The US–Israel Tax Treaty: A Practical Guide for American Non-Residents

A New York physician owns a stake in an Israeli medical device startup. Each year the company distributes dividends, and the Israeli payor withholds 30% — the domestic rate for a controlling shareholder — because the physician never submitted the paperwork needed to invoke the treaty. On the US side, she reports the full gross dividend and claims a Foreign Tax Credit for the Israeli tax. After speaking with a cross-border tax attorney, she learns that Article 10 of the US–Israel Income Tax Convention caps her withholding at 12.5%. Reclaiming the excess requires filing an Israeli tax return and waiting 12 to 18 months for a refund from the Israel Tax Authority. Getting it right prospectively takes about eight weeks.

That gap between the treaty rate and what actually happens is common. The US–Israel tax treaty has been in force since 1995, but its mechanics remain unfamiliar to many Americans with Israeli-source income. This guide walks through every major provision at a practitioner level.

Who the Treaty Covers and What It Governs

The Convention Between the Government of the United States of America and the Government of the Government of Israel with Respect to Taxes on Income was signed in 1975 and entered into force on January 1, 1995. It covers Israeli income tax and the Israeli Company Tax on one side, and US federal income tax on the other. It does not cover state income taxes, Israeli municipal taxes, Israeli VAT, or Israeli National Insurance (Bituach Leumi) contributions.

Covered persons are US residents (for US tax purposes) and Israeli residents (for Israeli tax purposes). The treaty does not extend to a US citizen who is not a US or Israeli resident — so an American living in Germany and receiving Israeli dividends cannot invoke it.

Dual residents — people who qualify as a resident of both countries under domestic law — use the Article 4 tie-breaker cascade:

1. Permanent home available to the person
2. Center of vital interests (personal and economic relations)
3. Habitual abode
4. Nationality
5. Mutual agreement between the two tax authorities

Getting the tie-breaker determination wrong has real consequences. A person mistakenly treated as an Israeli resident for treaty purposes may lose the benefit of US treaty protections and face Israeli worldwide taxation. Any treaty-based position must be disclosed on IRS Form 8833 with the US return.

Reduced Withholding Rates: What the Treaty Actually Provides

| Income Type | Israeli Domestic Rate | Treaty Cap | Treaty Article | |-------------|----------------------|------------|----------------| | Dividends — non-controlling shareholder | 25% | 25% | Article 10 | | Dividends — 10%+ controlling shareholder | 30% | 12.5% | Article 10 | | Interest | 15–25% | 17.5% | Article 11 | | Royalties | 23–25% | 15% | Article 12 | | Capital gains — Israeli real property | 25% (non-resident) | Israel retains primary right | Article 13 | | Private pension income | Varies | Residence country only | Article 19 |

The table shows where the treaty moves the needle. For non-controlling shareholders receiving dividends, domestic Israeli law already applies 25%, so the treaty adds nothing on that income type. For controlling shareholders, the shift from 30% to 12.5% is material — on NIS 500,000 in dividends, that is NIS 87,500 in additional tax if the treaty is not invoked.

Interest is a more nuanced category. Many types of Israeli government bond interest are exempt from withholding entirely under domestic law, so the 17.5% treaty cap may be irrelevant. On commercial interest paid by an Israeli company to a US lender, however, the treaty cap matters.

Royalties from Israeli licensees paid to US IP holders are capped at 15% under Article 12. Israeli domestic withholding can reach 25% on software royalties, so the treaty savings can be significant on recurring license streams.

Capital Gains: Why the Treaty Offers Limited Protection on Israeli Property

Article 13 explicitly preserves Israel's right to tax gains from the sale of Israeli real property, regardless of where the seller resides. A US resident selling an Israeli apartment pays Israeli capital gains tax — generally 25% for a non-resident individual under the Israeli Income Tax Ordinance — and then claims a Foreign Tax Credit on the US return.

This means the treaty provides no shield against Israeli capital gains tax on property. The only relief is the Foreign Tax Credit mechanism, which offsets the Israeli tax against US federal tax on the same gain. For a full treatment of the computation — including the linear allocation method, betterment tax (hetel hashbacha), and the non-resident election — see our guide on capital gains tax on the sale of Israeli property.

For Israeli publicly traded shares acquired after January 1, 2009, domestic Israeli law already exempts non-residents from capital gains tax, subject to conditions. The treaty does not need to be invoked; domestic law does the work.

How to Claim Treaty Benefits: The Step-by-Step Process

Getting treaty-reduced withholding applied prospectively requires action before the payment is made. Retroactive claims are possible but slower and more burdensome.

Step 1: Obtain IRS Form 6166

Form 6166 is the IRS's official certificate confirming that the applicant is a US tax resident. It is issued by the IRS Philadelphia Accounts Management Center. Processing takes 45 to 60 days from receipt of the application. There is no fee. The form must be current — Israeli payors generally require a certificate issued within the past 12 months.

