Global Forum On Transparency and Exchange of Information For Tax Purposes: Global Forum On Transparency and Exchange of Information For Tax Purposes Peer Reviews: Israel 2013

GLOBAL FORUM ON TRANSPARENCY AND EXCHANGE
OF INFORMATION FOR TAX PURPOSES

Peer Review Report
Phase 1
Legal and Regulatory Framework
-:HSTCQE=WUWZW]:
ISBN 978-92-64-20252-8
23 2013 23 1 P
Global Forum on Transparency and Exchange of Information
for Tax Purposes
PEER REVIEWS, PHASE 1: ISRAEL
The Global Forum on Transparency and Exchange of Information for Tax Purposes is the
multilateral framework within which work in the area of tax transparency and exchange of
information is carried out by 120 jurisdictions, which participate in the Global Forum on an
equal footing.
The Global Forum is charged with in-depth monitoring and peer review of the implementation
of the international standards of transparency and exchange of information for tax purposes.
These standards are primarily reected in the 2002 OECD Model Agreement on Exchange
of Information on Tax Matters and its commentary, and in Article 26 of the OECD Model
Tax Convention on Income and on Capital and its commentary as updated in 2004. The
standards have also been incorporated into the UN Model Tax Convention.
The standards provide for international exchange on request of foreseeably relevant
information for the administration or enforcement of the domestic tax laws of a requesting
party. Fishing expeditions are not authorised but all foreseeably relevant information must be
provided, including bank information and information held by duciaries, regardless of the
existence of a domestic tax interest or the application of a dual criminality standard.
All members of the Global Forum, as well as jurisdictions identied by the Global Forum
as relevant to its work, are being reviewed. This process is undertaken in two phases.
Phase 1 reviews assess the quality of a jurisdictions legal and regulatory framework for
the exchange of information, while Phase 2 reviews look at the practical implementation of
that framework. Some Global Forum members are undergoing combined Phase 1 and
Phase 2 reviews. The Global Forum has also put in place a process for supplementary
reports to follow-up on recommendations, as well as for the ongoing monitoring of
jurisdictions following the conclusion of a review. The ultimate goal is to help jurisdictions
to effectively implement the international standards of transparency and exchange of
information for tax purposes.
All review reports are published once approved by the Global Forum and they thus represent
agreed Global Forum reports.
For more information on the work of the Global Forum on Transparency and Exchange of
Information for Tax Purposes, and for copies of the published review reports, please refer to
www.oecd.org/tax/transparency and www.eoi-tax.org.
ISRAEL
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Global Forum
on Transparency
and Exchange
of Information for Tax
Purposes Peer Reviews:
Israel
2013
PHASE 1
July 2013
(reflecting the legal and regulatory framework
as at April 2013)
This work is published on the responsibility of the Secretary-General of the
OECD. The opinions expressed and arguments employed herein do not
necessarily reflect the official views of the OECD or of the governments of its
member countries or those of the Global Forum on Transparency and Exchange
of Information for Tax Purposes.
This document and any map included herein are without prejudice to the status
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and boundaries and to the name of any territory, city or area.
ISBN 978-92-64-20252-8 (print)
ISBN 978-92-64-20253-5 (PDF)
Series: Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews
ISSN 2219-4681 (print)
ISSN 2219-469X (online)
The statistical data for Israel are supplied by and under the responsibility of the relevant
Israeli authorities. The use of such data by the OECD is without prejudice to the status of the
Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of
international law.
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Please cite this publication as:
OECD (2013), Global Forum on Transparency and Exchange of Information for Tax Purposes Peer
Reviews: Israel 2013: Phase 1: Legal and Regulatory Framework, OECD Publishing.
http://dx.doi.org/10.1787/9789264202535-en
PEER REVIEW REPORT PHASE 1: LEGAL AND REGULATORY FRAMEWORK ISRAEL OECD 2013
TABLE OF CONTENTS 3
Table of Contents
About the Global Forum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Information and methodology used for the peer review of Israel . . . . . . . . . . . . . 9
Overview of Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
General information on legal system and the taxation system . . . . . . . . . . . . . . .11
Recent developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Compliance with the Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
A. Availability of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
A.1. Ownership and identity information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
A.2. Accounting records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
A.3. Banking information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
B. Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
B.1. Competent Authoritys ability to obtain and provide information . . . . . . . . 50
B.2. Notification requirements and rights and safeguards. . . . . . . . . . . . . . . . . . 57
C. Exchanging Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
C.1. Exchange-of-information mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
C.2. Exchange-of-information mechanisms with all relevant partners . . . . . . . . 67
C.3. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
C.4. Rights and safeguards of taxpayers and third parties. . . . . . . . . . . . . . . . . . 70
C.5. Timeliness of responses to requests for information . . . . . . . . . . . . . . . . . . 71
4 TABLE OF CONTENTS
Summary of Determinations and Factors Underlying Recommendations. . . . 73
Annex 1: Jurisdictions Response to the Supplementary Report . . . . . . . . . . . 79
Annex 2: List of All Exchange of Information Mechanisms . . . . . . . . . . . . . . . 80
Annex 3: List of All Laws, Regulations and Other Material. . . . . . . . . . . . . . . 82
ABOUT THE GLOBAL FORUM 5
About the Global Forum
The Global Forum on Transparency and Exchange of Information for Tax
Purposes is the multilateral framework within which work in the area of tax
transparency and exchange of information is carried out by over 100 jurisdic-
tions, which participate in the Global Forum on an equal footing.
The Global Forum is charged with in-depth monitoring and peer review of
the implementation of the international standards of transparency and exchange
of information for tax purposes. These standards are primarily reflected in the
2002 OECD Model Agreement on Exchange of Information on Tax Matters
and its commentary, and in Article 26 of the OECD Model Tax Convention on
Income and on Capital and its commentary as updated in 2004. The standards
have also been incorporated into the UN Model Tax Convention.
The standards provide for international exchange on request of foreseeably
relevant information for the administration or enforcement of the domestic tax
laws of a requesting party. Fishing expeditions are not authorised but all fore-
seeably relevant information must be provided, including bank information
and information held by fiduciaries, regardless of the existence of a domestic
tax interest or the application of a dual criminality standard.
All members of the Global Forum, as well as jurisdictions identified by the
Global Forum as relevant to its work, are being reviewed. This process is under-
taken in two phases. Phase 1 reviews assess the quality of a jurisdictions legal
and regulatory framework for the exchange of information, while Phase 2 reviews
look at the practical implementation of that framework. Some Global Forum
members are undergoing combined Phase 1 and Phase 2 reviews. The Global
Forum has also put in place a process for supplementary reports to follow-up on
recommendations, as well as for the ongoing monitoring of jurisdictions following
the conclusion of a review. The ultimate goal is to help jurisdictions to effectively
implement the international standards of transparency and exchange of informa-
tion for tax purposes.
All review reports are published once approved by the Global Forum and
they thus represent agreed Global Forum reports.
For more information on the work of the Global Forum on Transparency and
Exchange of Information for Tax Purposes, and for copies of the published review
reports, please refer to www.oecd.org/tax/transparency and www.eoi-tax.org.
EXECUTIVE SUMMARY 7
Executive Summary
1. This report summarises the legal and regulatory framework for
transparency and exchange of information in the State of Israel
1
(hereafter
Israel). The international standard which is set out in the Global Forums
Terms of Reference to Monitor and Review Progress Towards Transparency
and Exchange of Information, is concerned with the availability of relevant
information within a jurisdiction, the competent authoritys ability to gain
timely access to that information, and in turn, whether that information can
be effectively exchanged with its exchange of information partners.
2. Israel is a coastline country in the Middle East region politically
organised as a parliamentary democracy. The Israeli economy is highly
developed technically and mainly based on the service sector and high-tech
technologies. Government expenditure plays an important role in Israeli
economy constituting relatively high share of the GDP.
3. Relevant entities include companies, partnerships, trusts and associa-
tions. Commercial laws and tax laws ensure availability of ownership and
identity information consistent with the standard for all companies, partner-
ships and associations. Nevertheless, companies other than those registered
on the stock exchange may issue bearer shares and no requirements exist to
identify the owners of such bearer shares. However, only 12 out of a total of
325 694 companies incorporated in Israel are reported to have issued bearer
shares. Ownership information of foreign companies that are managed and
controlled in Israel by new immigrants or veteran returning residents is not
fully ensured as they are tax exempt for 10 years. With regards to trusts,
obligations exist under the tax and trust law that ensure availability of infor-
mation on Israeli as well as foreign trusts other than foreign resident settlor
trusts.
1. The statistical data for Israel are supplied by and under the responsibility of the
relevant Israeli authorities. The use of such data by the OECD is without preju-
dice to the status of the Golan Heights, East Jerusalem and Israeli settlements in
the West Bank under the terms of international law.
8 EXECUTIVE SUMMARY
4. The legal framework of Israel contains obligations to keep reliable
accounting records and underlying documentation for at least five years
in respect of domestic companies, partnerships and associations. Trustees
are also required to keep records in accordance with trust law. Companies
incorporated in another jurisdiction but managed and controlled in Israel
are required by tax law to have adequate accounting books and underlying
documentation for at least five years. However, a gap in this regard remains
for foreign companies that are managed and controlled by new immigrants
and veteran returning residents. Anti-money laundering laws ensure that
all records pertaining to the identity of account holders consistent with
the standard are kept by all banks operating in Israel. However, some con-
cerns remain about records of transactions below an amount of NIS 10 000
(EUR 2 000).
5. The Israeli tax administration has broad powers to access relevant
information from any person including banks and from public authorities.
However, there are some limits on these powers in respect of information
relating to new immigrants or returning veterans during a 10 year tax exempt
period and in respect of foreign resident settlor trusts. Currently, the Israeli
competent authority does not have powers to give effect to the agreements
solely for the purposes of administrative assistance (e.g. TIEAs). The scope
of professional privilege in Israel is consistent with the international standard.
6. Israel has a considerable network of 54 double tax conventions that
provide for exchange of information in tax matters. The vast majority of these
agreements are in force and to standard. Nevertheless, Israel should continue
its program of renegotiation of DTCs to incorporate wording in line with the
OECD Model Tax Convention and should ensure that it is able to enter agree-
ments for exchange of information (regardless of their form) with all relevant
partners.
7. Israels response to the findings in this report, in particular the
recommendations made, as well as the application of the legal framework
and the implementation of the international standard in practice, will be
considered in detail in the Phase 2 review of Israel, which is scheduled to
commence in the second half of 2013.
INTRODUCTION 9
Introduction
Information and methodology used for the peer review of Israel
8. The assessment of the legal and regulatory framework of Israel was
based on the international standards for transparency and exchange of infor-
mation as described in the Global Forums Terms of Reference to Monitor and
Review Progress Towards Transparency and Exchange of Information, and
was prepared using the Global Forums Methodology for Peer Reviews and
Non-Member Reviews. The assessment was based on the laws, regulations,
and exchange of information mechanisms in force or effect as at April 2013,
other materials supplied by Israel, information supplied by partner jurisdic-
tions and information available in the public domain.
9. The Terms of Reference breaks down the standards of transparency
and exchange of information into ten essential elements and 31 enumer-
ated aspects under three broad categories: (A) availability of information;
(B) access to information; and (C) exchange of information. This review
assesses Israels legal and regulatory framework against these elements
and each of the enumerated aspects. In respect of each essential element, a
determination is made that either: (i) the element is in place; (ii) the element
is in place but certain aspects of the legal implementation of the element
need improvement; or (iii) the element is not in place. These determinations
are accompanied by recommendations on how certain aspects of the system
could be strengthened. A summary of the findings against those elements is
set out at the end of this report.
10. The assessment was conducted by a team which consisted of two
expert assessors: Ms. Marlene Parker, Director of Legislation and Treaty
Services, Ministry of Finance of Jamaica and Ms. Sarita de Geus, Senior Tax
Policy Advisor, Ministry of Finance of the Netherlands; and representatives
of the Global Forum Secretariat: Mr. Sanjeev Sharma, Mr. David Moussali
and Mr. Radovan Zidek.
10 INTRODUCTION
Overview of Israel
11. Israel is a relatively small State located in the Middle East region
with an area of 22072 sq km and a population of 8 million (Feb 2013 Central
Bureau of Statistics estimate), of which roughly 804 500 reside in the capital
city of Jerusalem. Israel lies on the east coastline of the Mediterranean Sea
and borders Lebanon, Syria, Jordan and Egypt. Hebrew and Arabic are the
official languages; however English and Russian are also widely spoken. The
official currency is the New Israeli Shekel (NIS).
12. Israel is a highly developed country with a GDP of NIS 929.8 billion
(EUR 187.6
2
billion) in 2011. Sixty-two percent of Net Domestic Product is
produced in the service sector, followed by industry with 20% and agriculture
1.8%. In the year 2011, the financial services produced 25% of the services
sector contribution to the NDP
3
.
13. Israel has a technologically advanced market economy. It depends
on imports of crude oil, vehicles, raw materials, and military equipment. Cut
diamonds, high-technology equipment, chemicals, medicine and agricul-
tural products (fruits and vegetables) are the leading exports
4
. Israel used to
post sizable trade deficits, which were covered by tourism and other service
exports, as well as significant foreign investment inflows. In 2009-10 Israel
recorded trade deficit amounting to about 3% of GDP. Nevertheless, there
was a current account surplus in the balance of payments. In 2011, the current
account surplus has reduced and leveled off. Natural gas fields discovered
off Israels coast during the past two years can lead to a further expansion
of Israeli exports in coming years and decrease its need for energy source
imports.
14. The global financial crisis of 2008-09 spurred a brief recession in
Israel, but the country weathered the crisis with solid fundamentals following
years of prudent fiscal policy and a resilient banking sector. The economy
has recovered better than most advanced and comparably sized economies.
GDP grew in 2008 by 4.14 % (in constant prices), followed by 1.1% in 2009.
In 2010 and 2011 the GDP growth bounced back to 5 % and 4.6% followed by
3.2% in 2012
5
.
