ARTICLE 1

Taxes Covered

Paragraph (1) designates the taxes of the Contracting States which are the subject of the Convention. With respect to the United States, the subject taxes are the Federal income taxes imposed by the Internal Revenue Code (“Code”). The Convention also applies to the excise tax on insurance premiums paid to foreign insurers, under section 4371 of the Code. However, the excise tax on insurance premiums is covered only to the extent that the foreign insurer does not reinsure the risks, directly or indirectly, with a person who is not entitled to exemption from such tax under this or another United States tax convention. This limitation on coverage is intended to clarify that persons not entitled to the benefits of this or another convention may not use an insurer in Israel as a conduit for the purpose of obtaining convention benefits. Moreover, as provided by paragraph (5) of Article 6 (General Rules of Taxation). The United States reserves the right to impose taxes under Code sections 531 (accumulated earnings tax) and 541 (personal holding company tax), except as provided in such paragraph (5).

United States taxes not generally covered by the Convention include the estate, gift and generation skipping transfer taxes, the Windfall Profits Tax, Federal unemployment taxes and social security taxes imposed under sections 1401, 3101 and 3111 of the Code.

In the case of Israel, paragraph (1) provides that the Convention applies to the income tax (including capital gains tax); the company tax; the tax on gains from the sale of land under the land appreciation tax law; the tax on profits levied on banking institutions and insurance companies under the Value Added Tax Law; and compulsory loans made with respect to taxable years ending before April 1, 1988, with respect to corporations that became subject thereto before April 1, 1977. This reflects the fact that compulsory loans are being phased-out from Israeli law. See the discussion of Article 26 (Relief from Double Taxation) for an analysis of the treatment of these compulsory loans for purposes of the United States foreign tax credit.

Pursuant to paragraph (2), the Convention will also apply to taxes substantially similar to those covered by paragraph (1) which are imposed in addition to, or in place of, existing income taxes, after November 20, 1975 (the date of signature of the Convention).

Under paragraph (3), for purposes of Article 27 (Nondiscrimination), the Convention applies to taxes of every kind imposed at the national level.

Paragraph (4) provides that the competent authority of each Contracting State will notify the competent authority of the other Contracting State of any substantial amendment of the tax laws referred to in paragraph (1), or of the adoption of substantially similar taxes imposed in addition to, or in place of, those taxes by transmitting the texts of such amendments or statutes. Paragraph (5) provides for a similar exchange with respect to the publication of material concerning the application of the Convention, whether in the form of regulations, rulings or judicial decisions.