Tax Treaty Case Law around the Globe 2023

1. Introduction

This case deals with a levy that was imposed on foreign (non-Israeli) employees employed in Israel (the “Levy”) and whether it is compatible with the non-discrimination provisions included in the tax treaties signed between Israel and the countries of origin of these employees (Bulgaria, China, Moldova, and Romania).

The Levy in question was introduced in 2003 as part of the Israeli Economy Recovery Plan Act 2003 (the “Act”). Section 45(a) generally provides that an employer will be subject to a levy at a rate of 20% of the total amount of income it paid a foreign employee in that taxable year. In certain industries, the Levy rate is reduced to 15%. The Act specifically prohibits the deduction of this Levy, directly or indirectly, from the employee’s salary.

The taxpayers in this case are human resources companies that operate in the construction sector. The taxpayers were audited by the Israeli Tax Authority (ITA) as they did not pay the Levy with respect to foreign workers they employed. On a joint appeal first to the District Court of Tel Aviv and then to the Supreme Court of Israel, S. 104the taxpayers argue that the Levy should be cancelled because the imposition of thi...