15. Government expenditures play a significant role in the Israeli
economy. Its share of the GDP peaked at around 70% in the mid-1980s
accompanied by high levels of debt. In recent years the Israeli government
2. As of 5 June 2012: EUR 1 = USD 1.2429 and USD 1 = NIS 3.896. Source: European
Central Bank.
3. www.cbs.gov.il/shnaton62/st14_02x.pdf.
4. Central Bureau of Statistics press release on 21 August 2011.
5. www.cbs.gov.il/shnaton62/st14_02x.pdf.
INTRODUCTION 11
pursued a Stabilisation Programme with an over-arching goal of smaller
government through privatisation, savings in public spending, lower tax
burdens and debt reduction. As a result, expenditures have decreased to
around 42% of GDP in 2010-11. The government strongly supports research
and development activities. The main research and development projects are
in information, communication, medicine, bio and nano technologies. Budget
deficits peaked in 2001-03. The economic boom from 2004-08 resulted in
rapid growth in tax revenues leading to cuts to corporate and personal income
tax rates. In recent years, with the aim of having a responsible fiscal policy,
the tax cuts were stopped and even partially reversed.
16. The main trading partners of Israel are the United States as a destina-
tion of over 24% of Israeli export (excluding diamonds) and the EU with over
30% (excluding diamonds). With regard to imports, the main trading partner
is the EU (35% excluding diamonds). Other important trading partners
6
are:
China, India, Japan and Brazil.
17. In 2010, Israel formally acceded to the OECD. Israel is also a member
of World Trade Organization, International Monetary Fund and the United
Nations. Israel is a member of the Global Forum on Transparency and
Exchange of Information for Tax Purposes and is committed to implement
the international standards for transparency and exchange of information for
tax purposes.
General information on legal system and the taxation system
Legal system
18. Israel is a parliamentary democratic republic with a multi-party
system. Israels highest legislative body is the 120-seat unicameral Parliament
(Knesset). Knesset members are elected for a four year term based on the
share of total national vote in general elections. The Israeli head of state is
the President, elected by the Knesset for a seven year term. Most executive
power lies with the Government which is accountable to the Knesset. The
Prime Minister, who is the head of government, is appointed by the President
on the basis of the general election results. The Prime Minister is responsible
for proposing a list of ministers, which is submitted within 28 days to the
Knesset for approval.
19. The State of Israel is subdivided into six main administrative districts
(known as mehozot): Center, Haifa, Jerusalem, North, Southern, and Tel Aviv
Districts. Districts are further divided into fifteen sub-districts (known as
nafot), which are themselves partitioned into fifty natural regions. Israels
6. www.cbs.gov.il/reader/newhodaot/hodaa_template_eng.html?hodaa=201216012.
12 INTRODUCTION
largest and most populated district is Jerusalem. Districts have a certain
degree of administrative autonomy however; most of the state policies includ-
ing levying taxes are centralised in the hands of the Israeli government.
20. Israels legal system is strongly influenced by the common law tra-
dition. Israel has no formal constitution. Upon attaining statehood, Israel
took over statutes in force during the British mandate, insofar as they were
not opposed to the provisions of the Declaration of the Establishment of the
State of Israel. The main principles of the states power and its functioning
are stipulated in number of Basic Laws. Laws are passed by the Knesset. The
Government (typically ministers) can issue secondary legislation to imple-
ment laws within the limits laid down by the law. In some cases, laws can be
conditioned on the adoption of secondary legislation by approval in a Knesset
committee or require consultation with other ministers. Laws and secondary
legislation come into force on their promulgation.
21. Israels judicial branch consists of three levels of courts: Magistrates
Courts, District Courts and the Supreme Court, which operates also as the
High Court of Justice. Civil tax cases are heard by the District Courts and
indictments are submitted to the Magistrates Courts. Supreme Court can
overrule decision of the District Court based on appeal by the taxpayer or the
tax authority. Supervision of the activities of government and other public
institutions is also carried out by the State Comptroller.
Taxation system
22. The Israeli taxation system is mainly based on indirect taxation of
goods and services and income taxes. Total tax revenue as percentage of GDP
was 32.4 % in 2010, which is about the average percentage among the OECD
members. The total tax revenue in 2010 was NIS 240 billion (EUR 49.52 bil-
lion), out of which taxation of goods and services represented 39%, income
taxes 30% and social security contributions 17%.
7
A gradual reduction of
tax rates for individuals and companies has been implemented over the past
decade.
23. Income tax is levied according to the Israeli Income Tax Ordinance,
5721-1961 (ITO). The ITO contains rules for corporate income tax, individual
income tax as well as for the administrative aspects of taxation. Based on the
Trachtenberg committee recommendation, ITO amendments were approved
in December 2011, which repealed the earlier reduction in tax rates and set
higher tax rates for tax year 2012 and later.
7. OECD (2011), Revenue Statistics 2011, OECD Publishing, http://dx.doi.
org/10.1787/rev_stats-2011-en-fr.
INTRODUCTION 13
24. As of 2012, corporations in Israel are subject to a tax rate of 25%.
Individuals are subject to progressive personal income tax rates ranging
from 10% to 48%. Special rules apply among others with regard to pas-
sive source income, rental fees, persons aged over 60, new immigrants and
returning residents. Personal and corporate income taxes are levied on the
worldwide income of individuals or companies who are Israeli tax residents.
Non-residents are taxed on Israeli-source income. An individual is an Israeli
tax resident if centre of life of that person is located in Israel (s. 1(a) ITO).
A company is considered as Israeli tax resident if it is incorporated in Israel
or it is managed and controlled from Israel
8
(s. 1(b) ITO).
25. Income earned abroad or derived from assets abroad by a new immi-
grant and a veteran returning resident is exempt from taxes for ten years after
the date on which they become resident in Israel. Foreign companies that are
managed and controlled in Israel are not considered resident for tax purposes
for a period of ten years if they are managed and controlled by new immi-
grants or veteran returning residents who have spent at least ten consecutive
years abroad as a foreign resident. Foreign residents are liable to tax on
income generated or derived in Israel, subject to source rules and the respec-
tive double taxation treaties. Permanent establishments of foreign companies
are generally taxed on Israeli-source income only. The Israeli income tax
system includes special rules with regard to foreign professional companies,
controlled foreign companies and foreign occupational companies enabling
Israel to tax foreign source income in Israel under the defined circumstances.
Israel also applies transfer pricing and participation exemption rules. Capital
gains, defined as the excess of proceeds from the sale of an asset over its
depreciated cost, are taxed at the rate of 25% or 30% based on ownership
interest holding with respect to individuals and at the standard income tax
rate of 25% with respect to companies. There is no gift tax or inheritance tax
in Israel.
26. Companies are required to inform the tax authorities when they start
operating and must submit annual tax returns. Upon the formation of a com-
pany registered in Israel, the company is required to open a tax file with the
tax authorities and file Form 4436 accompanied by its articles of association.
27. The government levies a 15.5% value-added tax (VAT). The VAT rate
in Israel is uniform for all taxable transactions. However, exported goods,
sale of intangible assets to non-residents, in certain instances sale of goods to
licensed warehouses, certain services rendered to non-residents, cross border
transport services are among others not subject to VAT. Financial institutions
are subject to profit tax instead of VAT at the same rate as VAT. Generally,
8. Based on the prevailing interpretation, this term should be understood in light of
the analogous notion of place of effective management.
14 INTRODUCTION
anyone who operates any business activity in Israel must be registered with
the local tax administration for VAT purposes. However, there are exceptions
from registration for persons whose main income arise from certain services
(such as lectures, artistic performances etc.), in these cases the payment
obligation transfers to the recipient. There are cases of exempt dealers, in
which the dealer will have to be registered yet will not be obligated to issue
tax invoices. (A VAT exempt dealer is defined as one having a transaction
turnover less than NIS 76 884 [EUR 15 920] per year.)
28. Employers and employees are subject to national insurance (social
security) and pension contribution. The employees share of national insur-
ance also includes compulsory health insurance. Employees contribution to
national insurance is applied at rates from 3.5% to 12%, employers rates are
from 3.85% to 5.43%. In both cases the applied rate is based on the amount of
individuals income which is subject to the insurance. Total pension contribu-
tion rate including employees and employers part is 10%.
29. The government further levies real estate taxes (acquisition tax
between 0% to 5% for first apartment and 5% to 7% for a second apartment;
betterment levy and land betterment levy at 48% until 7 November 2011 and
at 25% after 1 January 2012 and at 20% during intermediate period; customs
duties; purchase tax and municipal taxes on real estate. The customs duties
rates vary between 0% to 100% on agriculture products, and between 0% and
12 % on industrial products.
Overview of commercial laws and other relevant factors for exchange
of information
30. Private and public companies are principally governed by the Israeli
Companies Law, 5759-1999. The courts have made a significant contribution
to the development of Israeli law by means of judicial interpretation. In their
decisions, the courts, to some extent, have been influenced by continental
law, although English and American law also has persuasive force. It should
be noted that before the Companies Law came into effect, the normative
framework was based on the Companies Ordinance, 5743-1983, and much of
it has not been repealed upon the coming into effect of the Companies Law,
and remains in force even now.
31. The Companies Registrar is part of the Corporations Authority in
Israel, which is an administrative body reporting to the Ministry of Justice.
The Companies Registrar is in charge of maintaining the Israeli Register of
Companies, in accordance with the requirements of the Companies Law and
regulations.
32. Partnerships are regulated by Israels Partnership Ordinance, 1975.
A partnership can be a general partnership or limited partnership. Trusts
INTRODUCTION 15
are a type of non-corporate entity and their legal regulation is contained in
the Trust law, 5739-1979. Israels law does not recognise the concept of a
foundation.
33. The main relevant tax rules are stipulated by the Income Tax
Ordinance, 5721-1961 and the Income tax regulation (returns and supple-
mentary returns by body of persons, Regulation No. 5724-1963) prescribe
its detailed application. Tax laws are enforced by state tax authorities that
administratively report to the Ministry of Finance. Accounting obligations
follow from Income Tax Ordinance and corresponding Income Tax Rules,
5733-1973. AML/CFT rules are contained in the Prohibition on Money
Laundering Law, 5760-2000 (PMLL) and the Prohibition on Terror Financing
Law, 2005 (PTFL). Israels AML obligations apply to banking corporations,
members of stock exchange, portfolio managers, currency service providers,
insurers and insurance agents, the postal company and provident funds (pen-
sion business). A number of ordinances stipulating detailed rules for AML
procedures and obligations have been issued for all of the above mentioned
entities
9
. The Mutual Evaluation of Israel with regard to its compliance with
the AML /CFT obligations is carried out by MONEYVAL
10
.
34. Israels banking system is small and basically locally owned. In
August 2012
11
, the banking system in Israel consists of 15 ordinary bank-
ing corporations, 5 foreign banks, 2 mortgage banks, 1 financial institution
and 2 joint service companies. The banking system in Israel is highly con-
centrated, with five of the largest banking groups (Bank Hapoalim, Bank
Leumi, Discount Bank, Mizrahi Bank and First International Bank of Israel)
controlling 94.7 per cent of all bank assets, and the three largest among them
9. These ordinances are: Prohibition of Money Laundering (Obligations of Stock
Exchange Members to identify, report and retain lists for the purpose of pre-
venting money laundering and financing terrorism), 5770-2010; Prohibition
on Money Laundering (The Banking Corporations Requirement regarding
Identification, Reporting, and Record-Keeping for the Prevention of Money
Laundering and the Financing of Terrorism) Order, 57612001; Order on
Prohibition on Money Laundering (Obligations of Identification, Reporting and
Keeping Records of the Postal Bank to Prevent Money Laundering and Financing
Terrorism), 57712011; Prohibition on Money Laundering Regulations (Rules
for Use of Information Transferred to the Israel Police Force and the General
Security Service for Investigation of Other Offenses and for Transferring it to
Another Authority), 57662006.
10. Third Evaluation Round Report (adopted on 9 July 2008) and Second Progress
Report (adopted on 14 December 2011) can be seen at the MONEYVAL website:
www.coe.int/t/dghl/monitoring/moneyval/Countries/Israel_en.asp.
11. www.boi.org.il/en/BankingSupervision/Data/Pages/bankcoLists/list11.aspx.
16 INTRODUCTION
accounting for over 77.3 per cent
12
. A full range of banking services, includ-
ing private banking, is offered by the banks. The Bank of Israel (Central
Bank) is responsible for the supervision of the banking corporations. Its
Licenses Committee approves the issuing of licenses to establish or purchase
a controlling interest in a banking corporation, as well as approval for estab-
lishing a branch. The postal bank is owned by the government and has about
650 branches. It is supervised by the Ministry of Communication.
35. The Tel-Aviv Stock Exchange (TASE) is the only stock exchange
operating in Israel. It is supervised by the Israel Securities Authority and
offers various products for investors, including the trading of shares, corpo-
rate bonds, treasury bills and bonds, index-tracking products and derivatives
on shares, indices and currency exchange rates. It provides clearing, set-
tlement and depository services. TASE is the home market for Israeli
companies, however, companies trading in the USA and on the London Stock
Exchange can dual-list their shares on the TASE. At present, 552 equity com-
panies are listed on the TASE, out of which 43 companies are cross-listed
abroad.
Recent developments
36. An amendment to the Income Tax Ordinance enabling Israel to
conclude international agreements solely for the purpose of exchange of
information and clarifying Israels tax authority information gathering
powers in respect of exchange of information is currently under legislative
procedure.
37. A draft bill concerning the application of AML/CFT obligations on
DNFBPs such as lawyers, that often provide trust services was approved by
the Committee for Legislation and Law Enforcement on the 20
th
November
of 2011 and is awaiting approval by the legislative power to become law.
38. On 19 May 2013 the Israeli Government has taken a decision to elim-
inate the exemption from filing tax returns by new immigrants and veteran
returning residents and this decision is subjected to the further legislation
procedure. The obligations will apply to new arrivals to Israel from the date
the law comes into force.
