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Tax Problems of American Investments in Israel, Part I*
Published online by Cambridge University Press: 12 February 2016
Extract
In 1967 North American investors invested $11.1 million in approved Israeli investments which accounted for 48% of the total foreign investments made during that year. In 1969 North American investors invested a sum of $81 million in similar investments which accounted for 75% of all foreign investments made in Israel during that year. During the years 1967–69, 214 different North American investment projects were approved by the Israeli Investment Centre, with the year 1969 alone accounting for 88 such projects, many in economic fields considered to be most vital to the Israeli economy. In 1969 some 6,000 United States citizens immigrated to Israel. In 1970 this number is expected to rise to 10,000. Indeed, the achievements, often termed “miracles”, of the past twenty-two years would not have been possible without the continual assistance of United States citizens and corporations in both technical know-how and capital.
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References
1 Report of Investment Centre, 1969, Table 25. See also “U.S. Investing Bolstering Israel”, N.Y. Times, December 24, 1969.
2 The term “key money” refers to premiums paid by a lessee to a lessor for longterm leases granting the lessee statutory rights otherwise unavailable to him. See Banin v. Assessing Officer of Tel Aviv (1970) (II) 24 P.D. 425.
3 The catch-all clause appears in section 2 (10) despite the fact that only nine sources are listed in section 2. This is due to a statutory amendment by virtue of which section 2 (3), dealing with the net value of real property used as living quarters, was withdrawn without the insertion of a new numerical order for the remaining sources designated in section 2.
4 See, Harry Ferguson (Motors) Ltd. v. I.R. Comrs. [1951] N.I. 115.
5 Vallambrosa Rubber Co. Ltd. v. Farmer [1910] S.C. 519; London Investment and Mortgage Co. Ltd. v. I.R. Comrs. [1959] A.C. 199.
6 Withers v. Nethersole [1948] 1 All E.R. 400.
7 Van den Berghs Ltd. v. Clark [1935] A.C. 431.
8 See, for example, Burmah Steamship Co. Ltd. v. I.R. Comrs. [1931] S.C. 156; Thompson v. Magnesium Elektron Ltd. [1944] 1 All E.R. 126; Cattermole v. Reigate Corporation [1941] 2 All E.R. 765; Glikstein (].) & Son Ltd. v. Green [1929] A.C. 381.
9 The difference between engaging in a non-recurrent ‘transaction or adventure in the nature of trade” and engaging in business is largely artificial and most probably due to the inadvertence of the Palestinian lawmaker. Originally the Ordinance provided for the taxation of income from “any trade, business, profession or vocation” (1941) P.G. No. 1126, Sup. 1, p. 51). In 1947 the words “or from any adventure or transaction in the nature of trade” were added to the four income producing sources enumerated above (1947) P.G. No. 1568 Sup. 1, p. 93). This amendment was inspired by section 237 of the English Income Tax Act, 1918 which defined the term “trade” to include “every trade, manufacture, adventure or concern in the nature of trade”. The 1947 amendment was apparently promulgated without awareness of the definitional role accorded by the English tax system to the phrase “nature of trade”. In 1961 the entire Ordinance was reviewed but the existing statutory pattern was left intact. The four words “trade, business, profession or vocation” were grouped into two groups—one called “business” and the other “vocation”.
10 Since the difference between engaging in a “transaction or adventure in the nature of trade” and engaging in business is artificial and most probably due to the inadvertence of the Palestinian lawmaker, this difference should not prevent the application of identical criteria to both “business” and a “transaction or adventure in the nature of trade” for purposes of the qualitative test.
11 See Lapidoth, A., “The Taxation of Income from Trade or Vocation” (1967) 2 Quarterly Tax Journal 243Google Scholar (Hebrew); Witkon, and Neeman, , The Law Of Taxation (Tel-Aviv, Schocken, 4th ed., 1969) 70–85 (Hebrew)Google Scholar.
12 A.R. v. Assessing Officer of Natanya, (1963) 40 P.M. 249; Yehezkiel v. Assessing Officer of Tel-Aviv (1968) 1 P.D.A. 381; Kirshenberg v. Assessing Officer of Dan Region (1966) 5 (V) K.P.D. 25; Ben Zion and Meron v. Assessing Officer of Tel-Aviv (1965) (1)19 P.D. 245; Anonymous v. Assessing Officer of Jerusalem (1956) 2 K.P.D. 189; New Immigrant v. Assessing Officer of Jaffa (1957) 2 K.P.D. 320.
