On June 30, 2014 an Intergovernmental Agreement ("IGA") was signed between the United States of America and the state of Israel in respect of the legislation commonly known as the Foreign Account Tax Compliance Act ("FATCA").
In general, the main objective of the IGA is to enable and ease the compliance of Israeli financial institutions (as such term is defined under FATCA). The basic concept of the IGA is that Israeli financial institutions, to which the FATCA provisions apply, will be able to comply with FATCA by providing information to an Israeli government agency, instead of to the Internal Revenue Service ("IRS"). The Israeli government will then supply all the information it has received from Israeli financial institutions to the United States.
The IGA signed between the United States and Israel is what is referred to as a "Model 1" IGA, which means that compliance with FATCA is performed via the local government. The covenants made by each government under the IGA are reciprocal. As a result of the IGA, US financial institutions will be obligated to identify accounts held by Israeli residents and submit that information to the US Government, which will then submit that information to the Israeli Government. Thus, as a practical matter, the IGA creates a kind of Israeli FATCA provisions with respect to United States financial institutions.
Below is a general outline of the key concepts contained in the IGA.
FATCA at a Glance
The provisions commonly known as FATCA were enacted in the US under the 2010 Hiring Incentives to Restore Employment (HIRE) Act and are mostly contained in §§ 1471-1474 of the Internal Revenue Code and the Treasury regulations promulgated thereunder. These provisions require institutions that are defined as Foreign Financial Institutions ("FFI") to identify "accounts" held by US persons. In general, under FATCA, FFIs include (i) banks; (ii) broker-dealers and other entities conducting custodial businesses; (iii) certain entities that conduct investment activities on behalf of customers; (iv) professionally managed investment funds or other entities that function or hold themselves out as collective investment vehicles that are established to invest, reinvest or trade in financial assets; (v) certain holding companies and treasury centers that are part of financial groups or that are “formed in connection with or are availed of” investment vehicles; and (vi) certain foreign insurance companies.
In order to identify the existence of an account held by a US person the FFI must implement a set of due diligence requirements. Depending on the nature of the FFI, it will often need to enter into an agreement with the IRS under which the FFI will report such accounts to the IRS and act as a withholding agent. An FFI that enters into an agreement with the IRS is referred to as a Participating FFI.
Under certain other circumstances, an FFI that meets certain criteria can still be FATCA compliant, without entering into an agreement with the IRS.
If an FFI does not enter into an agreement with the IRS and does not meet the criteria for being otherwise FATCA compliant, the FFI will be considered a Nonparticipating FFI. Any person making a so called "withholdable payment" to a Nonparticipating FFI must withhold 30% taxes at source.
Reporting Israeli Financial Institutions
Currently, there are 39 IGA's signed between the US government and other countries, 34 of which are Model 1 IGAs. Moreover, more than additional 50 countries have reached agreements in substance with respect to singing an IGA with the United States.
One of the main effects of the IGA is that generally Israeli FFIs will not need to enter into an agreement with the IRS in order to avoid the status of "Nonparticipating FFIs". In general, Israeli FFIs that would have otherwise been subject to FATCA reporting are defined as "Reporting Israeli FFIs". Reporting Israeli FFIs are not considered Nonparticipating FFIs and therefore not subject to FATCA withholding, unless they are determined to be in significant non-compliance with their obligations under the IGA.
Furthermore an Israeli Reporting FFI is deemed to be FATCA compliant if they meet the following conditions:

  1. The FFI identifies US accounts and reports annually to the Israeli government.
  2. For each of 2015 and 2016, the identity of each Nonparticipating FFI to which payments have been made is identified.
  3. The Reporting Israeli FFI complies with the applicable registration requirements on the IRS FATCA website (this is a registration requirement and is not equivalent to entering into an agreement with the IRS as a Participating FFI).
  4. If the Reporting Israeli FFI has elected to be responsible for FATCA withholding, then it has withheld 30% from any payments to Nonparticipating FFIs.
  5. If the Reporting Israeli FFI has not elected to be responsible for FATCA withholding, the Israeli Reporting FFI immediately provides the party that is responsible for withholding the information required to withhold correctly.

 Exchange of Information
The IGA sets out the information that each of the United States and Israel must obtain and provide to the other party. The information that must be maintained includes a long list of items. However, not all the information must be collected from the date the IGA enters into effect. Instead the IGA sets out a gradual schedule of the information that must be collected each year. As mentioned above, because the IGA is reciprocal, US financial intuitions will be required to identify accounts held by Israeli residents and submit that information to the US Government, which will then submit that information to the Israeli Government. 
It should be noted that each of the countries is allowed to collect information based on its own tax reporting rules. This is intended to allow both Israeli FFIs and the Israeli government to comply with FATCA without having to introduce new systems of reporting and accounting.  
The IGA also contains certain confidentiality and restriction of use provisions that each contracting state must abide by in respect of the information it receives from the contracting state.
Diligence Requirements
Annex I of the IGA includes a very extensive description of the diligence that is necessary for the purpose of determining the existence of what is defined as a US Reportable Account or accounts held by Nonparticipating FFIs.
The diligence requirements differ based on the following types of accounts:

Preexisting Individual Accounts – accounts belonging to individuals prior to July 1, 2014.

  1. New Individual Accounts – accounts opened by individuals on or after July 1, 2014.
  2. Preexisting Entity Accounts – accounts belonging to entities prior to July 1, 2014.
  3. New Entity Accounts – accounts opened by entities on or after July 1, 2014.

Effective Dates
The IGA itself enters into force on the date that Israel formally notifies the US in writing that it has completed the necessary internal procedures required to bring the IGA into force in Israel. The Government of Israel has issued a bill that would create the legislation in domestic Israeli tax law required to implement the IGA. The bill however has not yet been published as law.
In the interim however, from the point of view of US law, the IRS has indicated that it will treat Israel as having an IGA in force, based on the signing of the IGA on June 30, 2014.

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 The IGA is a very detailed and nuanced document which interfaces with the FATCA provisions themselves. The above is meant only to give a very broad idea of the issues addressed by the IGA and the manner in which FFIs may be affected. This update should not however be relied upon for specific circumstances and legal counsel should be consulted to address compliance in each particular case.