12. Updated 31 December 2011.
COMPLIANCE WITH THE STANDARDS: AVAILABILITY OF INFORMATION 17
Compliance with the Standards
A. Availability of Information
Overview
39. Effective exchange of information requires the availability of reliable
information. In particular, it requires information on the identity of owners
and other stakeholders as well as information on the transactions carried out
by entities and other organisational structures. Such information may be kept
for tax, regulatory, commercial or other reasons. If such information is not
kept or the information is not maintained for a reasonable period of time, a
jurisdictions competent authority may not be able to obtain and provide it
when requested. This section of the report describes and assesses Israels
legal and regulatory framework on availability of information.
40. Availability of ownership and identity information in respect of
companies is generally ensured by the requirement to keep an up to date
register of members. However, companies other than those listed on the
stock exchange may issue bearer shares and no requirements exist to identify
the owners of such shares. As on June 2013 only 12 out of a total of 325 694
companies incorporated in Israel are reported to have issued bearer shares.
Ownership information in respect of foreign companies that are managed and
controlled in Israel by new immigrants or veteran returning residents is not
fully ensured as they are tax exempt for 10 years. Recommendations have
been made in respect of these deficiencies.
41. Partnerships must be registered with the authorities and details of
each partner must be furnished upon registration. Any change in this respect
18 COMPLIANCE WITH THE STANDARDS: AVAILABILITY OF INFORMATION
must also be registered, ensuring up to date ownership information on part-
nerships. Associations are required to register and keep an up to date register
of its members, and must file a copy of the general meetings and financial
reports with the Registrar of Associations.
42. With regards to trusts, obligations exist under the tax and trust law
that ensure availability of information on Israeli as well as foreign trusts
except in the case of foreign resident settlor trusts.
43. An obligation to keep reliable accounting records including under-
lying documentation for a period of at least five years is in place in respect
of all relevant entities except for foreign resident settlor trusts and foreign
companies that are controlled and managed by new immigrants and veterans
returning residents. Most of the obligations are based on Israels tax law. The
requirements to keep underlying documentation cover a wide spectrum of
documentation in respect of transactions and collections. A general obligation
to keep accounting records separate from the tax law exists for companies,
partnerships, associations and trusts.
44. The AML/CFT legislation ensures that all records pertaining to the
identity of the account holders consistent with the standard are kept by all
banks operating in Israel. The AML/CFT laws require that the documents
attesting the instruction to carry out a transaction above the threshold of
NIS 10 000 (EUR 2 000) or reported as suspicious transaction to the FIU
must be recorded for a period of seven years. However, there are no explicit
obligations on the banks to keep financial and transactional information in
respect of accounts held by them.
45. Enforcement provisions are in place in respect of the relevant obliga-
tions to maintain ownership and identity information for all relevant entities
and arrangements. The effectiveness of the enforcement provisions which are
in place in Israel will be assessed as part of its Phase 2 review.
A.1. Ownership and identity information
Les juridictions doivent sassurer que leurs autorits comptentes ont disposition
des renseignements relatifs la proprit et lidentit pour lensemble des entits
et arrangements pertinents.
Companies (ToR A.1.1)
46. Under the Companies Law 5759-1999 (CL) two types of companies
may be incorporated (s. 1 CL):
Public Companies: these companies have their shares listed for trading
on a stock exchange, or have been offered to the public pursuant to
a prospectus as defined in the Securities Law, and are held by the
public.
Private Companies: these companies are companies that are not
public companies.
47. Any person can establish a company, provided that none of the pur-
poses of the company is illegal, immoral or contrary to public policy (s. 2 CL).
A company can have a single shareholder (s. 3 CL). There are no limitations
on the number of shareholders in either private or public companies. Every
security in a company is presumed to be transferable (s. 293 CL), unless
contrary provisions are laid down the articles of association (s. 294 CL). The
rules described below on the availability of ownership information apply to
all companies, unless indicated otherwise.
48. All companies are required to have a registered office in Israel
(s. 123(a) CL). Any change of address of the registered office must be noti-
fied to the Registrar of Companies (Registrar) within 14 days of the change
(s. 123(b) CL). Non-compliance with these provisions can lead to a fine of
NIS 6 000 (EUR 1 200) (ss. 140(3), 145(2) and 354(a) CL).
Ownership information held by companies
49. All companies incorporated under the CL are required to keep a
register of shareholders (s. 127 CL). Public companies also need to have a
register of substantial shareholders in addition to the register of shareholders
(s. 128 CL). The register of shareholders should contain the following infor-
mation (s. 130 CL):
(a) In respect of shares registered under a persons name:
(i) the name, identity number and address of the shareholder;
(ii) the amount of shares and class of shares held by each shareholder,
indicating their nominal value, if any, and if any amount of the
consideration fixed for a share in not yet paid, the amount paid;
(iii) the date of allotment of the shares or the dates of their transfer to
shareholders, as the case may be;
(iv) where the shares are marked with serial numbers, the company
must note next to the name of each shareholder the numbers of
the shares registered in such persons name;
(b) in respect of bearer shares;
(i) an indication of the fact of the allotment of bearer shares, the date
of their allotment and the number of shares allotted;
(ii) the numbering of the bearer share and of the share warrant (a
document stating that the holder there of is the owner of the bearer
share (s. 1 CL));
(c) in respect of dormant shares (own shares purchased by the company
(s. 308 CL)), their number and the date on which they became dormant.
50. A company is obliged to alter the registration of ownership of shares
in the register of shareholders when a transfer deed of a share is delivered
to the company signed by the transferor and the transferee (s. 299(1) CL). A
company must keep the register of shareholders in its registered office located
in Israel (s. 124 CL). Public companies are also required to keep a register of
substantial shareholders (s. 128 CL). Not keeping a register of shareholders or
not giving notices or reports to the Registrar of Companies as required under
Companies Law or Companies Ordinances is considered a breach of duty
(s. 353 CL). A fine of NIS 6 000 (EUR 1 200) may be imposed on a company
for the aforementioned breach once the Registrar has made a demand to the
company to remedy the breach and the breach is not remedied in a period of
forty-five days (sections 354(a) and 356(a) CL).
Ownership information held by the authorities
51. A person seeking to register a company must submit an application to
the Registrar in the form prescribed by the Minister of Justice, to which must
be attached: (a) a copy of the articles of association; and (b) a declaration by
the first directors that they are willing to serves as directors (s. 8 CL). The
Registrar will give every company a registration number and shall enter it on
the certificate of registration (s. 10 (b) CL). The articles of association must
contain the registered share capital of the company, including the number
of each class (s. 18 CL). The articles of association of a company must be
signed by the first shareholders and the shares allotted to them must be noted
therein, as shall be the name, address and identity number of each such share-
holder (s. 23(a) CL).
52. Private companies must report annually to the Registrar: (a) the
alterations in the articles of association, and increase or decrease of capital;
(b) the change of address of its registered office; (c) a notification to the effect
of stating that the company has no auditor; (d) appointments to the board of
directors and changes in its composition; (e) the allotment of shares; (f) the
transfer of shares, fourteen days from the date of transfer; and (g) a merger
it will enter into (s. 140 CL). A report on the transfer of shares made to the
Registrar would include identity information on the old and new shareholders
(s. 299(1)). As the articles of association of a private company include details
on the initial shareholders, updated information should be available with the
Registrar.
53. Public companies must report certain information to the Registrar as
well, but this does not include ownership information (s. 142 CL). However,
ownership information is available through the register of shareholders (s. 127).
54. Non-compliance with yearly reporting by companies can lead to a
fine of NIS 6 000 (EUR 1200) (s. 354(a) CL).
Tax law
55. The Income Tax Ordinance (ITO) establishes that residents in Israel
are obliged to pay income tax on their worldwide income for each tax year
(s. 2 ITO). The ITO defines a company as a company incorporated or regis-
tered under any law in effect in Israel or elsewhere, including a cooperative
society (s. 1 ITO). Companies are resident in Israel for tax purposes if they
are incorporated in Israel or when they are managed and controlled in Israel
(s. 1(b) ITO).
56. The ITO determines that companies are required to register no later
than they start to operate (s. 134 ITO). Upon the formation of a company
registered in Israel, the company is required to open a tax file with the Israel
Tax Authority by filing Form 4436 titled Opening Corporation Tax File
with the Israel Tax Authority accompanied by the articles of association
in accordance with the tax authorities powers to demand the submission of
returns (s. 135 ITO). Form 4436 must include the details of the directors and
shareholders of the company such as: name and registration number, address,
assessing office, type and amount of shares, holding percentage of shares by
the shareholders and whether the shareholder is a director of the company.
57. Companies are required to file an annual tax return (s. 131(a)(5)). The
Minister of Finance may, by regulations, prescribe additional returns for a
company obliged to file an income tax return (s. 131A ITO). Companies must
also file an annual report in Form 1214 reporting its current shareholders.
This ensures availability of information on current shareholders annually.
Non-filing of these returns attracts sanctions under the ITO (see section A.1.6
below).
58. The ITO obliges all persons
13
to notify the assessing officer about the
beginning or change of occupation in time. The defaults of failure to inform
the Assessing Officer of this fact in time and also non submission of their
first annual tax return after the event are liable to three years of imprison-
ment or to a fine of NIS 75 300 (EUR 15 100) and to another fine of half the
tax to which it was liable (s. 215A(a) ITO).
13. A person includes a company and a body of persons (s. 1 ITO).
Ownership information held by service providers
59. Under the Israeli legal framework AML/CFT obligations apply to
banking corporations, members of stock exchange, portfolio managers, cur-
rency service providers, insurers and insurance agents, the postal company
and provident funds. Section 2(a) of the Prohibition of Money Laundering
(The Banking Corporations Requirement regarding Identification, Reporting,
and Record-Keeping for the Prevention of Money Laundering and the
Financing of Terrorism) Order (PMLO) of 2001 determines that a banking
corporation shall not open an account without recording the following iden-
tification particulars in respect of each of the account holders or authorised
signatories, and in respect of any other person applying to open an account,
and authenticating them as set forth in section 3 of the PMLO: (i) name;
(ii) identification number; (iii) date of birth for an individual or date of incor-
poration for a company; and (iv) address.
60. Further, the Prohibition on Money Laundering Law (PMLL) deter-
mines that a banking corporation and any other financial institution to whom
these legal provisions apply shall not perform a property transaction unless it
possesses the identifying particulars as specified in the PMLO, of the person
receiving the service from the banking corporation (s. 7(a)(1), (7)(b) PMLL).
The Governor of the Bank of Israel or the relevant Minister are empowered
to determine by order who is a recipient of a service of a property transaction
performed by a banking corporation; this determination may include a ben-
eficiary of the transaction, and, in addition, where the act is performed at the
request of a corporation or by means of a corporate account, it may include
the person in control of the corporation (s. 7(a)(1),(7)(b) PMLL).
61. In the case of companies which open an account or realise a property
transaction through a banking corporation or other financial institution,
there is an obligation to record: (a) the names of the controlling shareholders
and their identity numbers; (b) if the banking corporation does not process
such an identity number, after having taken reasonable measures to obtain
one, it may instead record the date of incorporation; and (c) the country of
citizenship (s. 2 PMLO and 7(a)(1)(a) PMLL). Failure to carry out CDD or to
maintain the documentation for at least five years can lead to an administra-
tive fine of no more than NIS 2 226 000 (EUR 445 200) (s. 14(a) PMLL). The
term controlling shareholder is derived from the Securities Law, 5278-1968
and as per the interpretation of the Security Authority controlling shareholder
means information on the last individual in the chain of control.
Foreign companies
62. Foreign companies are considered to be resident for tax purposes
in Israel if they are managed and controlled from Israel (s. 1(b)(2) ITO), and
are therefore subject to income tax in respect of their worldwide income
(s. 2 ITO). Foreign companies are obliged to submit an annual tax return
under section 131(a)(5) of the ITO if they are resident in Israel for tax pur-
poses. The Minister of Finance may, by regulations, prescribe additional
returns which a company is required to make which shall be attached to the
income tax return (s. 131A ITO). Foreign companies which are resident in
Israel for tax purposes must attach Form 1214 which contains a report of
current shareholders. Foreign companies resident in Israel are also subject
to the same penalties as domestic resident companies (see above). A total of
2564 foreign companies are registered in the register of Israeli Corporation
Authority.
63. From 2007, foreign companies that are managed and controlled in
Israel are not considered resident for tax purposes for a period of ten years
if they are managed and controlled by new immigrants or veteran returning
residents who have spent at least ten consecutive years abroad as a foreign
resident (s. 1(b)(2) ITO). However, as part of a tentative regulation applicable
for the years 2007-09 only, the requirement of 10 years consecutive stay
abroad was reduced to five years. The tax exemption only applies to income
generated outside Israel, however, income earned by these companies from
any operation carried on in Israel, including management activities, is tax-
able. There is no requirement to file tax returns for such companies if they
have no Israeli-source income. In the absence of a compulsory requirement
to file tax returns by these foreign companies, information on the sharehold-
ers of these companies may not be available to Israeli authorities. The Israeli
authorities have advised that number of persons managing a foreign company
from Israel is uncertain. It is worth noting that only new immigrants and
veteran returning residents who came to Israel from 2007 and onwards are
eligible to the tax exemption. Since 2007, 92 484 new immigrants have come
to Israel. A total of 13 188 veteran returning residents, who are eligible to
claim the benefits, arrived in Israel between 2010 and 2012. The information
on veteran returning residents for the period of 2007 and 2009 is not avail-
able. Israeli authorities advise that such persons are about 20 000.
64. A foreign company which keeps a place of business in Israel, includ-
ing an office for the transfer of shares or for the registration of shares, must
be registered as a foreign company (s. 346(a) CL). The application for regis-
tration has to be submitted to the Registrar within one month of setting up a
place of business and it must attach the following documents: (a) a copy of
the documents under which the company is incorporated or pursuant to which
it operates, including its articles of association; (b) a list of the directors of
the company; (c) the name and address of an authorised person in Israel to
receive service of process; and (d) a certified copy of a power of attorney for
an authorised agent who is resident in Israel (s. 346(b) CL). The Registrar
should be notified within fourteen days if an alteration occurs in a document,
a change of the directors of the company, or a change in the name or address
of the authorised agent or of the person designated for service of process
(s. 346(c) CL).