13 See, Ben Zion and Meron v. Assessing Officer of Tel-Aviv (1965) (I) 19 P.D. 245; Bar Yohai v. Assessing Officer of Natanya (1968) 1 P.D.A. 276.
14 Shomer v. Assessing Officer of Tel-Aviv (1966) 5 (IV) K.P.D. 63; Assessing Officer of Tel-Aviv v. Rosenwasser (1965) (III) 19 P.D. 94.
15 Natzba, Hevra Lehitnahalut, Ltd. v. Assessing Officer of Larger Enterprises (1960) 14 P.D. 1814; Mivtach Insurance Agency v. Assessing Officer of Larger Enterprises (1966) (I) 20 P.D. 26; Weinbaum v. Assessing Officer of Kfar Saba (1966) (IV) 20 P.D. 553.
16 Habas v. Assessing Officer of Larger Enterprises (1960) 14 P.D. 2568; Chaimovsky v. Assessing Officer of Tel-Aviv (1965) (III) 19 P.D. 315.
17 Anonymous v. Assessing Officer of Jerusalem (1956) 2 K.P.D. 189; New Immigrant v. Assessing Officer of Jaffa (1957) 2 K.P.D. 320; Curi v. Assessing Officer of Tel-Aviv (1959) 13 P.D. 752.
18 Though income from a “transaction or adventure in the nature of trade” is listed separately from income from “business”, the courts have applied the same criteria to both. Thus, the fact that the taxpayer engaged in numerous transactions of the same nature has been held to characterize future transactions (Building Contractor v. Assessing Officer of Tel-Aviv (1959) 21 P.M. 456; Daklo v. Assessing Officer of Tel-Aviv (1965) (III) 19 P.D. 658). It is our contention, however, that with such activity the taxpayer is deriving income from a business which in turn is based on numerous and distinct business transactions. Therefore, the frequency of transactions bears upon the final determination of whether the activities of the taxpayer, viewed as a whole, amount to a business as distinguished from the mere engagement in transactions or adventures in the nature of trade. Support of this contention is found in Dulach v. Assessing Officer of Tel-Aviv (1966) 5 (V) K.P.D. 21. For a general discussion see: Ziss v. Assessing Officer of Tel-Aviv (1969) 2 P.D.A. 421; Hevra America Halatinit Lehashkaot Avur Yisrael Ltd. v. Assessing Officer of Larger Enterprises (1966) 53 P.M. 362; Hevra Lepituach Teveria, Ltd. v. Assessing Officer of Tel-Aviv (1961) 15 P.D. 2455; Assessing Officer of Tel-Aviv v. Nichse Cohnim, Ltd. (1967) (II) 21 P.D. 748; Sidis Hasherut Hamercazi Lepituach BeYisrael, Ltd. v. Assessing Officer of Larger Enterprises (1967) (II) 21 P.D. 194, wherein the readiness to engage in several transactions was deemed sufficient to constitute engaging in business; cf. Company, Ltd. v. Assessing Officer (1957) 3 (III) K.P.D. 93.
19 Rehov Pinsker 42, Ltd. v. Assessing Officer of Tel-Aviv (1969) (I) 23 P.D. 89; Teller v. Assessing Officer of Haifa (1969) 2 P.D.A. 473.
