Most of you have heard about the San Andreas Fault, which runs nearly 1,300
kilometers through California. It is caused by two continental plates colliding
against each other and is the cause of earthquakes in the area. Expatriates
living in Israel may feel you are caught between two continental plates when you
try managing your overseas bank accounts and investment
Certain major overseas financial
institutions have been requiring their Israeli resident clients to liquidate
their accounts. A recent letter from one of these financial institutions
situated in the United States says: “Our records indicate that you are currently
a resident of Israel and are affected by recent amendments to Israeli law
concerning investment accounts carried by foreign institutions. These amendments
place significant restrictions on our ability to service the investment accounts
of residents of Israel. Accordingly, your account at… is being restricted to
liquidating orders only. This means that you may sell your current investments,
but no new investments may be purchased in your account. All decisions relating
to the timing of your liquidations must be made without our input.”
financial institution probably has in mind the Efficiency of Enforcement
Procedures in the Securities Authority Law (legislation amendments), 2011 (Book
of Laws 2274, passed by the Knesset on January 27, 2011). This is a lengthy
piece of legislation aimed making enforcement by the Israel Securities Authority
(ISA) of the laws more efficient.
Section 15 of the Securities Law
stipulates that it is forbidden to offer securities to the public in Israel
without first publishing a prospectus approved by the Israeli Securities
But there are exceptions. According to Section 15, a public
offering does not include an offer to:
• 35 persons/entities or less in Israel
during any given 12 month period and/or
• any number of investors of the types
listed in an Annex “classified investors.”
The amendment expands the
types of the investors to whom it is permitted to offer securities, without
triggering the public-offering rules and the Israeli requirement to publish a
prospectus. In particular, classified investors now include “sophisticated
Consequently, one alternative being
offered by foreign financial institutions not regulated in Israel is for Israeli
resident clients to sign a confirmation that you meet the criteria of being a
“sophisticated client” and consent to being treated as such under the Israeli
investment laws. A “sophisticated client” is an individual who meets two of the
following three criteria:
• holds cash, deposits, financial assets and/or
securities (excluding properties) worth more than NIS 12 million;
expertise in the capital markets or was employed for at least a year in a
professional role that requires such expertise;
• during the four preceding
quarters he/she executed at least 30 transactions on average per quarter (not
including transactions performed on his/her account by his/her portfolio
These conditions are onerous and probably do not apply to most
Investors who are unable to sign such a “sophisticated client”
confirmation may be asked to liquidate their investment account, as their
financial institution is unwilling to be exposed to the requirements of
supervision by the Israeli Securities Authority.
Nevertheless, there is
an alternative solution available to these “orphaned investors.”
as a non-Israeli portfolio manager and/or financial institution complies with
the following conditions, it seems there should be no need for them to be
registered in Israel:
• be physically out of Israel when service is provided;
be resident out of Israel;
• performs service not in a random fashion (which
shouldn’t be a problem if the service provider is regulated abroad);
communication for service is provided out of Israel.
practical arrangement for Israeli resident investors to consider is to appoint
an investment professional who is licensed in Israel with the ISA. This
investment professional will help you identify your risk profile, investment
goals and asset-allocation requirements.
The investment professional will
also attend to the Israeli regulatory requirements that need to be attended
Thereafter, the investment professional will interface with the
non-Israeli portfolio manager and/or financial institution and provide them with
the information required to help them effectively manage the client’s investment
requirements. The Israeli resident client continues to be a client of the
overseas financial institution, but no investment management services need to be
provided in Israel by the non- Israeli portfolio manager and/or financial
The above deals with Israeli Securities
Law issues for any Israeli investor who invests abroad.
or green-card holders in Israel face an additional set of hurdles under US law
when you attempt to manage your investment accounts. Here are some of the issues
you may face in this regard: US persons are required to file US income-tax
returns regardless of their residency status. This reporting is required even if
the individual enjoys the 10-year tax exemptions granted by Israel to new
resident olim. The reporting requirements are complex, but it is important for
US citizens residing outside of America to be familiar with them and to ensure
that your financial affairs are reported accurately and on time.
taxpayer who has a financial interest or signatory right over financial accounts
with an aggregate value exceeding $10,000 in a country outside the US at any
time during the taxable year must file a Report of Foreign Bank and Financial
Account, known as the FBAR. This must be filed with the IRS on or before June 30
the following year even if no tax is due. Failure to file a FBAR form on time
and voluntarily may result in steep penalties.
In addition to the FBAR
obligations, US taxpayers are also obligated to inform the IRS about any
investments you may have in so-called Passive Foreign Investment Companies
(PFICs), which include non-US companies, partnerships, mutual funds and
US persons invested in PFICs must pay income tax on all
distributions and appreciated share values regardless of whether capital-gains
tax rates would normally apply. An extra US tax form (Form 8621) must be
submitted annually for each PFIC held. These strict guidelines are intended to
discourage ownership of PFICs by US investors.AMERICAN ADDRESS
expatriate Americans recently have been frustrated because some banks and
investment companies in the US will not allow them to open accounts if they have
a foreign residence and cannot provide a valid American address. They base this
on the extra compliance requirements that US financial institutions face under
the Patriot Act. This has resulted in many US expatriates seeking investment
solutions outside of the US.
This led to the Foreign Tax Compliance Act
(FATCA), signed into law in 2010 by President Barack Obama as part of the US
jobs bill known as the HIRE Act. It is intended to crack down on the use of
overseas accounts for taxevasion purposes by American citizens.
will add significantly to the tax-reporting burdens for American citizens,
foreign owners of US investments and income-generating assets and all
non-American financial-services institutions (such as banks, trusts and
investment firms) that have American account holders. Effective from July 13,
2013, foreign financial institutions and banks are obligated to identify any US
persons who are account holders and report their accounts to the IRS.
part of the US authorities’ quest to obtain information about the assets of US
persons, from January 2012 any US persons with foreign financial assets worth
more than $50,000 will also have to start filing Form 8938, listing the assets
that they have held since January 1, 2011. This form requires a US taxpayer to
supply “the maximum value” of their assets during the taxable year in question
as well as various other details about the asset or account.
solutions for US persons residing in Israel to check out include:
• Ensure that
your US tax reporting is up-to-date.
• Ensure that you do not have any
PFICs in your investment portfolios.
• Ensure that the financial
institutions hosting your accounts provide proper year-end reporting (Form 1099
– Summary of Income and Form 8938) so that your annual income tax return can be
• Ensuring that your portfolio manager is
• Ensure that you work with professionals in Israel who
are licensed by the ISA.
We do not expect Israeli banks or investment
companies to be willing to fulfill these new requirements, and some have already
started to turn away American customers. These problems are not going to go
away, and American clients should consider moving into US-compliant investments
as soon as possible, with a view to avoiding crisis situations when it comes to
filing your tax and other US returns.
Finally, reporting and paying taxes
is bad enough. Always check whether you are eligible for double-tax relief, such
as a foreign tax credit, under the tax laws of the relevant countries and/or
under a double-tax treaty. Do this early enough, because if you pay tax in the
“wrong” country, the other country may not allow a foreign tax credit.
always, consult experienced professional advisers in each country at an early
stage in specific email@example.com firstname.lastname@example.org Philip
Braude, an accountant, personal financial planner and investment marketer
licensed by the ISA, is CEO of Anglo Capital Ltd.
Leon Harris is an
Israeli certified public accountant.