65. Section 349 of the CL states that foreign companies which have a
place of business in Israel and do not register with the Registrar as well as
any office holder thereof who is party to such breach, shall be subject to a
fine of NIS 26 100 (EUR 5 220) and in the case of an ongoing breach, they
shall be subject to a further fine of NIS 1 300 (EUR 260) for every day on
which the breach continues, from the date that the foreign company receives
a notice from the Registrar.
66. Based on the above, foreign companies which are resident in Israel
for tax purposes due to the fact that they are managed and controlled in Israel
must maintain information about their shareholders in order to meet their
tax obligations, i.e. filing proper income tax returns indicating their current
shareholders. However, a gap exists with regards to foreign companies which
are managed and controlled in Israel by new immigrants or veteran returning
residents subject to a ten year tax exemption and a recommendation is made
to cover this deficiency.
Nominees
67. Section 131 of the Company Law provides that a shareholder who is
a trustee must be registered on the register of shareholders, with a reference
to the trusteeship, and such a person is considered as a shareholder for the
purpose of the Company Law. Section 176 of the Company Law establishes
that a person in whose name the shares are registered in a private company
is the shareholder of the company. Therefore, nominee shareholder is treated
as a legal owner of shares in case of a private company. Israeli authorities
have advised that nominee shareholders are treated as trustees in Israel and
provisions of the Trust Law 5739-1979 of 1980 apply in the matter and trus-
tees must hold information on the persons on whose behalf they hold shares.
Israel has further clarified that the definition of trustee and trust under the
Income Tax Ordinance is very broad and refer to any kind of relationship in
which one person hold assets on behalf of another person no matter how that
relationship is classified under Israeli or any other law. Therefore, nominee
shareholders are treated as trustees under the provisions of the ITO too. The
provisions concerning trusts in Israel are discussed further below in the
report.
68. The provisions with regard to ownership of the shares held by a nomi-
nee in a public company are different. When a companys shares are listed for
trading on a stock exchange in Israel, a nominee company may be entered on
the register of shareholders, in addition to the information as required in sec-
tion 130 (a)(1) (s. 132 CL). Section 130 (a)(1) requires information on the name,
identity number and address of the shareholder. Further, the nominee company
is not considered as a shareholder in the company and the shares entered under
its name are considered owned by a person for whose benefit such shares are
registered (ss. 132 and 177). Therefore, in case of a company whose shares are
listed on stock exchange and shares are held by a nominee, the information on
nominee as well as the person on whose behalf such shares are held by such a
nominee must be available in the register of shareholders.
Conclusion
69. All companies are required to keep a register of shareholders. Public
companies also need to keep a register of substantial shareholders in addi-
tion to the register of shareholders. In addition, the Registrar of Companies
keeps a register of all companies and the information available includes
ownership information for private companies. The Israeli tax authorities also
maintain ownership information on all companies that are resident for tax
purposes in Israel (including companies formed in Israel and foreign com-
panies that are managed and controlled in Israel), since these companies are
required to update shareholder information each year when they file their tax
return. However, a gap remains with regards to foreign companies which are
managed and controlled in Israel by new immigrants or veteran returning
residents subject to a ten year tax exemption. There are no impediments for a
person to act as a nominee shareholder for another person and the availability
of information on the nominees as well as the persons on whose behalf they
hold shares is ensured in Israel.
Bearer shares (ToR A.1.2)
70. The CL establishes that it is possible for companies to issue bearer
shares. A bearer share can be issued only after payment of full consideration
to the company. A person holding a share warrant is also a shareholder of the
company (s. 11, CL). A bearer share is a negotiable instrument, the transfer of
which is effected by delivery of a share warrant to the purchaser (s. 297 CL).
The holding of a share warrant is considered prima facie evidence of ownership
of a bearer share (s. 296(b) CL). Thus, the rights of the bearer shares that are
held by the company are executed through the share warrants that represent the
bearer shares. Share warrants that represent bearer shares may be returned to
the company that issued bearer shares for the purpose of their cancellation and
conversion into shares registered under the shareholders name (s. 136 CL).
71. As stated previously, a company is required to keep a register of
shareholders (s. 127 CL). The following must be entered in the register of
shareholders in respect of bearer shares: (a) an indication of the fact of the
allotment of bearer shares, the date of their allotment and the number of
shares allotted; and (b) the numbering of the bearer share and of the share
warrant that represents it (s. 130(a)(2) CL). The CL requires that companies
submit identification details of all founding members at the time of incor-
poration. Section 135 of the Companies Law provides that, when a share
warrant is issued in place of a share registered under a persons name, the
share must be registered, as set out in section 130(a)(2) discussed above, and
the name of the shareholder must be removed from the register of sharehold-
ers. 72.A company may lay down provisions in its articles of association
limiting the transferability of shares, under conditions prescribed in the arti-
cles of association. This situation may preclude any company who has such a
prohibition in its articles of association to have bearer shares (s. 294 CL).
73. Section 66 of the Corporate Guidance Note issued by the Tel Aviv
Stock exchange, as updated on 25 January 2010, prescribes conditions for the
registration of companies with the stock exchange. These conditions among
other include:
all stocks generated in the original capital of the company shall be
considered stocks that were fully paid;
all stocks generated in the original capital of a new company shall be
listed in the companys stockholders register; and
new stock that will be issued in a quoted company shall also be listed
in the companys stock holders register.
74. Israeli authorities have confirmed that issuing securities and offering
the option to sell them to public require a formal approval from the Minister
of Finance or his authorised representative. They have further confirmed
that there are at present no listed bearer shares in Israel Stock Market, and no
bearer shares are being traded, except one company with six bearer shares
which are not traded. In view of the specific requirements that for seeking
a registration of securities with the Stock Exchange such securities must be
listed in the companys stock register ensures that a public company regis-
tered on the stock exchange is not allowed to have its shares in bearer form.
It is clear that no public company of which shares are in bearer form can
register with the Stock Exchange.
75. Companies are required to file an annual report to the Register of
Companies. In this annual report the companies must provide information
on the capital of the company; authorised and allotted capital; and types and
numbers of shares issued. In respect of registered shares, information on the
identification of shareholders must also be provided. In respect of bearer
shares information on the number of warrants issued and number of shares in
each warrant is required to be stated but information on the identity of hold-
ers is not required. Israeli authorities have advised that 12 companies out of
325 694 companies incorporated in Israel are reported to have issued bearer
shares as on June 2013. Based on this information, the authorities report that
the use of bearer shares in Israel is negligible. Public companies registered
on the stock exchange are not allowed to have bearer shares. The mechanisms
to ensure availability of information on the owners of bearer shares issued
by other companies are not in place, therefore, it is recommended that Israel
establishes suitable legal mechanisms that ensure availability of information
on owners of bearer shares in all circumstances.
Partnerships (ToR A.1.3)
76. Partnerships are governed by the Partnership Ordinance (PO).
A partnership is defined as a body of persons engaged in a partnership
relationship (s. 1(a) PO). A partnership relationship is defined as the rela-
tionship between persons managing a business together for the production
of profits, excluding the relationship between members of a corporation
incorporated under any law (s. 1(a) PO). Three types of partnerships can be
distinguished:
General partnership: a partnership where all of the partners are liable
for the obligations of the partnership, jointly and severally (s. 1(a) PO).
Limited partnership: a partnership where a person who brought capital
into the partnership, at the time of the engagement, in money or in an
asset valued at an express amount, in order to not be liable for the obli-
gations of the partnership in excess of the amount provided; however,
the partnership must include at least one general partner (s. 1(a) PO).
Foreign partnership: A partnership established outside of Israel (s. 74 PO).
77. General and limited partnerships must be registered within one
month from the date of formation (s. 4 PO). If a partnership does not regis-
ter as required by law, then each of its partners is liable to a fine of NIS 15
(EUR 3) for each day on which the offense continues; however, non-registra-
tion of a partnership shall not affect the consideration of whether or not the
partnership exists (s. 6 PO).
78. Section 7 of the PO establishes that the registration of a general or
limited partnership shall be effected by sending a notice to the Registrar,
signed by the partners, which must include the following details:
(a) the name of the partnership;
(b) the general nature of the business;
(c) the main place of business;
(d) the full name, address and description of each partner (including
limited partners);
(e) the names of the partners who are authorised to manage the affairs
of the partnership and to sign in its name, unless all of them are so
authorised; and
(f) the period determined for the existence of the partnership, if such a
period has been determined, and the date of commencement thereof.
79. If any of the registration details is changed, a notice, signed by all
the partners, in which such change shall be specified, must be sent to the
Registrar within seven days (s. 9 PO). The registration requirement and the
obligation to submit any change ensure the availability of ownership infor-
mation in respect of all partnerships formed under Israeli law with Israeli
authorities. Any person failing to submit a notice to the Registrar of a change
in any of the details of registration, is liable to a fine of NIS 15 (EUR 3) for
each day on which the offence continues (s. 9 PO).
80. A foreign partnership shall not conduct any business in Israel unless
it has been registered in Israel (s. 75 PO). In addition, if it is a limited part-
nership it must obtain registration approval from the Ministry of Justice
(s. 75 PO). A foreign partnership doing business in Israel that fails to register
with the Registrar or the Ministry of Justice is liable to a penalty of ITA
14
3 750 (NIS 7.55 (1.52 EUR)).
81. Section 76 of the PO establishes that the registration of a foreign
general partnership or a foreign limited partnership shall be by delivery of a
notice to the Registrar, signed by all the partners and including the following
details:
(a) the name of the partnership;
(b) the nature of the business;
(c) the full name, address, description and citizenship of each of its partners;
(d) the names of the partners authorised to conduct the partnerships
business and to sign on its behalf, unless all are authorised;
(e) the term of existence of the partnership, if such was determined, and
the date of commencement thereof;
14. The last date an exchange rate between Italian Liras and New Israeli Shekels was
published was on the 25 January 2002: ITA 1 000 = NIS 2.075. Source Israeli
National Bank.
(f) the name and address of the Israeli citizen authorised to receive legal
documents and notifications on behalf of the partnership; and
(g) regarding a limited partnership, also a notice that the partnership is a
limited one, and the details of each limited partner, the sum inserted
by him and if paid in cash or any other way, and if paid in full.
82. In the case of changes in the registration details of a foreign part-
nership, a notice, signed by all the partners, in which such change shall be
specified, must be sent to the Registrar within fourteen days (s. 78 PO). The
registration requirement and the obligation to submit any change ensure
the availability of ownership information in respect of all foreign partner-
ships doing business in Israel. Any person failing to submit a notice to the
Registrar of a change in any of the details of registration is liable to a fine of
NIS 15 for each day on which the offence continues (s. 78 PO).
Tax law
83. Under the Income Tax Ordinance two or more persons carrying
on business or vocation jointly are taxed as partnerships. These tax provi-
sions equally apply to foreign partnerships carrying on business in Israel.
Partnerships are considered transparent for tax purposes, which mean that
the partners are taxed separately for their share in the partnerships income
(s. 63(a)(1) ITO). Nonetheless, partnerships are obliged to register with the
tax authorities no later than on the date they start operating by filing Form
4436 (s. 134 ITO) and one of the partners resident in Israel of the partnership
at the request of the assessing officer must make and deliver a return of the
partnerships income for every year (s. 63(2) ITO). The return must contain
the names and addresses of the other partners together with the amount of the
share of the income to which each partner was entitled (s. 63(2) ITO). Where
there is no partner resident in Israel, the return must be filed by a representa-
tive (e.g. attorney) of the partnership who is resident in Israel upon the request
of the tax authorities (s. 63(2) ITO). This means that where a partnership
return has been submitted, full ownership information for the relevant year
is available with the tax authorities.
Conclusion
84. All partnerships organised in Israel or carrying on a business in Israel
must be registered and upon registration details of all partners must be sub-
mitted. Any changes must be notified within 7 days in the case of domestic
partnerships and 14 days in the case of foreign partnerships. Updated ownership
information on partnerships must therefore be available with the registration
authorities. In addition, the tax authorities may request that a tax return for a
partnership be made including ownership information on all partners.
Trusts (ToR A.1.4)
85. The legal basis for trusts is found in the Trust Law 5739-1979 of 1980
(TL). Trusts are not a separate legal entity. A trust is defined as a relationship
to any property by virtue of which a trustee is bound to hold the property, or
act in respect thereof, in the interest of a beneficiary or for some other pur-
pose (s. 1 TL). Israeli law does not require that trust property be owned by the
trustee. The trustee must exercise control over assets to fulfil the purpose of
the trust, but there are no particular conditions as to the manner of control.
Where the trust property includes property that must be registered (such as
real estate), the trustee may notify his/her relationship with the property to
the Registrar of Lands, and such person shall register the appropriate anno-
tation on the deed of the property (s. 4 TL). Trusts created under Israeli law
terminate on the death of the settlor, because the Israeli succession rules
override the rules of trusts. There is a need for probate of the will in order
to achieve a settlors goal of creating a trust that will exist for a number of
generations. Trustees of a trust must keep account books in respect of the
affairs of the trust (s. 7 TL). The trustee must report to the beneficiaries on
the affairs of the trust, annually and upon termination of his/her tenure, and
to provide them with any other additional information that they may reason-
ably request (s. 7 TL).
86. The Trust Law regulates the establishment of private trusts and
public purpose trusts. Public trusts are similar to charitable trusts.
87. Under the definition of a trust in section 1 of the TL, private trusts
are relationships to any property and may take a wide variety of forms
according to the wishes of the parties. The commencement of a trust occurs
on the date when the trustee is granted sufficient control of the property for
carrying out his functions. A trust can be created by law or through a con-
tract with a trustee or by a trust instrument (s. 2 TL). There is no general legal
requirement that a trust arrangement must be evidenced in writing. However,
Section 17 of the Trust Law provides for the creation of an endowment trust
by means of a written instrument of endowment in which the settlor of the
trust expresses his/her intentions to create a trust and determines its objects,
property and conditions. In an endowment, the property is transferred for the
benefit of a beneficiary or for any other purpose. The trust document can be
in one of the following forms:
(a) an instrument signed by the settlor of the trust, before a notary;
(b) a will of the settlor of the trust, other than an oral will; and
(c) an order to make a payment under section 147 of the Succession Law,
5725-1965.