20 Aminoff v. Assessing Officer of Jerusalem (1957) 11 P.D. 763.
20 Merva v. Assessing Officer of Tel-Aviv (1969) 3 P.D.A. 21.
22 Zodkovitch v. Assessing Afficer of Tel-Aviv (1970) 3 P.D.A. 89, reversed on other gronds, (1971) 4 P.D.A. 70.
23 Goldberg v. Assessing Officer of Tel-Aviv (1970) 3 P.D.A. 180.
24 Ahuzat Hanah Ltd. v. Assessing Officer of Tel-Aviv (1970) 3 P.D.A. 115.
25 Building Contractor and Director of Gas Company v. Assessing Officer for Larger Enterprises (1961) 28 P.M. 332. See also El-Al v. Assessing Officer of Tel-Aviv (1965) 5(1) K.P.D. 83; Prostitute v. Assessing Officer of Tel-Aviv (1962) 4 (IV) K.P.D. 26; Mani v. Assessing Officer of Tel-Aviv (1959) 13 P.D. 460. In determining whether income is from a vocation or other source, the Israeli courts are likely to be influenced by the English tax system which has dealt with this problem on numerous occasions. Many of the English cases relating to the definition of a profession and a vocation have dealt with excess duty and profits tax and not income tax. Nevertheless, the same criteria have been applied in the case of all three taxes to the classification of income as deriving from a vocation or a profession. For purposes of the income tax an actress entering into separate contracts for each appearance was held to carry on a profession (Davies v. Braithwaite [1931] 2 K.B. 628); For purposes of the excess duty and profits tax a professional entertainer (Radcliffe v. I.R. Comrs. (1956) 56 Taxation 612), a journalist (I.R. Comrs., v. Maxe [1919] 1 K.B. 647), a headmaster of a preparatory school (I.R. Comrs. v. North and Ingram [1918] 2 K.B. 705), and an optician (Carr v. I.R. Comrs. [1944] 2 All. E.R. 163) have been held to engage in a profession. The word “vocation” has been interpreted as a synonym to the way in which a person passes his life; a bookmaker Partridge v. Malladaine (1886) 18 Q.B.D. 276; a jockey (Wing v. O'Connell, [1927] I.R. 84), and a land agent (Humphrey v. Peare [1913] 2 I.R. 462), have been held to derive income from a vocation.
26 See for example, Duvdevani v. Assessing Officer of Tel-Aviv (1968) 1 P.D.A. 157; Etzion v. Assessing Officer of Haifa (1968) 2 P.D.A. 5; Reznik v. Assessing Officer of Tel-Aviv (1968) (II) 22 P.D. 837.
27 However, article 18 (4) defines for purposes of article 18 the term employment income, and article 15 defines the term “royalties” in a comprehensive manner.
28 Article 10 (1).
29 The United States Internal Revenue Code refers to the active conduct of a trade or business in sections 346(b), 355(b), 921(2), 931(a)(2)(A) and 934(b)(2). The Regulations issued under section 355 (Treas. Reg. 1 355–1 (c) 1955) vaguely convey the idea of what constitutes an active trade or business as distinguished from an ordinary trade or business. See Bittker, B. and Eustice, J., Federal Income Taxation of Corporations and Shareholders, (Hamden, Federal Tax Press, 2nd. ed., 1966) 313–7Google Scholar; 460–9; Bittker, B. and Ebb, L., United States Taxation of Foreign Income and Foreign Persons (Branford, Federal Tax Press, 2nd ed., 1968) 365.Google Scholar
30 Article 5 of the O.E.C.D. Model Convention supplies the following definition: For the purposes of this Convention, the term ‘permanent establishment’ means a fixed place of business in which the business of the enterprise is wholly or partly carried on.
31 O.E.C.D. Model Convention, article 5(4).
32 Israeli Income Tax Ordinance, sec. 124.
33 Ibid., secs. 34–46; 69; 108.
34 Ibid., secs. 14; 68.
35 Ibid., sec. 127(b)(2).
36 In Landlord v. Assessing Officer of Northern Tel-Aviv (1957) 3(111) K.P.D. 78, the taxpayer was present in Israel for a period of 181 days during the taxable year. The taxpayer had come from Aden where he still maintained a business. His family lived in Israel. The taxpayer himself retained his British nationality so as to facilitate his occasional visits to Aden. The Court reached the conclusion that the taxpayer had a home in Israel but refused to interfere in the findings of the Assessing Officer. The taxpayer was therefore held a non-resident. This decision was vacated by mutual consent in Menachem v. Assessing Officer of Northern Tel-Aviv (1958) 12 P.D. 881. In Taxpayer v. Assessing Officer of Ramai Gan (1958) 3(IV) K.P.D. 168, aff'd on other grounds in Gabay v. Assessing Officer of Ramat Gan (1959) 13 P.D. 1258, the taxpayer was an Iranian citizen who built himself a house in Israel wherein he lived with his family. The taxpayer was present in Israel on a tourist's visa and claimed that he was a non-resident. In holding him a resident, the Court stressed that his visa status was not conclusive of his income tax status. In Taxpayer v. Assessing Officer of Jerusalem (1958) 3(VI) K.P.D. 322, the taxpayer left Israel. His son remained in Israel together with the taxpayer's mother-in-law. They occupied an apartment belonging to the taxpayer. A statement of the taxpayer that he “could not find anything to do in the country” and the fact that he had left Israel were determinative of his being of the status of a non-resident; in Student v. Assessing Officer of Natanya (1960) 23 P.M. 261, a student who was absent from Israel while studying abroad, had maintained an apartment in Israel, whose parents remained in Israel and who, upon the completion of his studies, returned to Israel, was held a resident thereof; in Lev v. Assessing Officer of Kfar Saba (1967) 5(VI) K.P.D. 49, the taxpayer was an Israeli student who, upon, completing his studies in the United States, remained there as an employee of a local corporation. The fact that the taxpayer had definite plans to return to Israel and owned an apartment in the country were held indicative of only a temporary absence. The taxpayer was held to be a resident of Israel.
