SKP Tax Alert
Volume 9 Issue 31 | 27 February 2017
  Amendments to the India–Israel tax treaty

Recently, the Central Board of Direct Taxes (CBDT) has notified several amendments in the Articles and Protocols of the India–Israel tax treaty. The revised tax treaty shall be enforced from 1 April 2017. The key takeaways from the revised treaty are as follows:

1. Insertion of Limitation of Benefit (LOB) Article
The LOB Article has been inserted to restrict the tax treaty benefits if the principal purpose test is not met. The LOB clause inserted provides that the benefits of the India–Israel tax treaty will not be available to a resident of Israel if the purpose of setting up an entity in Israel was to obtain the benefits under this tax treaty.

Furthermore, the LOB Article also provides that the benefits under the tax treaty would be available only to the beneficial owner of the income. It also provides both countries with the right to apply domestic laws on prevention of tax evasion or tax avoidance (i.e. General Anti-Avoidance Rule (GAAR) which will be enforced in India from 1 April 2017).

2. Deletion of Clause 2 of the Protocol
As per the existing tax treaty, paragraph 2 of the Protocol provides that in case India enters into a tax treaty with any other country which provides a lower rate or a restrictive scope for payments in the nature of royalty, Fees for Technical Services (FTS), interest and dividend, then such lower rate or restrictive scope shall also apply to the tax treaty between India and Israel. This was called the Most Favoured Nation (MFN) clause.

In the revised tax treaty, the MFN clause has been omitted.

3. Other amendments
  • The article on exchange of information categorically states that requests for information cannot be denied solely because the said information is held by a bank, a nominee, a person in an agency acting in a fiduciary capacity or any other financial institution. Furthermore, if the information is sought by one country, then the other country cannot refuse to divulge the information on the grounds that it does not need the said information for its tax purposes. 
  • The existing tax treaty provided that the gains earned from the alienation of shares, the assets of which consists of immovable property, may be taxed in India. The revised tax treaty provides that gains from the alienation of shares, deriving more than 50% of their value directly or indirectly from immovable property situated in India (at the time of alienation or at any time during the 12 preceding months), may be taxed in India. This is in line with Article 9 of the Multilateral Instrument (MLI) clause which is Action Plan 6 of Base Erosion Profit Shifting (BEPS). The same is also extended to gains derived from the alienation of interest in a partnership, trust or other entity.
  • The revised tax treaty removes the deemed tax credit available, which is 15% on the dividend income and 10% tax credit on interest income.
SKP's comments
India has been successful in renegotiating tax treaties with various countries including Mauritius, Cyprus, Singapore, etc. It would be pertinent to note that most of these tax treaties had favourable capital gains clause. This tax treaty has been amended in line with various BEPS Action Plans. This shows that India is committed to implementing the BEPS Action Plan at the earliest possible. India also has been successful in securing its right to tax income emanating from India (i.e. the source country) by making significant amendments to the MFN Clause.
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