January 12, 2011

A user on a popular Israeli online forum recently posted a tax compliance issue that their Israeli bank notified them about. This type of question has become more common since the new changes in US tax and SEC requirements for US citizens living abroad went into effect. Please see the question and Dave Wolf's response below:

Question:

My bank just announced to me that they are OBLIGATED to sell my investment account, because ACCORDING TO THE LAW, AMERICAN CITIZENS ARE PROHIBITED FROM OWNING ANY TYPE OF SECURITIES (NIYAROT ERECH?) IN ISRAEL. This doesn't sound right to me, to say the least. I get it if we are talking about American citizens who are NOT Israeli citizens. But how can they prohibit an Israeli citizen from having an investment account in Israel?

Answer:

Some Israeli banks have indeed started to tell their US clients that they will only hold the US clients' monies in a deposit account. It will no longer be held in a US or Israeli securities account.

Some banks make a distinction between those US clients that live in the USA and those that live outside the USA. In the latter case, some Israeli banks will not restrict for the time being the US client from investing in US or Israeli securities.

This issue arose because of the new requirement under US tax and SEC rules for the Israeli banks regarding withholding tax requirements and compliance under the registered broker/dealer regulations.

This issue will become even more pressing in 2013, when the Foreign Accounts Tax Compliance Act ("FATCA") provisions need to be implemented by Israeli banks. These provisions impose a new 30% withholding tax on certain U.S. source payments made to "foreign financial institutions" (FFI) such as banks that refuse to identify certain U.S. investors, even if such U.S. persons directly or indirectly hold only non-U.S. assets.

FATCA will be a major challenge for non-U.S. financial entities. FFIs have three basic choices:
(1) enter into an agreement with the IRS to put procedures in place to identify and disclose U.S. account holders
(2) accept the 30% withholding tax on U.S. payments, or
(3) restructure their businesses to stop serving U.S. customers, stop offering (and owning) U.S. investments, or both.

For any further information, please contact Hacohen Wolf at 02-6222335. Hacohen Wolf is a U.S. and Israeli tax firm specializing in US tax compliance for individuals and corporations. You can find more information on our areas of expertise at the practice areas page.