UK-Israel Tax Treaty Planning: What Israeli Advisers Need to Know

The economic relationship between the UK and Israel has deepened significantly over the past decade. Israeli technology companies routinely establish UK subsidiaries or target UK customers, Israeli entrepreneurs relocate to London to access European markets, and UK-resident investors participate in Israeli venture capital funds and direct investments. The bilateral trade relationship, underpinned by the UK-Israel Trade and Partnership Agreement signed post-Brexit, creates a constant flow of income, capital, and personnel across the two jurisdictions. For Israeli law firms, accounting firms, and private wealth managers, the UK tax dimensions of these cross-border activities are increasingly important. Clients who establish UK operations, acquire UK assets, or spend time working in the UK may trigger UK tax obligations that interact with — and potentially duplicate — their Israeli tax liabilities. Understanding the mechanics of the UK-Israel Double Taxation Convention (originally signed in 1962 and subsequently amended) is essential to advising these clients effectively. The treaty allocates taxing rights between the two countries across the principal categories of income — business profits, employment income, dividends, interest, royalties, and capital gains — and provides mechanisms for the relief of double taxation. However, the treaty was negotiated in a different era and does not always provide clear answers to the questions raised by modern business models, particularly in the technology sector where value creation is often distributed across multiple jurisdictions.

One of the most significant UK tax risks for Israeli technology companies is the inadvertent creation of a permanent establishment in the UK. Under Article 5 of the UK-Israel treaty, a permanent establishment includes a fixed place of business through which the business of an enterprise is wholly or partly carried on — and extends to cases where an agent in the UK habitually exercises authority to conclude contracts on behalf of the Israeli company. For Israeli software companies that employ UK-based sales staff, maintain UK offices (even serviced offices or co-working spaces), or send employees to the UK for extended periods to work on client implementations, the PE analysis is critical. If a PE is found to exist, the profits attributable to that PE are subject to UK corporation tax under Part 2 of the Corporation Tax Act 2009, and the Israeli company must register with HMRC, file UK corporation tax returns, and comply with UK transfer pricing requirements in relation to transactions between the PE and the head office. The OECD's evolving guidance on the attribution of profits to permanent establishments — reflected in the UK's domestic legislation and HMRC's practice — adds further complexity. The authorised OECD approach requires a functional and factual analysis of the activities performed in the UK, the assets used, and the risks assumed, which may result in a significant proportion of the company's global profits being attributed to the UK PE. Israeli law firms advising technology companies on their UK market entry strategies should ensure that the PE risk is assessed before operations commence. Restructuring after HMRC has identified a PE is significantly more costly — both in terms of back taxes and penalties — than getting the structure right from the outset. Daniel Feingold regularly advises on PE risk assessments and can provide opinions that support the chosen structure.

Israel's tax regime for new immigrants — olim chadashim — provides substantial tax benefits for individuals who make aliyah (immigrate to Israel). Under Section 14 of the Israeli Income Tax Ordinance, new immigrants and senior returning residents are exempt from Israeli tax on their foreign-source income and gains for a period of ten years from the date of their immigration or return. During this period, they are also exempt from reporting requirements in respect of their foreign assets and income. For individuals who are dual UK-Israeli nationals, or who retain UK tax residence or domicile connections despite relocating to Israel, the interaction between the Israeli new immigrant exemption and the UK tax rules requires careful analysis. The UK does not recognise the Israeli exemption as a basis for relieving UK tax — if the individual remains UK-resident under the Statutory Residence Test in Schedule 45 to Finance Act 2013, their worldwide income and gains remain subject to UK tax regardless of their Israeli tax status. Even where an individual successfully establishes non-UK residence under the SRT, the temporary non-residence rules in section 10A of the Taxation of Chargeable Gains Act 1992 may apply to bring back into the UK tax charge gains realised during a period of temporary absence. The interaction with the UK-Israel treaty's residence tie-breaker provisions (Article 4) may also be relevant where an individual is resident in both jurisdictions under their respective domestic laws. Israeli private wealth managers and accounting firms advising olim with UK connections must ensure that the UK tax position is properly analysed alongside the Israeli benefits. A failure to do so can result in the client facing unexpected UK tax liabilities that substantially diminish the value of the Israeli exemption. Daniel Feingold advises on the UK tax implications of relocation from the UK to Israel and the application of the treaty tie-breaker provisions.

