Article II of the Protocol amends Article 3 (Fiscal Residence) of the Convention.

Paragraph 1 of Article II of the Protocol adds a new subparagraph (c) to paragraph (1) of Article 3, clarifying the circumstances under which a U.S. citizen or "green card" holder is to be treated, for purposes of the Convention, as a U.S. resident. The new subparagraph (c) provides that a U.S. citizen or green card holder, who is not, under the provisions of this Article, a resident of Israel, will be treated as a resident of the United States for purposes of the Convention, and, thereby, entitled to treaty benefits, only if he has a substantial presence, permanent home or habitual abode in the United States. If such a person is a resident both of the United States and of Israel, whether he is to be treated as a resident of the United States or Israel for purposes of the Convention is determined by the tie-breaker rules of paragraph (2) of the Article. If, however, he is resident in the United States and not Israel, but has ties to a third State, in the absence of subparagraph (c), he would always be a resident of the United States, no matter how tenuous his relationship with the United States relative to that with the third State. For example, an individual resident of Mexico who is a U.S. citizen by birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case, has never lived in the United States, would not,

under this rule, be entitled to Israeli benefits under the Convention. On the other hand, a U.S. citizen employed by a U.S. corporation who is transferred to Mexico for two years but who maintains a permanent home or habitual abode in the United States would be entitled to treaty benefits under this rule.

Paragraph 3 of the Exchange of Notes clarifies the meaning of the term “a person resident in Israel”, as the term is used in subparagraph (a)(ii) of paragraph (1) of Article 3 (Fiscal Residence) of the Convention. The term is understood to refer to persons on whom taxes are imposed by Israel pursuant to the Income Tax Ordinance on income from sources outside Israel by virtue of their being Israeli citizens.

Paragraph 2 of Article II of the Protocol amends subparagraph (a) of paragraph (2) of Article 3 of the Convention to correct a cross-reference to a section of the Israeli Income Tax Ordinance that had changed from section 9(16) to section 35 between the time of the signing of the Convention and the negotiation of the Protocol.

Paragraph 3 of Article II of the Protocol amends paragraph (3) of Article 3 of the Convention. The paragraph defines the extent to which dual residents, other than individuals, are to be treated as resident in one of the Contracting States for purposes of the Convention. Under the Convention, the provision applies to dual resident corporations. The Protocol broadens to coverage to all non-individual dual residents. A corporation is resident in the United States if it is created or organized under the laws of the United States or a political subdivision. Under Israeli law a corporation is treated as a resident of Israel if it is either established there or managed and controlled there. Dual corporate residence, therefore, can arise if a U.S. corporation is managed in Israel. Under paragraph (3), the competent authorities are first to seek to settle the question of that person’s residence by mutual agreement, and determine how the Convention is to apply to that person. Unless or until the competent authorities make such a determination, however, the person is not to be treated as a resident of either Contacting State, except for purposes of certain specified Articles. Such persons may claim the benefits of the foreign tax credit under Article 26 (Relief from Double Taxation), and of protection against discrimination under Article 27 (Nondiscrimination). Thus, a dual-resident corporation may claim double taxation relief in one or both of the Contracting States that tax its worldwide income, and neither Contracting State can discriminate against a duel-resident corporation.

Since it is only for the purposes of deriving treaty benefits that such non-individual dual residents are excluded from the Convention, they may be treated as resident for other purposes, such as for determining whether treaty benefits should attach to payments made by such persons. For example, if a dual-resident corporation pays a dividend to a resident of Israel, the U.S. paying agent would withhold on that dividend at the appropriate treaty rate, since reduced withholding is a benefit enjoyed by the resident of Israel, not by the dual resident. The dualresident corporation which is the payor of the dividend would, for this purpose, be treated as a resident of the United States under the Convention. Paragraph 3, therefore, provides that a nonindividual dual resident shall be treated as a resident for purposes of payments of dividends, interest, and royalties by such persons, under paragraph 2 of Article 12 (Dividends), paragraphs (2) and (3) of Article 13 (Interest), and paragraph (l)(b) of a 14 (Royalties). Since information exchange under Article 29 (Exchange of Information and Administrative Assistance) is not

limited to residents of the Contracting States, information can be exchanged about dual residents. To the extent that the Convention is relevant for dual-residents it must enter into force for such purposes. Therefore, Article 31 (Entry Into Force) also applies to dual-resident corporations.

Paragraph 4 of the Exchange of Notes applies to paragraph (3) of Article 3. It clarifies the fact that when one of the provisions of the Convention applies to a dual resident, any other provision necessary to give effect to that provision will also apply. For example, as noted above, a dividend paid by a dual-resident corporation to a resident of one of the Contracting States is entitled to the benefit of the reduced rate of tax at source. The source rule in paragraph (1) of Article 4 (Source of Income) will apply to determine the source of a dividend for this purpose, even though Article 4 is not specified in paragraph (3) of Article 3 (Fiscal Residence).