37 In Gabay v. Assessing Officer of Ramat Gan (1959) 13 P.D. 1258, the Court did not take up the matter of status. In Menachem v. Assessing Officer of Northern Tel Aviv (1958) 12 P.D. 881, the decision was vacated by the mutual consent of the litigants.
38 Instruction Manual, sec. 1/4.
39 Taxpayer v. Assessing Officer of Ramat Gan (1958) 3(IV) K.P.D. 168 and Gabay v. Assessing Officer of Ramat Gan (1959) 13 P.D. 1258.
40 Landlord v. Assessing Officer of Northern Tel-Aviv (1957) 3(111) K.P.D. 78, rev'd by mutual consent in Menachem v. Assessing Officer of Northern Tel-Aviv (1958) 12 P.D. 881.
41 Student v. Assessing Officer of Natanya (1960) 23 P.M. 261, and Lev v. Assessing Officer of Kfar Saba (1967) 5(VI) K.P.D. 49, suggest that birth within Israel indicates status of resident.
42 See supra n. 36.
43 See supra n. 36.
44 This criterion is far from conclusive. Where a certain visa was employed only as a means of facilitating travel, it was ignored. For examples see supra n. 36.
45 Taxpayer v. Assessing Officer of Jerusalem (1958) 3(VI) K.P.D. 322.
46 Student v. Assessing Officer of Natanya (1960) 23 P.M. 261.
47 See supra n. 39.
48 See supra nn. 39, 40. The search for the taxpayer's home suggests a search for the centre of his vital interests. If “home” and “residence” are synonymous little clarification is added to the concept of status for income tax purposes.
49 Although the caption of section 68 reads “temporary residents” the section deals with non-residents who are present in Israel for a limited stay. The term temporary resident is ill-chosen, for a resident is defined in section 1 of the Ordinance as one who resided in Israel while section 68 prohibits even the intention of becoming a resident. No Israeli precedents have dealt with its provisions. Some assistance in its interpretation could be derived from the following selected sample of English cases: Inchiquin v. I.R. Comrs. (1948) 31 Tax Cas. 125; Kinloch v. I.R. Coms. (1929) 14 Tax Cas. 736; Elmhurst v. I.R. Comrs. [1937] 2 K.B. 551; Withers v. Wyngard (1938) 21 Tax Cas. 724; I.R. Corns, v. Zorab (1926) 11 Tax Cas. 289.
50 Instruction Manual, sec. 1/6.
51 Student v. Assessing Office of Natanya (1960) 23 P.M. 260, 264.
52 O.E.C.D. Model Convention, art. 4(2).
53 Ibid., art. 3(4).
54 Israeli Income Tax Ordinance, sec. 1.
55 The leading English cases are: De Beers Consolidated Mines Ltd. v. Howe [1906] A.C. 455; American Thread Co. v. Joyce (1912) 6 Tax Cas. 163; New Zealand Shipping Co. Ltd. v. Thew (1922) 8 Tax Cas. 208; Union Corporation Ltd. v. I.R. Coms. [1953] A.C. 482; Unit Construction Co. Ltd. v. Bullock [1960] A.C. 35.
56 [1906] A.C. 455.
57 [1906] A.C. 455, 458.
