. The result is that French residents too often either over-report (paying French tax on income already taxed in Israel without claiming the treaty credit) or under-report (ignoring Israeli withholding obligations entirely, creating penalties in Israel).

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Detailed Explanation

The treaty framework. The Convention between France and Israel for the Avoidance of Double Taxation was signed in 1995 and entered into force on 1 January 1996. It follows the OECD Model Convention broadly, with several specific provisions relevant to non-residents. The key principle is that most categories of Israeli-source income are taxable first in Israel, with France then providing a credit (crédit d'impôt) equal to the French tax that would have been attributable to that income — reducing French tax on that income rather than imposing French tax on top of Israeli tax.

Rental income from Israeli property (Article 6). Under Article 6 of the Convention, income from immovable property — Israeli real estate, agricultural land, or usufruct rights — is taxable in Israel. The standard options for French non-residents receiving Israeli rental income are: (a) the 10% flat-rate track under Section 122 of the Income Tax Ordinance 1961 on gross rental income up to a threshold (currently NIS 363,000 per year), which is a flat tax without deductions; or (b) the standard income tax track allowing deduction of depreciation, mortgage interest, and management expenses. France then applies its progressive income tax rates to the French resident's worldwide income, but applies the credit method under Article 22 to offset the Israeli tax already paid.

Dividends from Israeli companies (Article 10). When an Israeli company distributes a dividend to a French resident shareholder, Israel withholds tax at source. Under Article 10 of the Convention:

• 15% withholding for individual shareholders and portfolio corporate holders
• 5% withholding for qualifying corporate shareholders holding at least 25% of the Israeli company's voting capital

France taxes the dividend as part of the shareholder's worldwide income under the prélèvement forfaitaire unique (PFU — flat-rate income tax at 30% including social charges), but gives a credit for the Israeli withholding. Whether the treaty credit fully offsets the French PFU depends on the French resident's overall tax position and whether they elect the progressive regime.

Capital gains on Israeli real estate (Article 13). Under Article 13 of the Convention, gains from the sale of immovable property are taxable exclusively in Israel. France does not impose its own capital gains tax on gains arising from Israeli real estate sales. Israel imposes mas shevach (betterment levy / capital gains tax) on the full gain for non-residents, currently at 25% for individuals on post-2001 gains (with linear apportionment available for properties held prior to November 2001). For French heirs inheriting Israeli property and then selling it, the capital gain runs from the original purchase price — not the inheritance value — unless a reset of basis is available under specific exemption provisions.

In Practice: Under Article 22(2)(b) of the France-Israel Convention, France applies the imputation method: French tax is computed on worldwide income including the Israeli-source amount, then reduced by a credit equal to the "French tax corresponding to that income." In practice, this means the credit does not necessarily equal the Israeli tax paid — it equals the French tax that would have been attributable to that particular income item under French domestic rules. If French effective rates are lower than Israeli rates (which can occur for passive income), a French resident bears the higher Israeli rate without full credit absorption. A French resident receiving NIS 200,000 in Israeli rental income taxed in Israel at 10% (NIS 20,000) may find that only NIS 14,000–16,000 is creditable against French tax, leaving a small residual French charge. The Israel Tax Authority (Rashut HaMasim) requires submission of the annual Israeli income tax return by 30 April of the following year for non-residents with Israeli-source income.

Pensions (Article 19). Pensions paid by the Israeli State — Bituach Leumi / National Insurance Institute payments or civil service pensions — to French residents are taxable only in Israel under Article 19. Private Israeli pensions paid by a provident fund (keren pensia) to a retired French resident are taxable in France under Article 19(2), with Israel withholding at 25% unless a reduced-rate certificate (ishur nikui) is obtained from the Israel Tax Authority in advance of each payment.

Inheritance and gifts — a notable gap. The France-Israel Convention does not include an inheritance tax provision. French inheritance and gift tax (droits de succession et de donation) therefore applies to Israeli assets inherited by French residents in parallel with any Israeli proceedings. Israel has no standalone inheritance tax (only capital gains on a subsequent sale of inherited property), but French heirs inheriting Israeli property must include the full value in their French estate tax base. This combination — French estate tax on the asset plus future Israeli capital gains tax on the sale — is one of the most significant planning issues for French families with Israeli property.

For context on the Australia-Israel tax treaty, which follows a similar credit mechanism, see the Q&A on the Australia-Israel tax treaty.

Key Considerations

• Rental income from Israeli property is taxed first in Israel; France provides a credit — both filings must be accurate and coordinated to avoid double taxation or penalties.
• Israeli withholding at 15% on dividends from Israeli companies is creditable in France, but the interaction with the French PFU (30% flat rate) requires careful computation item by item.
• Capital gains on Israeli real estate are taxed only in Israel under Article 13 — this is a meaningful exemption from French capital gains tax on the same transaction.
• The France-Israel treaty has no inheritance provision — French droits de succession applies to Israeli assets inherited by French residents in parallel with any Israeli capital gains tax on a future sale.
• Obtaining Israeli tax clearance certificates (ishur nikui) before remitting Israeli income or sale proceeds to France reduces withholding to treaty rates and simplifies the French credit computation.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• You are a French resident receiving Israeli rental income for the first time and need to set up the correct Israeli tax track and coordinate French reporting.
• You are selling Israeli property and want to understand whether the mas shevach single-apartment exemption applies, and how to document the gain for both the Israel Tax Authority and the French tax administration.
• You have inherited Israeli assets as a French resident and need to understand how French droits de succession interacts with Israeli succession proceedings and future capital gains tax.
• Your Israeli company is distributing a significant dividend and you need to verify the correct withholding rate and whether a reduced-rate certificate from the Israel Tax Authority is available.

A qualified Israeli attorney, coordinating with a French tax adviser, should review the full structure before any major Israeli-French tax transaction.

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Speak With an Israeli Attorney

French residents with Israeli income — whether from rental property, a shareholding, or an inheritance — need coordinated advice that covers both Israeli obligations and the treaty's interaction with French law. Adv. Eli Shimony regularly advises French residents on Israeli tax compliance and can coordinate with French tax specialists on cross-border matters.

Contact us for a confidential initial consultation.