Israeli Tax Alerts | Practical Interpretations | 2008-2020

144 Applying Anti-Abuse Provisions to Tax Treaties General As a general rule, tax treaties provisions should prevail over the domestic laws of the contracting states. According to a landmark decision of the Tel-Aviv District Court (the 5663/2007 the Yanco-Weis Decision), Israeli domestic law provisions, which are designed to prevent tax abuse and tax evasion, should also apply to tax treaties concluded by Israel, since the domestic law provisions "merge" or combine with the applicable treaty provisions. In addition, a reliance on tax treaty provisions should be performed in order to prevent double taxation and not for abusive purposes. Any treaty should be interpreted in good faith, as this fundamental term is used in the legal world. The intention of treaty parties should be interpreted in light of the current sophisticated tax planning business world. The Dispute In that case, a company that was established under Israeli law has "migrated" to Belgium (a Belgian Certificate of Fiscal Residency was provided). The ITA argued that, according to Section 86 of the ITO (dealing with artificial transactions), this "migration" was motivated solely by illegitimate tax abuse purposes and not by any business purposes. It is therefore a sham transfer of residency. In addition, the company has been managed and controlled from Israel and most of its income is from Israeli sources. Therefore, the company should be classified as an Israeli tax resident according to the ITA. The company's position was that according to the Israel - Belgium Tax Treaty, it should be regarded as a Belgian tax resident, no anti-abuse provisions are included in the Treaty and a reference to Israeli domestic anti-abuse provisions is prohibited since only "treaty-level" provisions should apply. The Tel Aviv Court's Decision A limitation of benefit clause, according to the standards of the Israeli domestic law as well as the international law, should be read into the texts of treaties for the avoidance of double taxation, which were concluded by Israel, in cases where treaty abuse is evidenced and proved and also in cases where treaties do not include anti-abuse provisions. As for the evidential threshold required in order to establish an "abuse", the court refers to the OECD Commentaries: "Whilst these rules do not conflict with tax conventions, there is agreement that Member countries should carefully observe the specific obligations enshrined in tax treaties to relieve double taxation as long as there is no clear evidence that the treaties