58 Buckley L. J. of the Court of Appeals emphasized this principle in American Thread Co. v. Joyce (1912) 6 Tax Cas. 27, 32: “The shareholders can, no doubt, by virtue of their votes, control the corporation; they can compel the directors—who are not properly described as their servants, but who are the managing partners of the concern … to do their will, but it does not follow that the corporators are managing the corporation. The contrary is the truth, they are not. It is the directors who are managing the affairs of the corporation…”
59 Calcutta Jute Mills Co. Ltd. v. Nicholson (1876) and Cesena Sulphur Co. v. Nicholson (1876) 1 Ex. D. 428; New Zealand Shipping Co. Ltd. v. Stephens 5 Tax Cas. 553; De Beers Consolidated Mines Ltd. v. Howe [1906] A.C. 455; The United States Internal Revenue Code itself makes no distinction between resident and non-resident corporations. The regulations provide the following classification of foreign corporations:
A foreign corporation engaged in trade or business within the United States is referred to in the regulations in this chapter as a resident foreign corporation, and a foreign corporation not engaged in trade or business within the United States, as a non-resident foreign corporation. Treas. Reg. 301. 7701–5 (1960).
This classification is similar to the English requirement of locating a company's residence at the location of its place of engagement in business. The English criteria for locating a corporation's business is somewhat remindful of the “principal office” concept found in section 864 of the United States Internal Revenue Code.
60 Goerz and Co. v. Bell [1904] 2 K.B. 136; Swedish Central Rail Co. Ltd. v. Thompson [1925] A.C. 495; Mitchell v. Egyptian Hotels Ltd. [1915] A.C. 1022. The English criterion of residence focuses on the entire corporation and not on any division thereof. If, for example an independent division of a United States conglomerate was established in England, the English courts would seek to locate the control exercised over the entire conglomerate, so as to determine its residence. As long as the division remains unincorporated the degree of its independence within the general conglomerate structure is irrelevant.
61 The English courts have wrestled with the problem of multiple company residences. The issue was squarely presented to the House of Lords in Swedish Central Rail Co. v. Thompson [1925] A.C. 495; The taxpayer, an English company, specifically resolved to transfer its central control and management from England to Sweden. From and after the time of this decision, all important matters were decided at meetings conducted in Sweden. In England there remained a special committee which dealt with technical matters such as the transfer of shares, the attachment of the company's seal, and the signing of some checks. This committee met in London, where its secretary resided and the officially registered office of the company remained. The House of Lords upheld the finding of the Special Commissioners to the effect that although control and management were located in Sweden, the company was nevertheless a resident of England.
Shortly afterwards came the case of the Egyptian Delta Land and Investment Co. Ltd. v. Todd [1929] A.C. 1, where the House of Lords, at first blush, seemed to have overruled its Swedish Central doctrine. In Egyptian Delta the appellant taxpayer was incorporated and maintained an office in England. The directors and shareholders of the company met in Egypt for the purpose of declaring dividends, issuing share certificates, having accounts made up and audited and in order to perform other administrative functions. Only the essential formal requirements of English Company Law were complied with by the registered office in London. It was from there that certain statutory reports were filed and that a register of shareholders was kept. The House of Lords upheld the finding of the General Commissioners to the effect that the company was not resident in England. The Swedish Central case and the decision in Egyptian Delta are difficult to reconcile. In both cases the duties performed in England were menial and unimportant. In both cases the management and control over the tax-payers were exercised from without England. Nevertheless, both cases reached opposite results. Lord Radcliffe attempted the reconciliation of the two cases in Unit Construction Co. Ltd. v. Bullock [1960] A.C. 351. Having restated the propositions that residence is determined by the location of central control and management, he noted two opponent qualifications to the general principle. The first dealt with those cases in which the facts could not fix the one and only country in which control and management were located. The second qualification was derived from the Swedish Central case and phrased:
To all appearances that, laid down the proposition that, although there was a residence in Sweden by virtue of central control and management being exercised there, there was at the same time residence in England by virtue of incorporation here, of administrative duties such as exercising the custody of the company's seal and registration of transfers. The novel idea thus appeared that there were some circumstances that could establish residence for a company even though its central management and control were being conveniently exercised elsewhere.
Lord Radcliffe however preferred to eliminate this second qualification. He treated the latter as a mere example of the first qualification. On that basis the decision in Swedish Central illustrates a division of management and control between Sweden and England. Treating the case as such an example fails, however, to differentiate it from the Egyptian Delta case.