88. If the trust is intended to be executed during the life of the settlor, it
must be signed before a notary (s. 17(1) TL). The signing of a document before
a notary requires that the person appears before the notary and is identified
(Art. 12 Notaries Law 5732-1972). Notaries are licensed in Israel and must
not exercise their powers in respect of a document that is not duly stamped
(Art. 18 Notaries Law). A notary must also retain a copy of the document in
respect of which he or she acts and send it to the central archive for notarial
documents at the time prescribed in regulations (Arts. 19, 31 Notaries Law).
If it is intended to be executed after the death of the settlor, it must be set
out as a testament (s. 17(2) TL) or in the form of a payment order according
to section 147 of the Succession Law. Where any property is de facto a pri-
vate trust but no instrument of trust exists in respect thereof, the court may
declare the existence of a trust and may determine its objects, property con-
ditions and the date of commencement (s. 17 TL). Public trusts, of which one
of the purposes is to advance public interest, must register with the Registrar
of Endowments and also furnish an annual report (s. 26 TL). The Registrar
of Trusts keeps a computerised registry of trusts which is open to public
subject to the limitations of privacy protection. These trusts are also obliged
to furnish annual financial statements to the Registrar. Information on the
founders, the trust conditions and trustees of public trusts is available with
the Registrar. Private trusts including endowments are not obliged to register
with the Registrar.
89. It is conceivable that a trust could be created which has no connec-
tion with Israel other than that the settlor chooses the trust to be governed by
Israeli law. In that event, there may be no information about the trust avail-
able in Israel. In these situations, trust information would have to be available
in the jurisdiction where the trustee is located as the relevant records would
be situated there.
Foreign Trusts
90. Foreign trusts are not addressed in the Trust Law, so identity infor-
mation in relation to foreign trusts that have a nexus to Israel would not be
available under the provisions of the Trust Law. Israeli law does not prohibit
a resident from acting as a trustee or trust administrator for a foreign trust.
Israel is not a Party to the Hague Convention on the Law Applicable to
Trusts. However, information in respect of such trusts is ensured, with some
exceptions, due to the provisions of Israelis Income Tax Ordinance discussed
below.
Tax Obligations
91. The Income Tax Ordinance prescribes comprehensive rules with
regard to taxation and reporting requirements for trusts governed under
Israeli law or foreign law. These rules came into effect on 1 January 2006,
however, reporting obligations have been in force since 31 August 2008.
Under the taxation rules, it is immaterial that trustees are resident in Israel or
not or assets are located within or out of Israel. The ITO classifies trusts into
following categories for taxation purposes:
Israeli resident trusts (s. 75G): at the time of creation at least one sett-
lor and at least one beneficiary were Israeli residents, and in the tax
year at least one settlor and at least one beneficiary are residents in
Israel; further a trust that is not created by foreign residents and is not
a foreign resident beneficiary trust is regarded as an Israeli resident
trust. The assets and income of an Israeli resident trust are considered
as assets and income of the settlor(s). This trust is taxable in Israel.
Foreign resident settlor trusts (s. 75I); a trust of which all settlors were
foreign residents when created and also in the tax year or during the
tax year all settlors and beneficiaries are foreign residents. This trust
is exempt from tax in Israel. The assets held by trustee are deemed as
owned by the settlor personally.
Foreign resident beneficiary trusts (s. 75J): a trust settled by an Israeli
resident in favour of non-Israeli beneficiaries. These trusts are not
subject to tax in Israel subject to certain conditions including that all
beneficiaries are non-Israeli residents and their identity is known.
Assets and income of the trust are deemed to be the assets and
income of the beneficiaries.
Testamentary trust (s. 75L); a trust created under a Will and where all
the settlors of the trust are Testators who were residents in Israel at
the time of their demise. Assets and income are deemed to belong to
the beneficiaries and taxability depends on their residence. A trustee-
ship created by a Will, in which at least one of the beneficiaries is a
resident of Israel, is considered as an Israeli resident trust and provi-
sions of Section 75 G apply.
Tax returns
92. Section 131 (a) (5b) of the ITO provides for the filing of tax returns in
respect of a trusteeship. A trustee is obliged to file a tax return of an Israeli
resident trust (Form 1327: annual return of a trustee of trusteeship) to the
assessing officer of the trust. A trustee must also file a tax return of any trust
that has income or assets in Israel. A beneficiary or a settlor who elects to be
assessable and chargeable to the trust income must also file a tax return of
the trust. A trustee of a foreign resident beneficiary trust is required to file a
tax return only if the trust has income or assets in Israel. A testamentary trust
which has no Israel resident beneficiary is not compulsorily required to file a
return and provisions of a foreign resident beneficiary trusteeship apply.
93. The tax return of a trust must contain, among other things, particu-
lars of all settlors, trustees, protectors and beneficiaries and the residential
status of each (s. 131 ITO)). These details are required to be submitted in
Form 151 H, as an annexure to the annual tax return. Trusts are given a trust
file number by the assessing (tax) officer in Israel. Any change in the type of
trust or the termination of the trust is also notified through Form 151H. If the
reporting trustee is a foreign resident then a mailing address in Israel must
be provided. In the case of a foreign resident settlor trust or a foreign resident
beneficiary trust, Form 151H must be filed to provide details of vesting and
distributions of assets and income in Israel, however, such a form is only
required to be filed if these trusts have assets or income in Israel.
94. Section 75 O (e) provides exemption from filing of tax returns under
section 131 in respect of income created or accrued abroad by a trustee-
ship created by foreign residents or by a foreign resident beneficiary trusts
or by a trusteeship created under a will in which there is no Israel resident
beneficiary. This exemption from filing tax returns to trustees including an
Israeli resident applies in respect of foreign sourced income earned by these
trusts even if they file tax return about income produced or accrued in Israel.
Section 75P (c) provides that, the fact that a trustee is an Israeli resident does
not create a tax liability or an obligation to submit a return in respect of trust
income, in addition to the obligations specified in the ITO, such as would not
exist if all the trustees were foreign residents.
Reporting obligations
95. Section 75 P1 of the ITO obliges an Israeli resident settlor to give
a notice in Form 147 within 90 days of the creation of a trust or contribu-
tion of assets to a trust to the assessing officer of the trust and a copy to
the tax officer where the settlors tax file is maintained. The form contains
details like name of trust; date of creation of trust; details of each of the trust
protectors, trustees, beneficiaries, settlors and contributions to the trust.
Information on individuals includes name, identifying number and country
of residence. An individuals identifying number is associated with informa-
tion that identifies the person. However, this obligation does not apply to an
Israeli resident settlor who became an Israeli resident for the first time or a
veteran returning resident for a period of 10 years from the date on which
he/she became an Israeli resident on the condition that only assets abroad
or income from assets abroad are vested in such a trusteeship (s. 75P1(a1)).
Section 75 P 2 obliges a settlor to file Form 147 if a trust is converted to an
Israeli Resident Trust or a Foreign Resident Beneficiary Trust.
96. Pursuant to Section 75 P 2 (a), a notice in Form 147 must be submit-
ted within 90 days of the creation of a trusteeship under a will (Testamentary
Trust). Form 147 is also filed by a trustee in case of a change in the category
of trusteeship, the conclusion of a trusteeship of Israeli resident or the conclu-
sion of a trusteeship that at its conclusion held assets in Israel.
97. Section 75 P 3 of the ITO obligates an Israel resident beneficiary to a
give a notice in Form 149 of distributions received in moneys worth in a tax
year to the assessing officer of the trust. Such a notice must be given even if
the distribution is not liable to tax in Israel. The notice must contain informa-
tion on the trust, settlors and description of the assets distributed.
98. Pursuant to Section 75 J (f) of the ITO, a reporting trustee is required
to submit Form 143 as an appendix to annual tax return of a Foreign Resident
Beneficiary Trust. Form 143 must also be submitted by April 30
th
of the year
following the tax year, if an annual tax return is not required be filed. This
Form requires providing information such as name of trust, date of creation,
trust file number, identity information on the reporting trustee and all trust
protectors, settlors, beneficiaries, trustees and distributions. Change in type
of trust and termination of trust must also be intimated by this notice. This
Form is also submitted as an attachment to Form 147 by the trust settlor as a
onetime notice (s. 75 J (a) (4) (b)).
99. A declaration of an irrevocable trusteeship (Form 141) is filed as an
appendix to the annual return of trust.
Conclusion
100. Tax return filing requirements apply to the Israeli resident trusts and all
types of trusts that have income or assets in Israel. Information on the settlors,
trustees and beneficiaries must also be filed in a separate form attached to the tax
return. Tax reporting requirements apply to all beneficiaries and settlors resident
in Israel except for new immigrants and veteran returning residents. Further, a
reporting trustee of a foreign resident beneficiary trust must submit information
on the trust, even if no tax return is required to be submitted. There is no tax
filing or reporting requirements in case of foreign resident settlor trusts that have
no assets or income in Israel. The tax law exempts the Israeli settlor of trusts who
are new immigrants or veteran returning residents from reporting obligations for
the first ten years if such a trust has no income or assets in Israel. Therefore, it is
recommended that Israel sufficiently ensure the availability of identity informa-
tion in respect of the settlors, trustees and beneficiaries of the foreign resident
settlor trusts and for trusts created by the new immigrants and veteran returning
residents which are vested with assets or income from assets abroad.
Foundations (ToR A.1.5)
101. The Israeli legal and regulatory framework does not provide for the
establishment of foundations.
Other relevant entities and arrangements
102. Under the Associations Law (AL), associations can be established.
An association is defined as an entity created by two or more persons who
wish to incorporate as a body corporate for a lawful purpose not aimed at the
distribution of profits to its members (s. 1 AL). An application for registra-
tion of an association must be submitted by the founders to the Registrar of
Associations, indicating: (i) the name, (ii) objects and (iii) address in Israel
of the association and (iv) the names, (v) address and (vi) identity numbers of
the founders (s. 2 AL). An association must also keep a register of members
in which every member must be registered indicating his address, identity
number, date of commencement and date of termination of his membership
(s. 18 AL). In addition, an association must keep a register of board members
in which the name, address, identity number, date of commencement and
termination of service of each member (s. 29 AL).
Enforcement provisions to ensure availability of information
(ToR A.1.6)
103. Jurisdictions should have in place effective enforcement provisions
to ensure the availability of ownership and identity information, one pos-
sibility among others being sufficiently strong compulsory powers to access
the information. This subsection of the report assesses whether the provi-
sions requiring the availability of information with the public authorities or
within the entities reviewed in section A.1 are enforceable and failures are
punishable.
104. Companies must keep a register of shareholders in their registered
office located in Israel. Public companies are also required to keep a register
of substantial shareholders. Not keeping a register of shareholders or not
giving notices or reports to the Registrar is considered a breach of duty. A
fine of NIS 6 000 (EUR 1 200) shall be imposed on a company for the afore-
mentioned breach once the Registrar has made a demand to the company to
remedy the breach and the breach is not remedied in a period of forty-five
days (ss. 354(a) and 356(a) CL). Private companies are obliged to annually
report to the Registrar information on certain matters including the allotment
of shares and transfer of shares (s. 140 CL). Further, income tax returns of
companies must contain a report of its current shareholders (s. 131(a)(5).
105. A new amendment to the Israeli Companies Law came into effect on
1 January 2010. This amendment allows the Companies Registrar to declare
that a company which does not comply with the regulations concerning the
payment of an annual fee and submitting an annual report to the Registrar
of Companies is a company in breach, and as a consequence, several sanc-
tions are imposed on that company, including refusal to register charges on
the companys assets or charges in favour of it, refusal to register a new com-
pany to a controlling member of a company in breach and refusal to register
a companys change of name.
106. The ITO obliges all persons including companies to notify the
assessing officer about the beginning or change of occupation in time. The
defaults of failure to inform the Assessing Officer of this fact in time and
also non submission of its first annual tax return after the event are liable to
three years of imprisonment or to a fine of NIS 75 300 (EUR 15 100) and to
another fine of half the tax to which it was liable (s. 215A(a) ITO).
107. Partnerships formed for the purpose of managing a business must
be registered within one month from the date of formation (s. 4 PO).The reg-
istration of partnerships ensures availability of information on partners. If a
partnership does not register as required by law, then each of its partners is
liable to a fine of NIS 15 (EUR 3) for each day on which the offense contin-
ues (s. 6 PO).
108. If a property is in effect an endowment and no instrument of endow-
ment exists as required by law, then the court may declare the existence of an
endowment trust and may determine its objects, property conditions and date
of commencement (s. 17 TL).
109. Non-compliance of the requirements of filing tax returns and other
reports to tax authorities as per provisions of sections 131 to 133 of the
Income Tax Ordinance are sanctionable with one year imprisonment, or to a
fine of NIS 26 100 (EUR 5 220), or both (s. 216(4) ITO). These enforcement
measures apply to all persons including domestic and foreign companies,
partnerships, trustees, settlors or beneficiaries and individuals. 110.An asso-
ciation must keep a register of members and board members. An association
and every person responsible who does not keep a register of members or
board members are liable to a fine of NIS 1 000 (EUR 200) (s. 64 AL).
Determination and factors underlying recommendations
Phase 1 determination
The element is not in place.
Factors underlying
recommendations Recommendations
Israel authorises the issuance
of bearer shares by companies
other than those registered on the
stock exchange without having in
place mechanisms for identifying
the holders of those shares in all
circumstances. Only 12 companies
have issued bearer shares.
Israel should take necessary
measures to ensure that robust
mechanisms are in place to identify
the owners of bearer shares.
Under the Income Tax Ordinance,
foreign companies that are managed
and controlled in Israel are considered
tax resident in Israel. However, foreign
companies that are managed and
controlled in Israel by new immigrants
or veteran returning residents are
given an exception from this tax
residency rule for a period of 10 years
and ownership information on such
companies is not ensured in Israel.
Israel should ensure that ownership
information is available to its
competent authority in respect of all
foreign companies that are managed
and controlled from Israel.
Israeli law does not ensure the
availability of identity information in
respect of the settlors, trustees and
beneficiaries of foreign resident settlor
trusts having a trustee resident in
Israel and for trusts created by new
immigrants and veteran returning
residents which are vested with assets
or income from assets abroad for a
period of 10 years.
