Kevin E. Packman is a Partner in our Miami office
While Israel welcomes immigrants, and even provides them with tax incentives, it is serious about ending any perceived notion that it is somehow complicit with taxes evaded by its foreign residents in their home country. As such, it plans to release information on accounts held by foreign residents to foreign tax authorities. Israeli residents who invest in the United States should also take note that the exchange of information will be reciprocal in nature.
Generally speaking, Israel taxes its residents on their worldwide income. However, the Israeli government provided a financial incentive to encourage immigration to Israel, otherwise known as aliyah. In 2008, Amendment 168 to the Income Tax Ordinance provided new immigrants and returning Israelis with a 10-year tax holiday. The holiday is actually a generous tax exemption that permits these new or returning residents to exclude their foreign income and capital gains from reporting and taxation in Israel. The exemption even extends to foreign income and capital gains obtained during the first 10 years of Israeli residency. Prior to Amendment 168, the exemption lasted for only five years.
Americans Are Still Liable For US Taxes
Perhaps because of or in spite of Amendment 168, a number of Americans became full time or part time residents of Israel. As such, it is natural that they would open one or more Israeli bank accounts. Furthermore, even if these individuals knew that they were supposed to continue filing United States income tax returns by virtue of their United States status, many of these Americans probably never heard of an FBAR.Therefore, these individuals failed to report the existence of their Israeli accounts to the United States authorities or to pay tax on these accounts. This should come as no surprise since, prior to 2009, many tax practitioners in the United States were unfamiliar with the extent of the FBAR filing obligation. Notwithstanding, some of the these individuals who failed to file FBARs did so willfully.
Israeli Tax Authority and Banks Cooperating With US Enforcement Efforts
As a result, at least three Israeli banks (or their Swiss subsidiaries) are part of United States enforcement efforts. These banks are reported to be Bank Leumi, Bank Hapoalim and Mizrahi Bank. On February 14, 2014, Monajem Hakimijoo, known as Manny Hakimi, a United States citizen pled guilty in Beverly Hills, California, to having held an unreported bank account as Mizrahi Bank in Israel and to filing a false tax return.1
Hakimi's troubles are simply the most recent, as it follows, the June 15, 2012, indictment of three Israeli – American tax preparers who were charged with helping their clients evade tax by hiding millions in undeclared Israeli banks, referred to as Bank A and Bank B.2 Then, exactly one year prior to Hakimi's plea, on February 14, 2013, Zvi Sperling, pled guilty to hiding assets in two Israeli banks, which were later reported to be Bank A: Mizrahi Tefahot Bank Ltd. and Bank B: Leumi Le-Israel Ltd.3
The Israeli newspaper Haaretz published an article on December 4, 2013, titled, "Israel fights against becoming tax haven for Diaspora Jews."4 Tax Authority Director, Moshe Asher, was quoted as telling a Jerusalem conference of the Institute of Certified Public Accountants that "Israel will not become a tax shelter for foreign residents." He went on to discuss that Israel plans to share information with foreign tax authorities on money held by foreign residents in Israel in exchange for the same information from foreign tax agencies on assets held by Israelis abroad.
Bloomberg BNA reported on February 11, 2014, in the Daily Tax Report that Israel was drafting an agreement with the United States for the reciprocal exchange of bank account information and plans to do so with other countries. Asher was quoted by BNA as having told the Association of Publicly Traded Companies on February 6, 2014, that "a decision is already brewing to exchange information about bank accounts between Israel and the United States." Perhaps Asher is referencing an Intergovernmental Agreement (IGA) created in an effort to assist countries in complying with FATCA. Alternatively, he could be referencing an agreement pertaining to accounts held in prior years.
Real Estate Investments Under Review, Too
Israeli authorities are also focusing on ownership of Israeli real estate by foreign investors. On December 13, 2013, Haaretz published an article titled, "An Israeli home away from taxes for many Diaspora Jews."5 The article stated that between 2005 and 2007 thousands of Swiss bank accounts were closed after their existence was revealed to governmental authorities in the United States, France and other Western countries. During this time the article stated many Jews from abroad purchased homes in Israel. Then in 2010 following the 2009 enforcement efforts designed to learn the identity of US account holders in Switzerland, Israeli real estate prices increased by 30%. The implication is that much of the Swiss money was put into real estate. However, perhaps even more shocking is Haaretz statement that more than $1 billion has been withdrawn by US citizens form Israeli banks. These funds have either been invested in Israeli real estate or transferred to other jurisdictions.
The extent to which funds utilized to purchase Israeli real estate are associated with money laundering, Israeli authorities are cooperating with foreign governments. Boaz Feinberg, who heads the Tax and Money Laundering Prohibition Department in the law firm of Zysman, Aharoni, Gayer & Co. was quoted by Haaretz as saying "When it comes to the prohibition on money laundering, Israel does not flinch from aiding foreign governments to seize assets. If in the past the state gave special weight to the fact that these were Jewish citizens, today it doesn't cut any slack to Jews who come here."
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