62 Unit Construction Co. Ltd. v. Bullock [1960] A.C. 351; cf. Kodak Ltd. v. Clark [1903] 1 K.B. 505.
63 See Gramophone and Typewriter Ltd. v. Stanley [1908] 2 K.B. 89.
64 See Lapidoth, A., “The Test For the Determination of the Scope of Taxes: The Territorial Location of the Object and the Personal Link of the Taxpayer to the Country” (1969) 4 Is. L.R. 392.Google Scholar
65 Grainger & Son v. Gough [1896] A.C. 325; Greenwood v. Smith (F.L.) & Co. [1922] A.C. 417; Machine & Co. v. Eccott [1926] A.C. 424; Wilcock v. Pinto & Co. (1924) 9 Tax Cas 111; Gavazzi v. Mace (1926) 10 Tax Cas. 698; Belfour v. Mace (1928) 13 Tax Cas. 539; Rowson v. Stephen (1929) 14 Tax Cas. 544; Boyd (T.L.) & Sons Ltd. v. Stephen (1926) 10 Tax Cas. 698.
66 See e.g., Tax Comrs. v. Kirk (1900) 83 L.T. 4; New Zealand Tax Comrs. v. Eastern Extension Australasia and China Telegraph Co. Ltd. [1906] A.C. 526; Boston Deep Sea Fishing and Ice Co. Ltd. v. Farnham [1957] 3 All E.R. 204.
67 In Maclaine & Co. v. Eccott [1926] A.C. 424, at 432 the Court stated:
The question whether a trade is exercised in the United Kingdom is a question of fact, and it is undesirable to attempt to lay down any exhaustive test of what constitutes such an exercise of trade; but I think it must now be taken as established that in the case of a merchant's business, the primary object of which is to sell goods at a profit, the trade is (speaking generally) exercised or carried on… at the place where the contracts are made.
68 For some examples of the application of this principle see Mitchell v. Egyptian Hotels Ltd. [1915] A.C. 1022; B.W. Noble Ltd. v. Mitchell (1926) II Tax. Cas. 372.
69 For some examples of the application of this principle to individual taxpayers see, Ogilvie v. Kitton [1908] S.C. 1003; Spiers v. Mackinnon (1929) 14 Tax Cas. 386.
70 See, Farrand v. Satterthwaite (1929) 14 Tax Cas. 469; Withers v. Wynyard (1938) 21 Tax Cas. 724. The place of contract criterion is not well suited for locating the source of vocational income. Contracts for services are not entered into in the same frequency and as routinely as sales contracts and do not involve a turnover of goods held as inventory. Indeed the possibilities of entering into contracts for vocational services within or without a given country are almost without limit.
71 Assessing Officer of Tel-Aviv v. Giora Godik Int. Productions (1969) (I) 23 P.D. 36; Oron v. Assessing Officer of Jerusalem (1969) 3 P.D.A. 7. By adopting the criterion of the place of performance the Israeli Income Tax Ordinance has departed from the traditional English tax standard, formerly applied by the Israeli courts. See Razin v. Assessing Officer of Ramat-Gan (1966) 52 P.M. 107; Assessing Officer of Natanya v. Gross (1960) 14 P.D. 688; Oron v. Assessing Officer of Jerusalem (1968) 66 P.M. 124; Shasha v. Assessing Officer of Dan Region (1968) 2 P.D.A. 48. The English criteria for the location of the source of employment income was the place of contract and remuneration but this test has been abandoned (Finance Act, 1956, sec. 10).
72 The statutory language is cumbersome and makes it difficult to ascertain specifically to what the exemption relates. Does it operate to exclude employment income of less than IL. 5,000, earned by non-residents, from the sweep of the term “income derived from Israel”, thereby rendering it without a source in Israel? Does it operate to except such income of non-residents from the rule of the place of performance, thereby subjecting it to the traditional standards of English law? Or, does the exception only relate to the word “derived” but not to the entire phrase “income accruing in [or] derived from Israel” and thus base the taxation of such income upon its accrual or receipt in Israel? See, Shapiro, , “Place of Income for Income Tax Purposes” (1969) 25 HaPraklit 309Google Scholar; Tovim, Ben, “Location of Income for the Purpose of Taxation” (1969) 1 Mishpatim 611Google Scholar; Neeman, , “Taxation Notes” (1969) 19 Roeh Haheshbon 412Google Scholar; (1969) 20 Roeh Haheshbon 19.
73 The exceptional cases relate to those instances where the employer is the State of Israel, a local authority thereof, the Jewish Agency, the Keren Kayemeth leYisrael, the Keren Hayesod-United Israel Appeal, or any other public body so designated by the Minister of Finance.
