An amendment to the Income Tax Ordinance that was recently enacted obligates financial institutions to identify the residency and citizenship of their foreign account holders. The financial institutions are required to report the information to the Israel Tax Authority, so that the ITA can then relay that information to the relevant foreign tax authority.

Consequently, provisions of the Ordinance that, up until now, had banned information exchanges between tax authorities, were amended accordingly, and provisions were added to the Ordinance that impose financial sanctions on financial institutions that fail to transfer the compulsory information, or that transmit partial information to the ITA (sanctions can reach 250,000 NIS for each non-transfer or partial transfer of information).

The amendment comes in the wake of FATCA enacted in the United States in order to prevent US citizens and companies owning financial assets outside the US from evading their obligations to file tax reports and pay taxes to the US Internal Revenue Service.

Pursuant to the FATCA, financial institutions outside the US, such as banks, are obligated to examine all accounts managed by them or through affiliates to identify account-holders who are US citizens and transfer financial information relating to them to the IRS, failure to comply with this requirement exposing them to US sanctions.

The State of Israel already signed a bilateral agreement with the United States about two years ago, regarding implementation of the provisions of the FATCA.

According to the FATCA Agreement, the State of Israel is obligated to inform Israeli financial institutions to examine all accounts managed by them and identify all US citizens or residents who directly or indirectly hold financial accounts at their institutions, and report information about them to the ITA, which, in turn, must relay this information to the IRS.

Additionally, the State of Israel has joined the OECD multilateral agreement regarding information exchange – the Common Reporting Standards agreement (the “CRS”), which has been signed by more than 90 countries. Pursuant to the CRS, the State of Israel is obligated to amend relevant Israeli laws and to begin transmitting information to foreign tax authorities by the end of 2018.