Israel should ensure the availability of
identity information in respect of the
settlors, trustees and beneficiaries of
foreign resident settlor trusts having
a trustee resident in Israel and for
trusts created by new immigrants and
veteran returning residents which are
vested with assets or income from
assets abroad.
A.2. Accounting records
Jurisdictions should ensure that reliable accounting records are kept for all
relevant entities and arrangements.
111. A condition for exchange of information for tax purposes to be effective
is that reliable information, foreseeably relevant to the tax requirements of
a requesting jurisdiction, is available, or can be made available, in a timely
manner. This requires clear rules regarding the maintenance of accounting
records.
General requirements (ToR A.2.1)
112. Private companies must keep accounts and are obliged to prepare
annual financial reports (s. 171 CL). The financial reports need to be approved
by the board of directors and signed in its name (s. 171 CL). A private com-
pany shall prepare financial reports for each year, which shall include a
balance sheet as of the 31
st
of December as well as a profit and loss account
for the period of a year ending on that date, and other financial reports, in
accordance with the requirements of accepted accounting rules (s. 172(a)
CL). The reports meet the international standard since they must be prepared
in accordance with accepted accounting rules in Israel (s. 172(d) CL) which
are in accordance to the Framework for the Preparation and Presentation of
Financial Statements (FPPFS) published by the International Accounting
Standards Board (IASB) that determine that the objective of financial reports
is to provide information about the financial position, financial performance
and cash flows of an entity that is useful to a wide range of users in making
economic decisions (p. 12 FPPFS). Due to the aforementioned, private com-
panies must keep accounts that (i) correctly explain all of its transactions,
(ii) enable the financial position of the company be determined with reason-
able accuracy at any time and (iii) allow financial statements to be prepared.
113. The board of directors of a private company must present the reports
approved by it to the annual general meeting (173(a) CL). The reports are
required to be kept at the registered office of the company for at least seven
years from the date on which they were prepared, for the inspection of the
directors and shareholders of the company (173(c) CL). A shareholder in a pri-
vate company may receive a copy of the reports (s. 174(d) CL). Furthermore,
the directors of a company must ensure that a full set of financial accounts
(financial statement) is drawn up in accordance with accepted accounting
rules (s. 92(a)(5) and s. 172(a) CL). If a company does not prepare financial
reports it is liable to a fine of NIS 6 000 (EUR 1 200) (s. 354(a) CL).
114. Public companies must keep accounts and are obliged to prepare
financial reports in accordance with the Securities Law (s. 171 CL). The
Minister of Finance is empowered under the Securities Law (SL) to enact reg-
ulations with regard to financial reporting of public companies (s. 17 SL). The
Securities Regulations (Preparation of Annual Financial Statements) 5753-
1993 (SR) determine that the financial statements of public companies must
be prepared in accordance with the accounting rules and must fairly reflect
the position of the corporations business on the balance sheet dates, the result
of its activities, the changes in its net worth and its cash flow in the reported
years (s. 3 SR). The financial statements of a company issuing securities in a
foreign country may be prepared in accordance with international accounting
standards or accepted accounting rules in the United States (s. 3A SR). The
assets of the corporation should be classified and presented in the following
categories: (i) current assets; (ii) non-current inventory; (iii) investments,
loans and long-term debit balances; (iv) fixed assets; and other assets, includ-
ing intangible assets and deferred expenses (s. 12 SR). Public companies are
also obliged to report the details of their investments in controlled companies
which should be classified in: (i) shares; (ii) certificates that grant a right to
purchase shares; (iii) certificates of indebtedness that can be converted into
shares; (iv) certificates of indebtedness that cannot be converted into shares;
and (iv) loans and debit balances that are not included in the current assets
(s. 22 SR).
115. Public companies are also required to report information on their
share capital which should include the number, class, nominal value and
main rights (s. 40 SR). The SR also includes an obligation on reporting taxes
on income on the current year and previous years (s. 57 SR). With regards to
ownership information of a public company, public companies must submit
information on their liabilities to their principal shareholder; their invest-
ments in a principal shareholder; and the benefits to a principal shareholder
and transactions with him (ss. 62, 63 and 64 SR). The accounting records
kept by public companies must correctly explain all the transactions of the
company, enable the financial position of the company to be determined
accurately at any time and allow financial statements to be prepared.
116. The SR defines the international auditing standards as the standards
published by the International Federation of Accountants (IFAC) (s. 1 SR).
The International Auditing Standard on Auditing (IASA) 200 require finan-
cial statements to be a structured representation of the financial information,
which ordinarily includes accompanying notes, derived from accounting
records and intended to communicate an entitys economic resources or
obligations at a point in time or the changes therein for a period of time
in accordance with a financial reporting framework (p. 34 IASA). The
International Financial Reporting Standards (IFRS) published by the IFAC
require financial statements to provide information about the financial posi-
tion, performance and cash flows of an entity. The IFRS require financial
statements to include a balance sheet; an income statement; a statement of
changes in equity; a cash flow statement; and notes, comprising a summary
of significant accounting policies and other explanatory notes. Taking into
account the requirement that the accounts must be audited under Israeli law,
it may be expected that the records to be kept (i) correctly explain all trans-
actions, (ii) enable the financial position of the entity or arrangement to be
determined with reasonable accuracy at any time, and (iii) allow financial
statements to be prepared.
117. Partners within a partnership are bound by a duty to conduct the
business of the partnership for their common benefit, to be honest and
trustworthy on another and to provide every partner or his proxy correct
accounts and complete information on all matters concerning the partnership
(s. 29 PO). Similarly, the Trust Law determines that the trustee of a trust must
keep account books in respect of the affairs of the trust (s. 7 TL). A trustee
of an Israeli trust must report to the beneficiaries on the affairs of the trust,
annually and upon termination of his tenure, and to provide them with any
other additional information that they may reasonable request (s. 7 TL).
Tax law obligations
118. The ITO in section 130(a)(1) prescribes that the Director of the Israel
Tax Authority (Director) may issue provisions ordering account books be
kept in respect of income derived from a business or vocation in Israel, and
in those provisions he may prescribe rules on the method of keeping the
account books, including the taxpayers duty to require a person with whom
he maintains any business relationship to deliver his personal particulars to
the taxpayer and to identify himself. Any person who fails to keep account
books in accordance with the provisions issued by the Director is liable to
one year imprisonment, or to a fine of NIS 29 200 (EUR 5 220), or both
(s. 216(5) ITO).
119. Section 130 ITO only applies to persons liable to income tax in Israel.
This includes all companies organised or managed and controlled in Israel.
Although general and limited partnerships organised or managed and con-
trolled in Israel are considered transparent for tax purposes, each partnership
is required to file a return on behalf of the partners and so are subject to these
record-keeping obligations as well (s. 63(a) ITO). The tax return filing obliga-
tions and other reporting obligations on trustees, settlors and beneficiaries
ensure that they keep and maintain accounting information of the trusts so
as to fulfil their tax obligations properly. However, a gap remains in respect
of foreign resident settlor trusts that have no assets or income in Israel. In
that case, there is no obligation on a trustee to keep and maintain accounting
records of the trust consistent with the standard as trust income derived from
non Israeli sources is not taxable in Israel. Similarly, in the absence of any
tax return filing requirement or reporting obligations on the trusts created by
new immigrants or veteran returning residents which are vested with assets
or income from assets abroad, it is unclear that accounting records consistent
with the standard will be maintained for those trusts. Foreign companies that
are managed and controlled in Israel by new immigrants or veteran returning
residents are exempt from taxation in respect of foreign source income for a
period of 10 years. As there are no obligations to file tax return or keeping
account books by such companies, the availability of their accounting records
in respect of activities outside of Israel is not ensured.
120. The Income Tax Regulations (Returns and Supplementary Returns
by Body of Persons) 5724-1963 require corporate entities to attach to their
annual tax return (i) a balance sheet as of the last day of the tax year and a
profit and loss account for the tax year, together with an auditors report; and
(ii) an adjustment account of the profit and loss of the income or loss declared
in the annual tax return.
121. Under the Income Tax Rules (Bookkeeping) 5733-1973 (ITR) a tax-
payer must keep a set of account books in accordance with the provisions
of the applicable Schedule depending on the type of business or profession
carried on by him (s. 2 ITR). The ITR provides that all taxpayers to whom
the provisions of the Schedules apply are obliged to have documentation that
would include receipts, a daily intake ledger, cash register, delivery notes,
invoices and an inventory list (sections 5 through 10 ITR). These taxpay-
ers are also required to keep account books that should include a cash book
(s. 11 ITR), intake and payments book (s. 12 ITR), stock book (s. 13 ITR),
goods of entry book (s. 14 ITR) and an order book (s. 15 ITR). Account
books required under Israeli tax law meet the international standard since
they would enable taxpayers to correctly explain all the transactions they
are engaged in, enable the financial position of the taxpayer be determined
with reasonable accuracy at any time and allow financial statements to be
prepared.
122. Persons who are tax residents but who are not covered by the obli-
gation to keep books and records under section 130 ITO are nevertheless
required to submit an income tax return if they receive income (s. 131 ITO).
Section 131(b) of the ITO further requires filing of a copy of balance sheet
and profit and loss account with the tax return, if the return is based on a
complete set of double-entry accounts. In other cases, the basis of declaration
of income must be stated. It is noted that companies, partnerships, trusts and
associations are subject to obligations to keep books and records separately
from tax law.
Underlying documentation (ToR A.2.2)
123. Section 130 of the ITO requires all taxpayers) deriving income to
keep account books. As mentioned above, these include underlying docu-
mentation such as receipts, invoices, a daily intake ledger, cash register tape,
delivery notes and an inventory list (ss. 5 to 10 ITR). The ITR describes the
aforementioned documentation as internal and external documentation. The
ITO exempts certain category of persons from obligations of keeping account
books. Section 130(a)(3) of the ITO empowers the Director to exempt a small
business from the duty of keeping account books if he meets criteria set by
the Director in respect of a physical or mental condition or illiteracy. The
exemption is granted after receiving the opinion of a committee appointed
by him and is on case to case basis. A small business is defined as a busi-
ness whose main income stems from groceries such as vegetables, fruits,
cigarettes or light soda and entire business turnover during the year does not
exceed NIS 310 000 (EUR 62 000).
124. Account books must comprehend internal documentation that would be
underlying documentation that would correctly explain all the transactions of
a taxpayer for which he received income (s. 17(a) ITR). Taxpayers are required
to keep internal documentation that must be registered near the time when an
act was performed regarding an intake, a sale, the shipment or transportation
of goods or the provision of a service (s. 17(a) ITR). Internal documentation is
defined in the ITR as a record of an act performed by the taxpayer or on his
behalf (s. 1 ITR). Section 5 of the ITR determines that internal documentation
which is a receipt shall be drawn up for each intake separately, and it must
include: (i) a serial number; (ii) the name of the taxpayer, his ID number, entity
registration number or registration number for VAT purposes; (iii) the date;
(iv) the name and address of the payer; (v) the amount received; (vi) the nature
of the intake or the account to be credited; and (vii) the recipients signature,
unless the receipt was sent as a computerised document. Taxpayers are also
required to have a daily intake ledger in their internal documentation that shall
be a bound book and must include: (i) the name of the taxpayer; (ii) the date of
the beginning of each day; (iii) the amount of each intake received separately
for a sale or a service, including a conditional sale or indirect tax; and (iv) the
total, in ink, of all the amounts received, that has to be recorded at the end of
each day or next morning (s. 6 ITR). Internal documentation requirements are
also provided for the cash register tape, delivery notes, invoices and an inven-
tory list that taxpayers are required to have (sections 7 through 10 ITR).
125. In addition, account books must include external documentation
on all the transactions in respect of which a taxpayer incurred an expense.
Section 14(b)(3) of the ITR establishes that every entry of goods into a busi-
ness shall be recorded in the goods entry book indicating the specification
and quantity of goods that will be supported by external documentation that
will specify the goods that were received. The ITR defines the term external
documentation as a record of an act, which was received by the taxpayer or
on his behalf from an outside factor (s. 1 ITR). If the taxpayer has sent or
received the external documentation by computer then the record that is in a
computerised document will be considered external documentation (s. 1 ITR).
With regards to the goods of entry book taxpayers have an obligation to
register the specification and quantity of goods received and this registra-
tion should be backed up by external documentation that specifies the goods
that were received. Schedule One of the ITR require that bookkeeping by
producers, retailers, contractors, professionals, physicians and other types of
taxpayers include a file of external documentation.
5-year retention standard (ToR A.2.3)
126. For tax purposes, account books are required to be kept for seven
years from the end of the tax year to which they refer, or for six years after
the day on which the return for that tax year was submitted, whichever is later
(s. 25(c) ITR). Since underlying documents form part of the account books
the same retention period applies for the underlying documentation required
to be kept for tax purposes (invoices and receipts, see ss. 5 to 10 ITR). Since
this requirement is linked to the general requirements under section 130 ITO,
it covers all relevant entities and arrangements (see A.2.1). The CL contains
a minimum retention period of 7 years for accounting records (sections 124
and 173 CL).
The element is in place, but certain aspects of the legal implementation
of the element need improvement.
Factors underlying
Israeli law does not ensure the
availability of accounting records in
respect of foreign resident settlor
trusts having a trustee resident in
Israel and for trusts created by new
or income from assets abroad for a
period of 10 years.
Israel should ensure that accounting
records consistent with the standard
are maintained for foreign resident
settlor trusts having a trustee resident
in Israel and for trusts created by new
or income from assets abroad.
Israeli law does not ensure availability
of accounting records in respect of
activities outside of Israel of foreign
or veteran returning residents for a
period of 10 years.
Israel should ensure availability of
accounting records in respect of
activities outside of Israel of foreign
or veteran returning residents.
A.3. Banking information
Banking information should be available for all account-holders.
