ARTICLE 26

Relief from Double Taxation

In order to avoid double taxation, each Contracting State agrees in this Article to provide to its citizens or residents a credit against its taxes for taxes paid by such persons to the other Contracting State.

The United States agrees to allow a United States citizen or resident as a credit against United States tax an appropriate amount of taxes paid or accrued to Israel in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle of paragraph (1)). In addition, in the case of a United States corporation owning at least ten percent of the voting stock of an Israeli corporation from which it receives dividends in any taxable year, the United States will allow credit for the appropriate amount of taxes paid or accrued to Israel by the Israeli corporation paying such dividends with respect to the profits out of which such dividends are paid. The appropriate amount will be based upon the amount of tax paid or accrued to Israel, but the credit is not to exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within Israel or on income from sources outside of the United States) provided by United States law for the taxable year. This provision does not require the United States to maintain a per-country or overall limitation in the future so long as the general principle of a foreign tax credit remains in effect. For the purpose of applying the United States credit in relation to taxes paid or accrued to Israel, the rules set forth in Article 4 (Source of Income) will

be applied to determine the source of income and the taxes referred to in paragraphs (l)(b) and (2) of Article 1 (Taxes Covered) will be considered to be income taxes. Whether Israeli taxes are paid or accrued is determined under the rules of the Code. A taxpayer may, for any year, claim a foreign tax credit under the rules of the Code. In that case, he would forego the rules of the Convention that guarantee income tax status for the specified Israeli taxes.

Paragraph (2) details the treatment for United States tax purposes of compulsory loans to Israel made by United States citizens or residents or by a subsidiary of a United States corporation. If for any taxable year a United States citizen or resident takes a credit against tax for a compulsory loan to Israel (which is included as a tax under paragraph (l)(b)(v) of Article 1 (Taxes Covered)), whether paid by such citizen or resident or by a corporation 10 percent or more of the voting stock of which is owned by such citizen or resident, then any interest received on such loan is not to be included in taxable income and no deduction is to be allowed for any interest subsequently assessed or collected by the United States; upon repayment or recoupment of the principal of the loan, the amount of the value in United States dollars received shall be treated as a refund for the year the loan was made of taxes paid to Israel for such year equal to the basis for such loan, and the amount of any tax credit taken shall be recomputed, notwithstanding the operation of any law or rule of law: any such amount in excess of such basis shall be included in taxable income for the year the repayment or recoupment is made: and no interest will be assessed or collected by the United States on any amount of tax due for the year the loan vas made except to the extent that interest was received from Israel on the loan. Thus, the United States, is to permit treatment of the compulsory loan payment as a creditable tax and will be entitled to its normal interest charges to the extent made on such loan, but not to exceed the amount actually received by the taxpayer.

Where the taxpayer has previously claimed an indirect credit for a compulsory loan payment made by a subsidiary corporation, the taxpayer at the time of payment of interest by Israel to the subsidiary will be considered to be the recipient of such Interest. The amount of the interest will be considered a contribution to the capital of the subsidiary by the taxpayer. As under section 905(c) of the Code, the recomputation and payment of tax shall be made without regard to any otherwise applicable statute of limitations on assessments. The Secretary of the Treasury will prescribe regulations he deems necessary to carry out the purposes of this paragraph, including rules for determining whether an amount included as a tax under paragraph (l)(b)(v) of Article 1 (Taxes Covered) has been taken as a credit against tax.

Under paragraph (3), Israel will allow a resident of Israel as a credit against Israeli tax the appropriate amount of income taxes paid or accrued to the United States and, in the case of an Israeli corporation owning at least ten percent of the voting stock of a United States corporation from which it receives dividends in any taxable year, will also allow credit for the appropriate amount of taxes paid or accrued to the United States by the United States corporation paying such dividends with respect to the profits out of which such dividends are paid. The appropriate amount will be based upon the amount of tax paid or accrued to the United States but will not exceed that portion of Israeli tax which such residents net income from sources within the United States bears to his entire net income for the same taxable year. For the purpose of applying the Israeli credit in relation to taxes paid or accrued to the United States, the rules set forth in Article 4 (Source of Income) will be applied to determine the source of income, and the taxes referred to

in paragraphs (1)(a) and (2) of Article 1 (Taxes Covered) will be considered to be creditable taxes.

The saving clause in paragraph (3) of Article 6 (General Rules of Taxation) does not apply to this Article. Thus, the provisions of this Article may be relied upon a citizen or resident of a Contracting State.