74 In a Palestinian case, Palestine Discount Bank Ltd. v. Assessing Officer of Tel Aviv (1947) A.L.R. 418, the court seems to have identified securities producing interest as the income producing source; however, the case is far from clear. See also, Assessing Officer of Tel Aviv v. Pearl Assurance Co. Ltd. (1962) 16 P.D. 1528, 1534. The English tax system seems to have fixed the source of interest at the debtor's residence. See, Steele v. Manton's (Lord) Trustees (1927) 11 Tax Cas. 549. A recent Israeli Haifa District Court case seems to regard the loan contract as the source of interest. See, Hevrat Hahashmal Leyisrael, Ltd. v. Assessing Officer of Haifa (1970) 3 P.D.A. 339.
75 The rule governing the location of dividend income for purposes of United Kingdom taxation seems to treat the dividend as arising at the distributing company's residence. See, Bradbury v. English Seiving Cotton Co. [1923] A.C. 744; American Thread Co. v. Joyce (1913) 6 Tax Cas. 163; Bartholomay Brewing Co. Ltd. v. Wyatt [1893] 2 Q.B. 499.
76 From an economic point of view pensions derived from employment ought to follow the rules regulating the location of employment income. It is not certain whether this is so under the Israeli Income Tax Ordinance. Section 5(2) of the Ordinance, laying down the general source rule for the location of employment income, applies to “employment income” which by virtue of the definition of sections 1 and 2(2) of the Ordinance does not include pensions. The latter are listed independently in paragraph 5 of section 2. This dichotomy may result in the application of the now abandoned, but traditional English test, to such income, which calls for locating the source of employment income in accordance with either the place the contract was entered into or the place of remuneration.
77 The source of rental payments is the property for which such sums are paid. Under the English tax system taxes are levied on income from any property located within the United Kingdom and hence the location of rental income in accordance with the location of the property. Cf. Swedish Central Rail Co. v. Thompson [1925] A.C. 495; Income Tax Act, 1952, sec. 122. Royalties derived from patents are apparently governed by the place of use. Cf. Income Tax Act, 1952, sees. 318, 322.
78 The result in Patuck v. Lloyd (1944) 26 Tax Cas. 284 seems to suggest that this is not so. See also, Walsh v. Randall (1940) 23 Tax Cas. 55. A different view was taken in Scottish Provident Institution v. Farmer [1912] S.C. 452 with respect to bonds.
79 Avniel v. Assessing Officer of Haifa (1969) 2 P.D.A. 496.
80 (1947) 28 Tax Cas. 293; See also, Fellowes-Gordon v. I.R. Comrs. (1935) 19 Tax Cas. 683; Rae v. Lazard Investment Co. Ltd. (1963) 41 Tax Cas. 1; I.R. Comrs. v. Reid's Trustees [1949] A.C. 361; Baron Inchyra v. Jennings [1965] 2 All E.R. 714. These cases illustrate the importance of distinguishing under the English tax system “capital” from “income”. In each of them the nature of the receipt was focused upon so as to determine whether the remittance was taxable as income or represented non-taxable capital. The remittance basis is chiefly used in the United Kingdom with regard to income from overseas securities and possessions chargeable under Schedule D, Cases IV and V. Schedule E and Schedule D, Case VII, also contain provisions for taxation on the basis of remittal.
81 Section 24. A similar device however without a debt instrument, can also be envisaged. Suppose the taxpayer deposits sums in a savings account outside Israel. For purposes of our example let us suppose that the interest on such accounts accrues annually and is credited on the last day of the calendar year. If the taxpayer seeks to import capital in the amount of interest accruing on his account, he need only withdraw a similar sum a day before the interest is credited. Such a withdrawal would represent capital if transacted after the first year of the account's existence. In later years interest would accrue on interest previously credited and the sum withdrawn would have to be slightly lower than the sum credited as interest. Of course, if this process is repeated at frequent intervals the account would consist entirely of amounts previously credited as interest. The question as to the capitalization of these receipts would then arise.
82 See Gresham Life Assurance Society v. Bishop [1902] A.C. 287; Thompson v. Moyse [1961] A.C. 967.
83 Scottish Mortgage Co. of New Mexico v. McKclvie (1886) 2 Tax Cas. 165; Universal Life Assurance Society v. Bishop (1899) 4 Tax Cas. 139.