127. The Banking (Licensing) Law (BL) determines that only banking
corporations shall engage in: (i) acceptance of deposits of funds and issuance
of credit as one activity and (ii) securities issuance that entails a prospectus
under Section 15 of the Securities Law, 5728-1968, and issuance of credit as
one activity (Section 21). In addition only banks or foreign banks, licensed
by the Governor of the Central Bank, are allowed to engage in acceptance of
deposits of funds in current accounts for payout from said deposits by cheque
upon demand (Section 13 BL). Banks are allowed to engage only in banking
business specified in Section 10 of the Banking Law (s. 3, s. 4 and s. 10 BL).
The Bank of Israel is the regulatory and supervisory body for the Israeli
banking industry. As at August 2012, a total of 22 banks were operating in
Israel. The Postal Bank is Government owned and supervised by the Ministry
of Communications.
Record-keeping requirements (ToR A.3.1)
128. The requirements for identity information banks must keep on account
holders are primarily provided in the Prohibition of Money Laundering (The
Banking Corporations Requirement regarding Identification, Reporting, and
Record-Keeping for the Prevention of Money Laundering and the Financing
of Terrorism) Order, 5761-2001 (PMLO). Section 2(a) of the PMLO establishes
that a banking corporation shall not open an account without recording the
following identification particulars in respect of each of the account holders
or authorised signatories, and in respect of any other person applying to open
an account, and authenticating them as set forth in section 3 of the PMLO:
(i) name; (ii) identification number; (iii) date of birth for an individual or date
of incorporation for a company; and (iv) address. Comparable obligations in
case of the Postal Bank are stipulated in the Order No.5762-2001.
129. In addition, the Prohibition on Money Laundering Law (PMLL)
requires that the banking corporations must not provide services in con-
nection with a property transaction unless they possess the identifying
particulars (CDD) as specified in the PMLO (s. 7(a)(1) PMLL).
130. Banking corporations and other financial institutions have the duty,
before opening an account, to receive from the customer a declaration bear-
ing an original signature stating whether he is acting for himself or on behalf
of another. If the applicant declares that he is acting on behalf of another
person, the declaration must include the name and identity number of the
beneficiary of the account (s. 4 PMLO). Banking corporations are obliged
to record the name and identity number of the beneficiary of the account in
accordance with the aforementioned declaration (s. 2 PMLO). Failure to carry
out CDD or to maintain the identification documentation for at least seven
years after the end of relationship can lead to an administrative fine of no
more than NIS 2 260 000 (EUR 452 000) for each default (s. 14(a) PMLL).
131. Even though financial institutions under section 18 of Directive 411 on
the Prevention of Money Laundering and Terrorism Financing, and Customer
Identification (Directive 411) may have numbered accounts (accounts in which
the name of the beneficial owner is known by the banking corporation but is
substituted by an account number or code name in some documentation) they
must abide by the following rules:
(a) numbered accounts shall be subject to customer due diligence proce-
dures applicable to all accounts;
(b) the identity of a customer with a numbered account shall be known
to a sufficient number of officials to enable a thorough and adequate
check of the customers identity and to monitor his transactions for
purposes of identifying unusual activity;
(c) numbered accounts shall not be used to hide a customers identity
from the compliance or supervisory authorities; and
(d) a banking corporation which takes special measures to ensure inter-
nal secrecy in regard to customers accounts shall ensure that the
accounts of these customers are examined and monitored at least as
thoroughly as accounts of customers regarding whom no such special
measures are taken, and shall ensure that the officer responsible and
the internal auditors shall have direct access to the information on
these accounts.
132. Due to the legal requirements mentioned above, financial institu-
tions cannot keep anonymous accounts or other types of accounts which are
opened on behalf of another person which are not identified and known.
133. Section 7 of the PMLO requires banking corporations to retain iden-
tification documents or photocopies thereof for at least seven years after the
account is closed or a transaction has been carried out. Banking corporations
are obliged to retain the documents attesting to the instruction to the bank-
ing corporation to carry out a transaction for the same period in two cases:
(a) when the transaction was reported to the Financial Intelligence Unit and
(b) when the value of the transaction was equivalent to at least NIS 10 000
(EUR 2 000). This means that the instruction documents for transactions
below this threshold may not be retained for at least seven years under the
provisions of the PMLO.
134. The Proper Conduct of Banking Business Directive 411 determines
that banking corporations must establish procedures for the retention of
information essential for authenticating customers identity and their type
of business, the period for which it should be retained, the type of customer
(individual, company, etc.), and the expected extent of activity in the account
(s. 13(a) Directive 411). The information shall be retained in a manner
which will make it readily available and enable efficient retrieval (s. 13(a)
Directive 411).
135. Section 13(b) of Directive 411 requires that a banking corporation
shall undertake reviews to ascertain the existence of adequate and updated
information and that the reviews shall take place at times and on occasions
determined by the banking corporation in its procedures, such as when a sig-
nificant transaction is about to take place, or when the requirements relating
to customer documentation change, or when the way the account is managed
alters significantly. If a banking corporation discovers that certain significant
information about a customer is lacking, it shall take steps to ensure that it
obtains the missing information as soon as possible (s. 13(b)(3) Directive 411).
136. Section 16(b) of Directive 411 requires banking corporations to
record the identity of the person requesting a transaction in transactions
involving sums below NIS 10 000 (EUR 2 000). The Directive has the force
of law as it is regarded as a Regulation according to section 5(c 2)(1) of the
Banking Ordinance, 1941.
137. Provisions of the PMLL, the PMLO and the Directive creates clear
obligations on the banks to keep customer identification information in
respect of all the accounts consistent with the standard.
138. The AML/CFT laws require that the documents attesting the instruc-
tion to carry out a transaction (above NIS 10 000 (EUR 2 000)) threshold or
reported as suspicious transaction to the FIU must be recorded for a period
of seven years, however, the Banking Law or the AML/CFT provisions
do not explicitly require the banks to keep all the financial and transac-
tional information in respect of transactions carried out by its customers.
MONEYVAL
15
adopted an Evaluation report
16
on the anti-money laundering
and the financing of terrorism in case of Israel in 2008. This report had iden-
tified deficiencies in Israels AML/CFT framework with regard to keeping
of the documents recording details of transactions carried out by the client
in the course of established business relationships. The report also referred
to the existence of thresholds for retaining the documents. MONEYVAL
15. Council of Experts on the Evaluation of Anti-Money Laundering Measures and
the Financing of Terrorism.
16. Council of Europe website: www.coe.int/t/dghl/monitoring/moneyval/countries/
Israel_en.asp.
issued a Second Progress report
17
on 14 December 2011 which states that,
it appears that the Israeli authorities have taken steps towards meeting the
MONEYVAL recommendations, firstly by adopting the obligations to main-
tain documents on the instruction to carry out any transactions for a period
of seven years for Stock Exchange Members and for Portfolio Managers, and
secondly, by drafting new provisions on record keeping, applicable to bank-
ing corporations, Post Bank, insurers and insurance agents, provident funds
and companies managing a provident fund business. However, the latest
provisions are not in force yet and thresholds are still applicable. The Israeli
authorities have advised that amendments to the PMLO with regard to record
keeping irrespective of threshold are currently pending for discussion of the
Knesset committee. The Company Law and the ITO oblige all relevant enti-
ties including banks to keep underlying documentation for at least five years,
however, this obligation may not meet the requirements of the TOR A.3.
Factors underlying
The AML/CFT laws only require
retention of documents attesting the
instruction to carry out transactions
above the threshold of NIS 10 000
(EUR 2 000) or reported as suspicious
transaction to the FIU.
Israel should ensure that transactional
information consistent with the
standard is available in respect of all
transactions carried out by the banks.
17. www.coe.int/t/dghl/monitoring/moneyval/Evaluations/Progress%20reports%202y/
MONEYVAL(2011)28_ProgRep2_ISR_en.pdf.
COMPLIANCE WITH THE STANDARDS: ACCESS TO INFORMATION 49
B. Access to Information
Overview
139. A variety of information may be needed in a tax enquiry and jurisdic-
tions should have the authority to obtain all such information. This includes
information held by banks and other financial institutions as well as infor-
mation concerning the ownership of companies or the identity of interest
holders in other persons or entities, such as partnerships and trusts, as well
as accounting information in respect of all such entities. This section of the
report examines whether Israels legal and regulatory framework gives the
authorities access powers that cover the right types of persons and informa-
tion and whether rights and safeguards would be compatible with effective
exchange of information.
140. The Israeli tax administration has broad powers to access informa-
tion relevant for the tasks of the tax administration from any person and from
public authorities. The assessing officer may ask a person for delivery of his
return including declaration of the capital and assets and for providing books
documents, accounts and returns which the assessing officer deems neces-
sary. The assessing officer is empowered to require relevant tax information
also from third parties (e.g. suppliers, customers, payers of taxable income,
employers). These information gathering powers include power to enter any
place in which a business or a vocation is carried on, and examine and seize
stock in trade, the cash box, machinery, books, accounts, vouchers, records
and other documents deemed necessary. The assessing officer has also the
power to summon any person who has business relations with the asses-
see and who he believes can testify on his income. Non-compliance can be
sanctioned with administrative as well as criminal penalties. However, there
are some limits on these powers in respect of information relating to new
immigrants or returning veterans during a 10 year tax exempt period and in
respect of foreign resident settlor trusts.
141. The Israeli authorities advise that usage of these broad informa-
tion gathering powers for exchange of information purposes is based on
50 COMPLIANCE WITH THE STANDARDS: ACCESS TO INFORMATION
integration of agreements affording double taxation relief into domestic
law through the ITO. Section 196 of the ITO has the effect of incorporating
the information exchange article of the relevant agreement into the tax law,
and accordingly exchange of information with foreign authorities is made a
purpose of the tax law. That said, the powers of authorities are not explicitly
drafted for the purposes of exchange of information and it is recommended
that Israel clarify its law in this respect. Moreover, the ITO does not give
effect to agreements concluded solely for the purpose of exchange of infor-
mation (e.g. TIEAs). As a result, Israels competent authority does not have
the power to obtain and provide information for the purpose of giving effect
to a TIEA. It is recommended that Israel rectifies this gap in its laws. The
Israeli authorities advise that at present their EOI relationships are based on
the DTCs only and an amendment to the ITO to empower its authorities to
execute the provisions of such agreements is in the legislative process.
142. There is no limitation to the tax authoritys power to request informa-
tion imposed by bank secrecy rules.
143. The Income Tax Ordinance empowers the assessing officer to obtain
information from advocates. The advocate must provide information but
when they claim that information is privileged, the court decides the issue.
The definition of professional secrecy in the ITO is consistent with the inter-
national standard.
144. The Israels law does not contain any notification requirement relat-
ing to exchange of information procedures.
B.1. Competent Authoritys ability to obtain and provide information
Competent authorities should have the power to obtain and provide information that is the
subject of a request under an exchange of information arrangement from any person within
their territorial jurisdiction who is in possession or control of such information (irrespective
of any legal obligation on such person to maintain the secrecy of the information).
Ownership and identity information (ToR B.1.1) and Accounting
records (ToR B.1.2)
145. The tax administration is under a general duty to systematically
ensure taxpayers and third parties compliance with obligations under
the ITO and has necessary powers for that purpose. The administration is
required and entitled to assess the correct tax liability of the taxpayer and in
order to do so has broad powers enabling it to obtain complete information
about persons income. This information can be gathered from broad variety
of persons, sources and by variety of means (s. 135140A ITO).
146. In order to obtain complete information about a persons income
the tax administration via assessing officer has power to demand from that
person by written notice delivery of his return specified in that notice, includ-
ing a declaration of the capital and assets of that person or of his spouse and
of their children for whom they are entitled to credit points or pension points,
or of assets for which he serves as a trustee of another person. The Assessing
Officer may also demand that the person appear before him, in person or by
a representative, and that he deliver to him all the particulars required by the
Assessing Officer in order to ascertain his income and that he produce for
examination books, documents, accounts and returns which the Assessing
Officer deems necessary (s. 135(1) ITO).
147. The Assessing Officer may enter any place in which a business or a
vocation is carried on, and examine stock in trade, the cash box, machinery,
books, accounts, vouchers, records and other documents that relate to that
business or vocation and demand explanations in connection with them. The
assessing officer can also seize books, accounts, vouchers, records and other
documents that relate to that business or vocation, if he is convinced that it is
necessary in order to ensure compliance with the provisions of the ITO or to
prevent an evasion of compliance with those provisions. The assessing officer
may summon any person who has business relations with the assessee and
who he believes can testify on his income, to appear before him and demand
of the said person that he give him documents that relate to that income
(s. 135(2-4) ITO).
148. The Israeli tax administration has also the power to demand infor-
mation about suppliers and customers from a person that owns a business or
practices a vocation except for advocates, physicians and psychologists. Upon
demand of the assessing officer he must provide to the officer information
and documents about his business relations with his suppliers, customers or
other persons with whom he has business relations, even though that informa-
tion and those documents are not required to ascertain his income (s. 135A
ITO). Israeli authorities advise that this obligation covers also banks and
other financial institutions and prevails over any respective secrecy rules in
respect of these entities stipulated in Israeli laws.
18
149. The Assessing Officer may demand a return of income from a person
who receives profits or income to which ITO applies and which belong to
a certain person, or which pays said profits or income to a certain person.
This demand obliges the requested person to submit a return regardless the
capacity in which he received or paid the respective income. This return must
contain a true and correct disclosure of all those profits and income, and the
name and address of that certain person (s. 137 ITO).
18. See section B.1.5.
150. Public authorities who have at their disposal information relevant for
the administration of ITO are under an obligation to provide information to
the tax administration if requested to do so (s. 140 ITO). These authorities are
the State, anybody subject to audit by the State Comptroller, and any other
body which the Minister of Finance, with approval by the Knesset Finance
Committee, declared a public body. However, this obligation does not apply
on information which cannot be disclosed based on the Statistics Ordinance,
the Postal Bank Law, 5711-1951, or the Bank of Israel Law, 5714-1953. Israeli
authorities have confirmed that there is no limitation to the tax authority
power to request information imposed by bank secrecy rules.
151. The powers of the Israeli tax administration further include the
specific power to demand a return about employees from an employer
(s. 136 ITO), the power to demand a return from a house occupant (s. 138 ITO)
or a return about lodgers and tenants (s. 139 ITO).
