Article XIV of the protocol amends Article 27 (Nondiscrimination) of the Convention.

Paragraph (1) of Article XIV replaces paragraph (1) of Article 27 of the Convention with a new paragraph (1). The new paragraph conforms more closely to the corresponding paragraph in the 1981 U.S. Model. Paragraph 1, as amended, provides that a citizen of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State that are different from, or more burdensome than, the taxes and connected requirements imposed upon a citizen of that other State in the same circumstances. A citizen of a Contracting State is afforded protection under this paragraph even if he is not a resident of either contracting State. The paragraph also provides that the United States need not apply the same taxing regime to an Israeli citizen who is not resident in the United States that it applies to a U.S. citizen who is not resident in the United States because theme persons are not in the same circumstances. A U.S. citizen who is not a resident of the United States is subject to United States tax on his worldwide income, unlike a citizen of Israel who is not U.S. resident. Thus, Article 27 would not entitle an Israeli citizen not resident in the United States to the net basis taxation of U.S. source dividends or other investment income, which applies to a U.S. citizen not resident in the United States. A U.S. citizen who is resident in a third country, however, is entitled, under this paragraph, to the same treatment in Israel as an Israeli citizen who is in similar circumstances.

Paragraph 2 of Article XIV of the Protocol adds a new paragraph (4) to Article 27 (Nondiscrimination). Paragraph (4) specifies that no provision of the Article will prevent either

Contracting State from imposing the branch tax described in Article 14A (Branch Tax). Thus, even if the branch tax were judged to violate the provisions of the other paragraphs of the Article, neither contracting State would be constrained from imposing the tax.

During the course of the negotiation of the Second Protocol, understandings were reached regarding the application of Article 27 to two aspects of U.S. tax law. Section 1446 of the Code imposes on any partnership with income that is effectively connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a foreign partner. In the context of the convention, this obligation applies with respect to an Israeli resident partner's share of the partnership income attributable to a U.S. permanent establishment. There is no similar obligation with respect to the distributive share of, a U.S. resident partner. It is understood, however, that this distinction is not a form of discrimination within the meaning of paragraph (2) of the Article. No distinction is made between U.S. and Israeli partnerships, since the law requires that partnerships of both States withhold tax in respect of the distributive shares of non-U.S. partners. In distinguishing between U.S. and Israeli partners, the requirement to withhold on the Israeli but not the U.S. partner's share is not discriminatory taxation, but, like other withholding on nonresident aliens, is merely a reasonable method for the collection of tax from persons who are not continually present in the United States, and as to whom it may otherwise be difficult for the United States to enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in other cases of over-withholding, file for a refund. For the same reasons, it also is understood that these provisions in section 1446 do not violate paragraph (3) of the Article.

The TRA introduced section 367(e)(2) of the Code, which changed the rules for taxing corporations on certain distributions they make in liquidation. Prior to the TRA, corporations were not taxed on distributions of appreciated property in complete liquidation, although nonliquidating distributions of the same property, with several exceptions, resulted in corporate-level tax. In part to eliminate this disparity, the law now generally taxes corporations on the liquidating distribution of appreciated property. The Code provides an exception in the case of distributions by 80 percent or more controlled subsidiaries to their parent corporations, because the assets' built-in gain will be recognized when the parent sells or distributes the asset. This exception does not apply to distributions to parent corporations that are tax-exempt organizations or, except to the extent provided in regulations, foreign corporations. The policy of the legislation is to collect one corporate-level tax on the liquidating distribution of appreciated property; if and only if that tax can be collected on a subsequent sale or distribution does the legislation defer the tax. It is understood that the inapplicability of the exception to the tax on distributions to foreign parent corporations does not conflict with paragraph (3) of the Article. While a liquidating distribution to a U.S. parent will not be taxed, and, except to the extent provided in regulations, a liquidating distribution to a foreign parent will, paragraph (3) merely prohibits discrimination among corporate taxpayers on the basis of U.S. or foreign stock ownership. Eligibility for the exception to the tax on liquidating distributions for distributions to non-exempt, U.S. corporate parents is not based upon the nationality of the owners of the distributing corporation, but rather is based upon whether such owners would be subject to corporate tax if they subsequently sold or distributed the same property. Thus, the exception does not apply to distributions to persons that would not be so subject -- not only foreign corporations, but also tax-exempt organizations.