Article III of the Protocol amends two of the source rules in Article 4 (Source of Income)

of the Convention. Both changes are technical changes necessary to conform the source rules to the substantive taxing rules of the Convention as they are amended by the Protocol. Paragraph 1 of Article III amends the source rule for gain from the sale or exchange of personal property to make the source rule for gain on the disposition of corporate shares reciprocal. This change conforms the source rule to the rule in Article 15 (Capital Gains) for the taxation of gain on the disposition of corporate shares, which is amended by Article X of the Protocol to make it apply reciprocally. As provided in paragraph 3 of Article XIII of the Protocol, this source rule applies notwithstanding the saving clause of paragraph (3) of Article 6 (General Rules of Taxation).

Paragraph 5 of the Exchange of Notes relates to paragraph 1 of Article III of the Protocol. It notes that, in applying the rules of the Convention to gain received by a U.S. resident on the disposition of shares in an Israeli corporation, section 865(h) of the Code say be applied to limit the foreign tax credit allowed to the U.S. resident on a per-item of income basis.

Paragraph 2 of Article III of the Protocol amends paragraph (7) of Article 4 of the Convention to conform the language of the source rule for Government remuneration, dealt with in Articles 21 (Social Security Payments) and 22 (Governmental Functions), to the broadened definition of the term "public funds of one of the Contracting States" in Article 22, resulting from Article XI of the Protocol.