In July 2014, an amendment to the Israeli Joint Investment Trust Law, 1994 was published, creating, for the first time, a route to allow foreign funds to offer units in Israel to the general public.
Prior to the amendment, the offer of foreign funds to the public in Israel was subject to the compliance with all regulatory requirements imposed on Israeli funds, including the requirement to publish a prospectus approved by the Israel Securities Authority (the ISA). As a result, no foreign funds were offered to the public in Israel.
The main objective of the amendment, the entry into force of which was subject to the passing of enabling regulations, was to allow the Israeli public to diversify its investment portfolio, lower the costs of investment and increase competition in the mutual fund market.
On 5 May 2016, the Joint Investment Trust (Offer of Units of a Foreign Fund) Regulations ("the Regulations") were published in the Official Gazette. Pursuant thereto, they will come into force six months following the date of publication, namely on 5 November 2016.
According to the Regulations, the ISA may permit a foreign fund to offer its units to the Israeli public subject to the fulfilment of certain criteria.
These include the following:
- The foreign fund must operate under the US Investment Company Act of 1940 or European Directive (UCITS) and have received a permit from the regulatory authority in its country of origin to offer securities/units in that country.
- The net asset value of the foreign fund must be at least US$50 million and its units must be available for purchase in the EU or the US for a period of at least twelve months prior to their offering in Israel.
- The total value of the foreign fund’s assets and client portfolios managed by the fund manager, a person controlling it or a company controlled by such person must be at least US$20 billion.
- The foreign fund manager must manage no fewer than five funds whose units are offered to the public for at least five years, and the total value of assets held in each fund for the past two years must be at least US$500 million.
- Unit prices of the foreign fund must be regularly published on a website and be freely available to the public.
- The foreign fund must not specialise in investments in Israel.
- The foreign fund manager must deposit a bank guarantee issued by a bank in Israel for at least NIS 1 million (or equivalent value thereof in securities) for the benefit of the ISA or, in lieu of a bank guarantee, a deposit in an account at a bank in Israel (such amount to be updated annually as against any change in the cost of living index).
- The foreign fund manager must deposit in an account at a bank in Israel a certain sum calculated on the basis of the value of units held by Israeli distributors in a cash deposit or in a securities account (such amount to be updated annually as against any change in the cost of living index).
- The manager of the foreign fund must appoint a representative in Israel to serve as liaison between itself and the ISA and between itself and the unit holders in Israel.
- If the fund is publicly traded in Israel, its units must also be listed for trading on a foreign stock exchange.
The enactment of the Regulations clearly represents a significant step in increasing competition in the funds market in Israel, and creates opportunities both for foreign funds and Israeli investors. The ISA expects that marketing of such funds is likely to commence around the end of 2016 or in early 2017, once their registration has been completed.
The ISA did, however, take the opportunity, via a set of new guidelines, to remind investment advisers (in particular those of banks) of their statutory duties towards their clients, and to warn them against being driven to advise investments in foreign rather than local funds due to the possibility of collecting higher fees (in particular currency conversion fees). The ISA further warned of the need to avoid such potential conflict of interest, and to institute appropriate mechanisms to preserve the giving of objective advice. This, though, represents a climb-down from the position taken by the ISA when the Regulations were first bruited, at which time it had sought to prohibit banks from collecting currency conversion fees and custodian fees in connection with their marketing of foreign funds.
Also worthy of note is that the Israeli Tax Authority (the ITA) has yet to publish any guidelines which would apply specifically to the taxation of the activity of foreign mutual funds in Israel and the taxation of Israeli investors in such funds. In the absence of such guidelines, it would appear that the taxation of these funds and investors therein would be in accordance with the current provisions of the Israeli Income Tax Ordinance and the ITA's guidelines pertaining to mutual funds in general.
In light of the foregoing, it is recommended that foreign funds which are intending to offer units to Israeli tax residents seek specific tax advice and accordingly apply, if necessary, for a specific tax ruling from the ITA regarding the fund's activity in Israel and the tax implications for its investors.