Israeli has adopted the automatic exchange of information (also referred to as “AEOI”) system between tax authorities. Under the AEOI system, which is based on the common reporting standard (also referred to as “CRS”) as developed by the Organisation for Economic Co-operation and Development (also referred to as “OECD”), Israeli banks will be required to report residents of foreign countries to the tax authorities of those countries. This reporting requirement will apply to certain Canadian residents and US residents such as US citizens and Green Card holders who own bank accounts in Israel.
Under AEOI regulations adopted by the Finance Committee of the Knesset, the Israeli parliament, the Israeli Ministry Finance will make an initial partial report on owners of Israeli bank accounts who declared that they were residents of foreign countries. A full report including owners of undeclared bank accounts suspected of being foreign residents will be provided as of September 2020.
The adoption of AEOI regulations by the Knesset will have especially important implications for Canadian residents and US residents who hold Israeli bank accounts. Both countries impose foreign bank account reporting requirements on their residents such as citizens and permanent residents. Failure to comply with these reporting requirements can result in significant penalties levied by the Internal Revenue Service (IRS) in the United States and the Canada Revenue Agency (CRA) in Canada. In addition, in 2014, the United States adopted Foreign Account Tax Compliance Act (FATCA), which requires non-US financial institutions to report bank accounts held by US residents such as US citizens and Green Card holders to the IRS. Many countries, including Canada, have concluded intergovernmental agreements with the United States to comply with FATCA.
The AEOI regulations may affect as many as one million foreign residents who hold Israeli bank accounts. Israeli bank accounts will likely ask these account holders to file tax declarations and reports. The adoption of these regulations is motivated by the Israel Tax Authority’s interest in a reciprocal exchange of information with foreign tax authorities to obtain information on Israeli citizens residing abroad or owning overseas bank accounts.
Under the regulations, an Israeli bank will examine whether it has a documented up-to-date address for the account holder. If the bank does not have such an address, it will conduct an electronic scan of any indication about the account holder’s residence in a foreign country. This can include an examination of the following: a residential address in a foreign country, a foreign telephone number, a continuous order to transfer funds to an account in a foreign country, or a power of attorney for an address in a foreign country. The bank will also verify formal documentation (e.g. photo identification). Depending on the results of the examination, the bank may classify the account as belonging to a foreign resident.
Should an Israeli conclude that there are significant signs of residence in a foreign country, the account holder shall have the opportunity to contest the classification of foreign resident. The bank will contact the account holder and notify him or her of its intention to classify the account as being held by a foreign resident. The account holder may examine the circumstances and present evidence to demonstrate that the bank account is not subject to the AEOI reporting requirements.
Bank accounts with a balance of over $1 million USD are subject to enhanced checking procedures. However, certain Israeli financial institutions such as insurance companies and large interest-free loan societies are exempted from the application of the AEOI regulations because these institutions already report foreign resident account holders.
If you reside outside of Israel and hold an account with an Israeli financial institution, we recommend that you consult us to determine if your account is subject to the AEOI reporting requirements and if you are in compliance with your country’s financial reporting requirements.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.