84 Timpsons Executors v. Yerbury (1936) 1 K.B. 645; Walsh v. Randall (1940) 23 Tax Cas. 55.
85 Carter v. Sharon [1936] 1 All E.R. 720.
86 This article of the Proposed Treaty is somewhat similar to section 861 (a) (2) (B) of the United States Internal Revenue Code which regards dividends paid by a foreign corporation to be from sources within the United States “unless less than 50 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was effectively connected with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected with the conduct of a trade or business within the United States bears to its gross income from all sources ….”
The Proposed Treaty adopts a similar pattern but demands that 85 percent of the gross income be derived from the Contracting State in which the permanent establishment is located. It does not provide for the allocation of dividends as does section 861 (a) (2) (B). Unlike the United States Internal Revenue Code the Proposed Treaty does not require the income generated at the location of the permanent establishment to be attributable to a trade or business carried on by means of such an establishment.
87 The general rule is similar to that of the United States Internal Revenue Code as embodied in section 861 (a) (1):
Interest from the United States, any Territory, any political subdivision of a Territory or the District of Columbia, and interest on bonds, notes, or other interest bearing obligations of residents, corporate or otherwise …
88 The exception to the general rule is generally in line with the exceptions of sections 861(a)(1)(B), 861(a)(1)(C) and 861(a)(1)(D) of the United States Internal Revenue Code. The Proposed Treaty has not developed a formula based on gross income or any other measuring rod to distinguish between interest from within and without a Contracting State. By contrast, the exceptions referred to above are based entirely on the ratio of gross income derived from sources within the United States (for purposes of 861 (a) (1) (C) and 861 (a) (1) (D) such gross income must be effectively connected with the conduct of a trade or business) and gross income derived from without the United States.
89 Section 861 (a) (5) of the United States Internal Revenue Code provides a similar source rule for rentals and royalties.
90 O.E.C.D. Model Convention, article 12.
91 The United States Internal Revenue Code does not contain a special source rule for all income derived from real property. Rental income is dealt with in section 861 (a) (4) and is from sources within the United States if the rental property (whether real or personal) is situated therein. Section 861 (a) (5) provides a similar source rule for income derived from the sale of real property.
92 O.E.C.D. Model Convention, article 6.
93 Article 5 (5).
94 Section 861 (a) (3) of the United States Internal Revenue Code provides a similar rule with respect to the location of income from personal services. Such income is from sources within the U.S. if the services are “performed in the U.S.”. The Proposed Treaty's rule is, however, more comprehensive than the rule of section 861 (a) (3). Thus, it refers to the furnishing of the services of others and to compensation received for the performance of personal services aboard ships or aircraft. The source rule of section 861 (a) (3) of the United States Internal Revenue Code is greatly modified by its exception applicable only to non-residents. Services performed by such taxpayers within the United States do not give rise to income from sources within the United States if the taxpayer is present for a period of less than 90 days during the taxable year within the country and does not receive remuneration in excess of 3000 dollars. Moreover, such services must be supplied as an employee or under a contract with the persons enumerated in section 861(a)(3)(C)(i) or 861(a) (3) (C) (ii). This provision is comparable to that of article 18 of the Proposed Treaty. The latter, however, has adopted it in dealing with the taxing of personal service income. The United States Internal Revenue Code rules such income to be from without the United States rather than exempt it from the taxation of the United States. The Israeli rule as embodied in section 5 (2) and 5 (3) of the Israeli Income Tax Ordinance has adopted the approach of the United States Internal Revenue Code.
95 O.E.C.D. Model Convention, articles 14, 15.
96 Section 861 (a) (6) of the United States Internal Revenue Code treats as income from sources within the United States:
gains, profits, and income derived from the purchase of personal property without the United States (other than within a possession of the United States) and its sale within the United States.
Unlike the rule of the Proposed Treaty this source rule requires that the purchase of the goods be made without the United States. The United States Internal Revenue Code does not establish a source rule for income derived from the purchase and sale of goods within the United States. Such income will therefore come under section 863 of the Code but will be totally apportioned to sources within the United States. In the final analysis the source rules of the Proposed Treaty and the United States Internal Revenue Code both concentrate on the place of sale.
97 This is the rule under the United States Internal Revenue Code. See, Treas. Reg. 861–7 (c).