How does a non-resident reclaim Israeli tax withheld above the treaty rate?

A non-resident receives a dividend, interest, or a royalty from Israel, looks at the payment, and finds Israeli tax taken out at a rate far above what the treaty with their country allows. This is normal, and it is not a mistake by the payer. Israeli companies and banks are required to withhold at domestic rates unless they hold paperwork telling them otherwise. The over-withholding is recoverable, but the money does not come back on its own.

---

Detailed Explanation

The mechanics start with why it happens. Under the Income Tax Ordinance 1961, an Israeli payer must deduct withholding tax on Israeli-source payments to a non-resident at the domestic rate, which for dividends, interest, and certain other income can sit at 25% to 30%. A tax treaty often caps the rate much lower, for example 15% or even less on dividends and interest depending on the treaty and the type of income. The payer, though, cannot simply apply the treaty on your say-so. It needs authorisation, and in the absence of that authorisation it withholds at the full domestic rate to protect itself.

That points to the better of the two recovery routes: prevention. Before the payment is made, you, usually through an Israeli representative, apply to the Israel Tax Authority for a reduced-withholding certificate that instructs the payer to deduct only the treaty rate. The key supporting document is a certificate of residence issued by your home tax authority, which proves you are entitled to the treaty in the first place. Get this in place ahead of a dividend or a sale and the over-withholding never occurs, which saves you the far slower business of clawing it back later.

If the tax has already gone, you switch to the refund route, and here the non-resident friction is real. You file a refund claim with the Israel Tax Authority, again backed by your home-country certificate of residence and by the payer's withholding certificate (ishur nikui mas) showing exactly what was deducted. Because you are abroad, this almost always means acting through an Israeli accountant or lawyer under a power of attorney, and it often means opening a tax file so the Authority can process and pay you. There is a deadline: a refund claim must generally be made within six years of the end of the relevant tax year, so do not let an over-withheld dividend sit forgotten. The same treaty mechanics underlie much of our US-Israel tax treaty guide, and the logic carries across to other treaties.

In Practice: Where an Israeli company withholds 25% on a dividend that a treaty caps at 15%, the extra ten points are recoverable: on an NIS 200,000 dividend that is NIS 20,000 of over-withheld tax. Under the Income Tax Ordinance 1961 the refund claim goes to the Israel Tax Authority with a home-country certificate of residence and the payer's withholding certificate, and it must be filed within six years of the end of the tax year. A complete file is typically paid out, with linkage, around six to twelve months after submission, which is why securing a reduced-withholding certificate before payment is usually the better course.

Key Considerations

• Israeli payers withhold at domestic rates by default, not at the treaty rate.
• A reduced-withholding certificate obtained before payment avoids over-withholding entirely.
• A refund claim afterward needs a home-country certificate of residence and the withholding certificate.
• Claims must generally be filed within six years of the end of the relevant tax year.
• A non-resident normally acts through an Israeli representative and may need to open a tax file.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• A large dividend, interest payment, or sale is coming and you want the treaty rate applied at source.
• Tax has already been over-withheld and you need the refund claim assembled and filed correctly.
• The payer or the Tax Authority disputes your treaty entitlement or your residence status.

A qualified Israeli adviser can secure relief at source where possible and pursue the refund where it is not.

---

Speak With an Israeli Attorney

We obtain reduced-withholding certificates before Israeli payments are made and, where tax has already been over-withheld, file and follow through the refund claim with the Israel Tax Authority on your behalf.

Contact us for a confidential initial consultation.