(1) Tax shall be determined in the case of a resident of Ger-
many as follows:
a) Unless foreign tax credit is to be allowed under sub-para-
graph b), there shall be exempted from the assessment basis
of the German tax any item of income arising in Israel and
any item of capital situated within Israel which, according to
this Agreement, may be taxed in Israel.
In the case of items of income from dividends the preceding
provision shall apply only to such dividends as are paid to a
company (not including partnerships) being a resident of Ger-
many by a company being a resident of Israel at least 10 per
cent of the capital of which is owned directly by the German
company and which were not deducted when determining
the profits of the company distributing these dividends.
There shall be exempted from the assessment basis of the
taxes on capital any shareholding the dividends of which, if
paid, would be exempted according to the foregoing sen-
tences.
b) Subject to the provisions of German tax law regarding credit
for foreign tax, there shall be allowed as a credit against Ger-
man tax on income payable in respect of the following items
of income the Israeli tax paid under the laws of Israel and in
accordance with this Agreement:
aa) dividends not dealt with in sub-paragraph a) and distribu-
tions made by a real estate investment company;
bb) interest;
cc) royalties;
dd) items of income that may be taxed in Israel according
to paragraph 2 of Article 13;
ee) directors’ fees;
ff)
items of income that may be taxed according to Article 16.
c) The provisions of sub-paragraph b) shall apply instead of the
provisions of sub-paragraph a) to items of income as defined
in Articles 7 and 10 and to the assets from which such in-
come is derived if the resident of Germany does not prove
that the gross income of the permanent establishment in the
business year in which the profit has been realised or of the
company resident in Israel in the business year for which the
dividends were paid was derived exclusively or almost exclu-
sively from activities within the meaning of nos. 1 to 6 of
paragraph 1 of section 8 of the German Law on External Tax
Relations (Aussensteuergesetz); the same shall apply to im-
movable property used by a permanent establishment and
to income from this immovable property of the permanent
establishment (paragraph 4 of Article 6) and to profits from
the alienation of such immovable property (paragraph 1 of
Article 13) and of the movable property forming part of the
business property of the permanent establishment (para-
graph 3 of Article 13).
d) Germany, however, retains the right to take into account in
the determination of its rate of tax the items of income and
capital, which are under the provisions of this Agreement
exempted from German tax.
e) Notwithstanding the provisions of sub-paragraph a) double
taxation shall be avoided by allowing a tax credit as laid
down in sub-paragraph b)
aa) if in the Contracting States items of income or capital are
placed under differing provisions of this Agreement or at-
tributed to different persons (except pursuant to Article 9)
and this conflict cannot be settled by a procedure in
accordance with paragraph 3 of Article 24 and if as a
result of this difference in placement or attribution the
relevant income or capital would remain untaxed or be
taxed lower than without this conflict or
bb) if after due consultation with the competent authority of
Israel Germany notifies Israel through diplomatic channels
of other items of income to which it intends to apply the
provisions of sub-paragraph b). Double Taxation is then
avoided for the notified income by allowing a tax credit
from the first day of the calendar year, next following
that in which the notification was made.
(2) Tax shall be determined in the case of a resident of Israel
as follows:
a) Where a resident of Israel derives income which, in accord -
ance with the provisions of this Agreement, may be taxed in
Germany, Israel shall (subject to the laws of Israel regarding
the allowance of a credit of foreign taxes, which shall not
affect the general principle contained in this paragraph) allow
as a deduction from the tax on the income of that resident,
an amount equal to the income tax paid in Germany.
b) Such deductions shall not, however, exceed that part of the
income tax as computed before the deduction is given, which
is attributable to the income which may be taxed in Germany.