Step 2: Prepare Israel Tax Authority Form 2513

Form 2513 (Baqashat Nikui Mimass Be-Mekor) is the non-resident's application for reduced withholding filed with the Israel Tax Authority (Rashut HaMasim). It must be accompanied by Form 6166, a copy of the payor's details, and documentation of the income type and amount.

Step 3: Submit to the Israel Tax Authority and Receive a Certificate

US-based applicants submit Form 2513 and the accompanying documents by post or through a licensed Israeli tax attorney — there is no requirement to appear in person at an ITA office. Most US-resident applicants use an Israeli tax representative to submit, track progress, and receive the certificate on their behalf. The Israel Tax Authority reviews the application and, if approved, issues a withholding reduction certificate specifying the applicable treaty rate and its validity period. The applicant presents this certificate to the Israeli payor — the company, bank, or tenant — who then applies the treaty rate going forward.

Without the certificate, Israeli payors are legally required to apply domestic withholding rates. They have no discretion.

In Practice: A US-resident shareholder holding 15% of an Israeli company invokes Article 10 of the US–Israel Income Tax Convention to reduce dividend withholding from 30% to 12.5%. She applies to the IRS for Form 6166 in early January; the form arrives by mid-February (approximately 45 days). She submits Form 6166 together with Israel Tax Authority Form 2513 to the Rashut HaMasim's Jerusalem District Office. The ITA issues a withholding certificate within 3 to 4 weeks. With the certificate in hand before the company's March dividend distribution, the payor withholds at 12.5%. On NIS 400,000 in dividends, the tax is NIS 50,000 instead of NIS 120,000 at the 30% domestic rate.

The Social Security Totalization Agreement

The US–Israel Income Tax Convention expressly excludes Social Security taxes from its scope. For decades, Americans working in Israel faced potential double contributions to both US Social Security and Israeli National Insurance (Bituach Leumi).

The US–Israel Totalization Agreement (formally, the Agreement on Social Security) entered into force on December 1, 2016. It addresses this gap. Under the agreement:

• An employee posted from the US to Israel for up to five years pays only US Social Security and is exempt from Israeli National Insurance contributions, provided the employer obtains a Certificate of Coverage from the US Social Security Administration.
• An Israeli employee sent to the US pays only Israeli National Insurance and is exempt from US Social Security tax.
• Self-employed individuals follow similar rules based on where they are ordinarily self-employed.

The agreement also allows workers to combine contribution periods from both countries to qualify for benefits when they would not meet the minimum period under either country's domestic rules alone.

This is a separate legal instrument from the income tax treaty and requires separate documentation — the Certificate of Coverage is not the same as IRS Form 6166.

FATCA and FBAR: Compliance Obligations for US Persons with Israeli Accounts

The US–Israel Income Tax Convention is silent on FATCA and FBAR, because these are unilateral US reporting regimes. But they interact with the treaty context constantly.

FATCA (Foreign Account Tax Compliance Act)

Israel and the United States signed an intergovernmental agreement in 2014. Under this IGA, Israeli financial institutions — banks, brokers, and certain insurance companies — report accounts held by US persons to the Israel Tax Authority, which transmits the data to the IRS annually. US account holders at Israeli banks do not report separately under FATCA; the institution does it.

However, US persons must still file IRS Form 8938 (Statement of Specified Foreign Financial Assets) if their Israeli financial assets exceed the thresholds: $50,000 at year-end or $75,000 at any point during the year for single filers; $100,000 and $150,000 for married filing jointly. Higher thresholds apply to Americans living abroad.

FBAR (FinCEN Form 114)

Any US person — citizen, green card holder, or resident alien — whose Israeli financial accounts exceed $10,000 in aggregate at any point during the calendar year must file FinCEN Form 114 electronically through the BSA E-Filing System. The deadline is April 15, extended automatically to October 15. There is no paper filing option.

The penalty for willful failure to file is the greater of $100,000 or 50% of the account balance per violation. Non-willful violations carry penalties up to $10,000 per violation, though enforcement is fact-specific.

In Practice: A dual US–Israeli citizen maintains NIS 200,000 (approximately $55,000) in a Tel Aviv savings account. Because the balance exceeded $10,000 at several points during the year, she must file FinCEN Form 114 by October 15 of the following year. She must also file Form 8938 because her foreign financial assets exceeded $50,000 at year-end. The Israel Tax Authority already reported her account to the IRS under the 2014 FATCA IGA, so the IRS has independent visibility — failure to self-report creates a mismatch risk and potential examination.

Common Mistake: Assuming that because the Israeli bank reports the account to the IRS under FATCA, there is no need to file FBAR separately. These are two distinct legal obligations. FATCA reporting by the bank does not substitute for the account holder's own FinCEN 114 filing. Missing the FBAR while the IRS already has FATCA data on the account makes the omission easy to detect — and the Israel Tax Authority confirms reporting under the IGA, giving the IRS corroborating documentation.

