On September 12, 2016, the Israeli Supreme Court rejected a petition that was submitted against the implementation of the FATCA rules in Israel. The decision followed the enactment in August of new legislation which governs the implementation of the FATCA rules. The Supreme Court’s decision cleared the way for the automatic exchange of financial information under FATCA.

1. Background

The Foreign Account Tax Compliance Act (“FATCA”) was enacted in the United States in 2010 as part of the U.S. Treasury’s ongoing effort to combat offshore tax evasion and money laundering. FATCA is focused on disclosure of accounts held by U.S. persons at non-U.S. financial institutions.

In an attempt to reduce the burdens and costs of complying with FATCA, the U.S. Treasury, in collaboration with foreign governments, developed an alternative framework for FATCA compliance through intergovernmental agreements. Israel and the United States signed such an agreement on June 30, 2014 (the “FATCA Agreement”). The FATCA Agreement aims to increase tax compliance and provides for the implementation of FATCA based on domestic reporting and reciprocal automatic exchange of information regarding bank accounts and financial assets between the Israeli Tax Authority (the “ITA”) and the U.S. Internal Revenue Service (the “IRS”).

2. Recent Developments

Last July, the Knesset, Israel’s Parliament, passed a law (the “Law”) which amends the Income Tax Ordinance (New Version) of 1961 by adding new provisions relating to the implementation of FATCA and the FATCA Agreement. In addition, regulations that were promulgated last month (the “FATCA Regulations”) provided further guidance on compliance with the obligations under the FATCA Agreement, including the obligation of Israeli banks and financial institutions to conduct due diligence procedures for identifying reportable accounts, information to be exchanged and reporting deadlines. The Law became effective upon publication of the FATCA Regulations on August 4, 2016.

According to the FATCA Regulations, Israeli banks and financial institutions are required to identify account holders who are citizens of the United States or residents or for U.S. tax purposes (which includes Israeli Americans and Israeli Green Card holders), and to submit to the ITA information relating to such reportable accounts, including year-end account balances. The deadline for submission is September 20 of each year for the preceding year. The first submission for the years 2014-2015 was due on September 20, 2016, although as noted below, the submission date was slightly postponed. The exchange of information is done online, on a computerized system through the ITA’s Web site.

To the extent no reportable accounts were identified, the Israeli financial institution is nevertheless required to submit a report to the ITA confirming no such reportable accounts were identified, which report should be submitted by December 31, 2016 for the years 2014 and 2015, and for years 2016 and afterwards, until September 20 of the following year (that is, similar to the deadline for reportable accounts).

A petition against the Law was submitted to Israel’s Supreme Court. On September 12, 2016, the Court rejected the petition upholding the Law and canceled a temporary injunction which it had previously granted and which prevented opening access to the computerized system and exchange of information with the IRS until final decision in the petition. The final decision clarified that with respect to accounts that an Israeli financial institution classified as reportable accounts, no information would be exchanged with the IRS until the passage of 30 days following notice to an account holder of such classification, or, if such notice has already been provided and the account holder has objected to such classification, until the account holder receives a response to said objection.

Following the Supreme Court’s decision, the ITA released a statement on September 18, 2016 granting an extension to Israeli financial institutions to transfer the required information on reportable accounts to the ITA by September 30, 2016.