Both the UK and Israel offer generous tax incentives for research and development activities, and Israeli technology companies with UK operations frequently seek to claim R&D relief in both jurisdictions. In the UK, the R&D relief regime — comprising the merged scheme for accounting periods beginning on or after 1 April 2024, which replaced the former SME and RDEC schemes — provides either an enhanced deduction or a payable tax credit for qualifying R&D expenditure. For Israeli companies with UK subsidiaries or PEs carrying on R&D activities in the UK, the UK relief is available in respect of expenditure incurred on qualifying activities performed in the UK. The definition of qualifying R&D activity follows the guidelines issued by the Department for Science, Innovation and Technology, which require the project to seek an advance in science or technology through the resolution of scientific or technological uncertainty. The cross-border dimension introduces additional complexity. Where R&D activities are split between Israel and the UK — for example, where the core algorithm development takes place in Tel Aviv but the product localisation and testing occurs in London — the allocation of costs between the two jurisdictions must be commercially justified and consistent with the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010. HMRC has increased its scrutiny of R&D claims generally, and claims involving cross-border cost allocation are subject to particularly close examination. Israeli accounting firms advising technology clients with UK R&D activities should ensure that the UK claims are properly supported by contemporaneous documentation and that the allocation of costs between Israel and the UK is defensible. Daniel Feingold can advise on the interaction between the UK R&D relief regime and the transfer pricing rules in the context of UK-Israel structures.

The growing community of UK-Israeli dual nationals — whether individuals who have made aliyah from the UK, Israelis who have acquired UK citizenship through residence, or those born to parents of both nationalities — creates a substantial client base for Israeli advisers dealing with UK tax issues. The determination of UK tax residence is the threshold question for these individuals, and the Statutory Residence Test provides the framework for that determination. The SRT operates through a series of automatic tests (both for overseas residence and for UK residence) and a sufficient ties test that weighs the individual's connections to the UK against the number of days spent in the UK during the tax year. For dual nationals who travel frequently between Tel Aviv and London, the day-counting rules are particularly important — and the definition of a 'day' spent in the UK (presence at midnight, subject to the transit day and exceptional circumstances exceptions) must be carefully managed. The sufficient ties include the family tie (having a spouse, civil partner, or minor child in the UK), the accommodation tie (having accessible accommodation in the UK), the work tie (working in the UK for 40 or more days), the 90-day tie (having spent 90 or more days in the UK in either of the two preceding tax years), and the country tie (being present in the UK for a greater number of days than in any other single country). For an individual splitting their time between Israel and the UK, even a small number of additional UK days can tip the balance from non-residence to residence. Israeli private wealth managers and law firms advising dual nationals should recommend that their clients maintain detailed records of their travel patterns and UK connections, and should seek specialist UK tax advice where the residence position is borderline. Daniel Feingold has extensive experience of the SRT and can provide definitive opinions on UK residence status.

Daniel Feingold provides specialist UK tax counsel services to Israeli law firms, accounting firms, private wealth managers, and corporate advisory firms. He understands the commercial dynamics of the UK-Israel business corridor and the tax issues that Israeli professionals encounter when advising clients with UK connections. His areas of particular relevance to Israeli firms include UK-Israel treaty interpretation, permanent establishment risk assessments for Israeli companies, the UK tax implications of aliyah and the interaction with oleh chadash benefits, R&D tax relief for cross-border technology operations, the Statutory Residence Test for dual nationals, and HMRC enquiries involving Israeli-connected taxpayers. Daniel is available for conferences by video call and welcomes instructions from Israeli professionals. To discuss how he can assist, contact the clerks at Burnell Chambers on 020 3576 1203 or at clerks@burnellchambers.co.uk.