Claiming the Foreign Tax Credit on the US Return

Americans with Israeli-source income cannot simply pay Israeli tax and ignore the US obligation. All worldwide income is reportable on the US return. The mechanism to avoid double taxation is the Foreign Tax Credit.

Form 1116 is used to compute and claim the credit. The credit is computed separately for each income category (passive income, general income, etc.) and is subject to a limitation: the credit cannot exceed the US tax attributable to the same foreign income. If Israeli taxes exceed the US limitation — common when Israeli rates are higher than US rates on the same income — the excess credits carry forward for up to 10 years.

Key rules:

• The credit applies to income taxes paid or accrued to Israel — not to Israeli VAT, Bituach Leumi contributions, or real property betterment tax.
• To claim the credit, the foreign tax must be a legal and actual foreign tax liability — not a voluntary payment or a penalty.
• Americans claiming a treaty position (for example, treating Israeli pension income as taxable only in Israel under Article 19) must disclose the position on Form 8833 with the US return.

For non-residents with Israeli income subject to withholding — such as dividends or royalties — the withheld amount is generally the creditable foreign tax. For income subject to assessment (rental income, Israeli business income), the creditable amount is the tax shown on the Israeli return.

What the Treaty Does NOT Cover

Understanding treaty limits is as important as knowing the benefits.

The treaty does not override the US citizenship-based taxation obligation. Americans are taxed on worldwide income regardless of residency. The treaty reduces Israeli tax; it does not eliminate the US reporting obligation.

The treaty does not cover inheritance and gift taxes. There is no US–Israel estate tax treaty. Israeli law does not impose an inheritance tax, but the US federal estate tax applies to US citizens and domiciliaries on their worldwide assets, including Israeli property.

The treaty does not address Israeli VAT (currently 18%), Arnona (municipal property tax), Bituach Leumi (National Insurance), or betterment levy on Israeli real property development.

Common US–Israeli Situations

Dual citizens. The treaty applies to dual US–Israeli citizens who are Israeli tax residents. A dual citizen living in Israel is an Israeli resident and can use the treaty's provisions when dealing with US-source income. For Israeli-source income, the treaty does not eliminate the US obligation to report; it only limits what Israel can withhold.

Americans inheriting Israeli property. Israel does not impose an inheritance tax. The heir takes ownership of the property without an Israeli tax event at the moment of inheritance. When the heir later sells the inherited property, Israeli capital gains tax applies — and the acquisition cost for purposes of computing the gain is the original acquisition cost paid by the deceased, not the value at the date of inheritance. This is a significant trap: the taxable gain can be very large if the original purchase price was low. Understanding this before selling is essential; see the general overview of Israeli income tax for non-residents for context on how the Israel Tax Authority treats non-resident income more broadly.

US persons receiving Israeli pension income. Article 19 of the treaty provides that private pension income is generally taxable only in the country of residence. An American living in the US receiving an Israeli private pension should be taxable only in the US — but the Israeli payor may still withhold unless given the treaty certificate. Obtaining Form 6166 and Form 2513 is the mechanism to stop the withholding.

Americans with Israeli rental income. Rental income is not subject to automatic withholding; the non-resident owes Israeli tax and must report it. Non-resident landlords can elect a 10% flat tax on gross rent (no deductions) or the standard method with deductions and progressive rates. Either way, a mispar tik misim (Israeli tax file number) from the Israel Tax Authority is required to file, and refund claims cannot proceed without one.

Practical Checklist

• Obtain IRS Form 6166 at least 60 days before the first expected Israeli payment
• Submit Israel Tax Authority Form 2513 with Form 6166 before payment is made
• Obtain a mispar tik misim (Israeli tax file number) if filing Israeli returns or claiming refunds
• File FinCEN Form 114 (FBAR) by October 15 if any Israeli account exceeded $10,000 during the year
• File IRS Form 8938 if Israeli financial assets exceeded $50,000 at year-end (single filer)
• Claim the Foreign Tax Credit on Form 1116 for Israeli taxes paid or withheld
• Disclose any treaty-based position on Form 8833 with the US return
• If claiming the Totalization Agreement exemption, obtain a Certificate of Coverage from the US Social Security Administration before beginning Israeli employment
• For Israeli pension income, invoke Article 19 by providing the treaty certificate to the Israeli payor
• When selling inherited Israeli property, obtain the original acquisition documentation — the Israeli capital gains computation starts from the deceased's cost basis

Speak With an Israeli Attorney

The US–Israel tax treaty provides real benefits, but capturing them requires advance planning and correct documentation. Errors — waiting until after withholding to act, missing FBAR, miscalculating the Foreign Tax Credit — are common and expensive to fix.

Contact us to speak with an Israeli attorney who advises US persons on cross-border Israeli tax matters, from treaty benefit applications to Israeli tax return filings and ITA negotiations.