152. An individual who became an Israeli resident for the first time and
a veteran returning resident shall during ten years after the date on which
they became residents are exempt from tax on their income from all the
sources that were produced or accrued abroad or that are derived from assets
abroad, unless they elect otherwise (s. 14(a) ITO). Such persons are not
required to submit a return of their capital and assets abroad during ten years
after the date on which they became an Israel resident. Trustees of a foreign
resident settlor trusts are not subject to any tax return filing or any other
reporting obligations. The Israeli authorities advise that, they can use their
domestic law powers to gather information for EOI purposes but the new
immigrant and veteran returning resident can decline to supply information
on capital and assets abroad during the first ten years. Similarly, information
from a trustee of a foreign resident settlor trusts cannot be obtained.
Use of information gathering measures absent domestic tax interest
(ToR B.1.3)
153. The concept of domestic tax interest describes a situation where a
contracting party can only provide information to another contracting party
if it has an interest in the requested information for its own tax purposes.
154. The information gathering powers of Israels tax administration are
stipulated under s. 135-140 of the ITO. The respective sections make refer-
ence to assessing officer, a person and an income. Section 1 of the ITO
defines person to include a company and a body of persons as defined in the
Ordinance. Company is defined as a company incorporated or registered in
Israel or elsewhere. Income is defined as a persons total income from the
sources specified in section 2 and together with amounts in respect of which
any statute provides that they be treated as income for the purpose of the
Ordinance (s. 1, ITO).
155. Israels tax administration has sufficiently broad access powers for
domestic tax purposes. Their usage for exchange of information purposes is
based on treaties and the way in which they have been given effect in Israels
law. Provisions concerning double taxation relief are contained in Chapter III
(sections 196 through 214) of the ITO. Section 196 in relation to the order that
gives effect to agreement reads as:
Order that gives effect to agreement
196. (a) When the Minister of Finance has given notice by
Order, that an agreement specified in the Order was con-
cluded with a certain state to afford double taxation relief
on income tax and on every other tax of a similar character
imposed by the Laws of that state (hereafter: reciprocating
state) and that it is expedient to give that agreement effect
in Israel, then that agreement (hereafter: agreement) shall
have effect in relation to income tax, notwithstanding any
provision of any statute.
156. Section 196 incorporates the international agreement into the ITO,
including the relevant EOI article, so that the treaty has full effect in Israel
in relation to income tax. Accordingly, the authorities have an obligation to
give effect to the provisions of the exchange of information article in their
tax treaties. As described above, the Israeli tax authorities have a number of
different powers at their disposal for domestic tax purposes. The provisions
themselves are not specifically drafted with exchange of information in mind,
and their application for exchange purposes is clearer in some cases than in
others. For example, sections 135(2) (4) empower the Assessing Officer,
among other things, may enter any place in which a business or a vocation is
carried on and examine any documents and demand explanations. There is
no aspect of this provision that is specifically connected to the determination
of Israeli tax. On the other hand, section 135 refers to requiring a person to
submit a return or provide any information to the Assessing Officer in order
to determine that persons income and it might be argued that this requires a
domestic tax interest, although no issues have ever arisen in practice in this
regard. Moreover, section 196 of the ITO only refers to double tax conven-
tions and does not apply to TIEAs. Therefore, the Israeli Tax Authorities
do not have the power to obtain and provide information for the purpose of
responding to a request for information pursuant to a TIEA.
157. Accordingly, it is recommended that Israel clarifies in its laws that
the information gathering powers under the Income Tax Ordinance can also
be used for exchange of information purposes, pursuant to both a DTC or
TIEA. The Israeli authorities advise that an amendment of the ITO provid-
ing for giving effect to international agreements concluded solely for the
administrative assistance, and to clarify that their powers generally can be
used for exchange purposes, is currently in the process of being proposed for
enactment.
Compulsory powers (ToR B.1.4)
158. Jurisdictions should have in place effective enforcement provisions to
compel the production of information.
159. Israel has sufficient compulsory powers to enforce production of the
requested information based on administrative as well as criminal penal-
ties. According to s. 215 and s. 216 of the ITO, if a person does not appear,
as required by a notification under the ordinance or does not answer a ques-
tion lawfully put to him, or is guilty of an offence against the Ordinance or
against a regulation made there under and for which no specific penalty is
provided shall be liable to one year imprisonment, or to the fine as mentioned
in section 61(a)(2) of the Penal Law, or to both penalties. Article 61 (a) (2) of
the Penal Law, 5737-1977, provides that notwithstanding anything contained
in any law, when a court is empowered to impose a fine, it may impose a fine
of up to NIS 29 200 (EUR 6 000), in a case an imprisonment for six months
to one year is prescribed for the offence. Such an offence is also considered as
an administrative offence according to the section two of the Administrative
Offences Regulations, 5747-1987, and additional fine between NIS 980
(EUR 195) and NIS 8 500 (EUR 1 700) might be levied.
160. The Minister of Police may also authorise an investigating assessing
officer to carry out investigations or searches in order to prevent or to detect
offences against the ITO and the authorised officers so appointed are granted
certain powers including those vested in a policeman and police officer of the
rank of inspector or above under section 2 of the Criminal Law Procedure
(Evidence) Ordinance. The authorised officer also has power to seize docu-
ments and power to record a statement and arrest a person. Israeli authorities
have confirmed that these powers can be used for EOI purposes.
Secrecy provisions (ToR B.1.5)
Financial institutions
161. There are no specific bank secrecy rules in Israel and such a secrecy
stems from the contractual relationship between the bank and its customers
based on the Private Protection Law. Israels tax administration has the power
to directly request relevant tax information from banks and other financial
institutions (s. 135A ITO). The Supreme Court has acknowledged
19
that
banking secrecy has a unique standing but it does not override disclosure
obligation stipulated by the law. Therefore, there are no restrictions on the
powers of the tax authorities to obtain information from the banks.
162. Assessing officer is authorised to apply to a bank institution and
ask for information regarding accounts and assets which belong to specific
clients. Consequently, banks and other financial institutions are required to
provide the requested information to the tax administration.
Professional privileges
163. Section 235B of the Income Tax Ordinance empowers the Assessing
Officer to obtain information from advocates. The advocates must deliver any
document in his possession to the assessing officer, enable him to examine
and seize any of the delivered documents and allow him to perform any other
act in respect of the said document. The assessing officer is empowered to
use all powers available to him under the ITO. These provisions of the ITO
specifically override the provisions of Advocates Law 5721-1961. However,
the advocate must not deliver the documents if he claims the document is
privileged. A document that includes a professional secret is considered
a privileged document (s. 235A). The advocate must deliver the document
demanded by the assessing officer and if he claims that the document is privi-
leged then the assessing officer must not inspect the document and the claim
of the advocate is decided by the court in accordance with the procedure
prescribed in sections 235C and 235D of the ITO.
164. Section 235A of the ITO defines professional secret as, communi-
cation between a client and an advocate, whether oral or written, which is
substantially connected to the professional service rendered by the advocate to
the client, including records prepared by the advocate for his own use, on con-
dition that they are substantially connected to the said professional service.
Professional service is limited to services provided in the advocates capacity
as an advocate, and does not extend to services rendered in another capacity.
165. Members of the Israeli Bar Association, their staff members or rep-
resentatives are obliged to maintain confidentiality on all the facts of which
they have learnt in connection with provision of their legal services (s. 90 of
the Bar Association Law, 1961). They can only be released from this obligation
of maintaining confidentiality including for the purpose of judicial proceed-
ings, by their clients declaration. However, the members of Bar Association or
their representatives are still obliged to maintain confidentiality if it is in the
clients interest (s. 19 of the Bar Association Rules (Professional Ethics), 1986).
19. LCA 1917/92 [1993] Scoler v. Jerabi, IsrSC 47(5) 764.
Information which is specifically not covered by professional privilege is the
identity of the client, the fact that legal advice was sought and information
regarding whether or not an attorney has in his possession a specified docu-
ment. Additionally, advice intended to facilitate commission of a crime and
the content of legal services (specifically, a contract is not privileged, although
the correspondence relating to it is) are not privileged.
Tax secrecy
166. Sections 231 to 235 of the ITO sets out secrecy provisions concern-
ing the information obtained by Israel Tax Authority. Section 234 states that,
if a person has possession or control of documents, information, returns,
assessment lists or their copies, which relate to the income of a person or
to a particular of his income, and if he at any time communicates or tries to
communicate aforesaid information or any contents of those documents to a
person to whom the Minister of Finance did not permit him to communicate
it, or if he communicates it not for purposes of this Ordinance, then he shall
be liable to six months imprisonment or to a fine. However, these secrecy
provisions are specifically overridden for disclosing information to an author-
ised office of the reciprocating state with whom an agreement has been given
effect as per provisions of section 196 (section 197 ITO).
Determination
Factors underlying
Israels access powers for the purpose
of exchange of information under
international tax agreements are not
provided for explicitly, in all cases, and
are only applicable to requests made
under double tax conventions.
Israel should ensure that its
competent authority has the power
to obtain all relevant information
pursuant to requests under all
exchange of information agreements
(regardless of their form).
The tax authorities powers to obtain
information from new immigrants,
veteran returning residents and the
trustees of foreign resident settlor
trusts, having a trustee resident in
Israel, in respect of foreign source
income are inadequate.
Israel should ensure that its authorities
have powers to obtain information
from new immigrants, veteran
returning residents and trustees of
foreign resident settlor trusts which
might be subject of an information
request from its EOI partners.
B.2. Notification requirements and rights and safeguards
The rights and safeguards (e.g. notification, appeal rights) that apply to persons in the
requested jurisdiction should be compatible with effective exchange of information.
Not unduly prevent or delay exchange of information (ToR B.2.1)
167. The Terms of Reference provide that rights and safeguards should not
unduly prevent or delay effective exchange of information. For instance, noti-
fication rules should permit exceptions from prior notification (e.g. in cases in
which the information request is of a very urgent nature or the notification is
likely to undermine the chance of success of the investigation conducted by
the requesting jurisdiction).
168. Israels law does not require the tax authorities to notify taxpayers or
third parties of an exchange of information request, or when the tax authority
collects information from a third party to fulfil an exchange of information
request.
169. As explained in Section B.1, Israels tax authorities can approach
persons holding relevant information to provide it to the assessing officer
without prior notice (s. 135-145 ITO). In certain circumstances, however, the
law prescribes that the assessing officer specifies that notice be given in order
to give the person time needed to provide the requested information (s. 135(1),
s. 135A(a), s. 136, s. 137-140 ITO). The time limits, within which information
must be provided as stipulated by law are part of the normal procedures for
requesting information from taxpayers in particular circumstances and are
not specific to EOI.
170. The income Tax Ordinance does not allow any appeal rights against
the authorities powers to gather information. However, Part IX of the ITO
grants appeal rights to taxpayers who dispute tax assessments. Article 253
of the Civil Law order regulation (1984) grants appeal rights to taxpayers to
apply to the court against any request, decision or action of authorities. These
rights are available to taxpayers in domestic cases and can be equally used to
oppose requests for exchange of information. These rights are normal and are
available to defend against any unauthorised use of powers by authorities.
Determination
The element is in place.
COMPLIANCE WITH THE STANDARDS: EXCHANGING INFORMATION 59
C. Exchanging Information
Overview
171. Jurisdictions generally cannot exchange information for tax purposes
unless they have a legal basis or mechanism for doing so. In Israel, the legal
authority to exchange information derives from double tax conventions as
well as from domestic law. This section of the report examines whether Israel
has a network of information exchange that would allow it to achieve effec-
tive exchange of information in practice.
172. In Israel, the legal authority to exchange information is derived
from double tax conventions upon their signature by the Minister of Foreign
Affairs and upon their ratification by the Knesset. DTCs are given effect
by order of the Minister of Finance. International agreement prevails when
in conflict with domestic legislation concerning issues covered by the
international agreement in respect of income taxes including exchange of
information.
173. Israel has a developed network of bilateral agreements that provide
for exchange of information in tax matters. This network currently covers
54 jurisdictions through double tax conventions (DTCs). All DTCs are in
force with the exception of DTCs with the Former Yugoslav Republic of
Macedonia (FYROM), Malta and Panama.
174. Israels DTCs cover most of its major trading partners including
almost all EU member states, 16 of the G20 members almost half of the
Global Forum members and all, except for four, OECD members. Israel
has an ongoing treaty negotiation program. In addition, Israel is currently
updating its older agreements by establishing amendments to the DTC and
Protocols to bring the exchange of information articles to the international
standard.
175. Out of the 54 signed DTCs, five DTCs (Denmark, FYROM, Georgia,
Malta and Panama) contain the full text of Article 26 of the OECD Model
60 COMPLIANCE WITH THE STANDARDS: EXCHANGING INFORMATION
Tax Convention. Due to various deficiencies, eight
20
of the 54 DTCs do not
provide for exchange of information consistent with the standard.
176. Israels agreements affording double taxation relief are given effect
by s. 196 of the ITO. Although Israels law does not explicitly stipulate
information gathering powers of the tax authority in relation to exchange of
information based on international agreements, the wording shall have effect
in relation to income tax is interpreted by Israeli authorities as including
authority to use information gathering powers in relation to exchange of infor-
mation. Further, Israel has never encountered any problem in this respect.
177. Israel cannot give effect in its domestic law to international agreement
solely for the purpose of exchange of information. As a consequence Israel
cannot conclude any TIEA or other international agreement including the
Convention on Mutual Administrative Assistance in Tax Matters that cover
administrative assistance. This fact limits possibility of Israel and its partners to
enter into agreements solely allowing exchange of information for tax purposes.
178. All of Israels DTCs contain confidentiality provisions to ensure that
the information exchanged will be disclosed only to authorised persons. All
Israeli DTCs ensure that the contracting parties are not obliged to provide
information which would disclose trade, business, industrial, commercial or
professional secrets or information which is the subject of legal professional
privilege. As noted in Part B of this report, the scope of information subject
professional privilege in Israel is wide and goes beyond the international
standard. All but two DTCs do not oblige the parties to provide information
the disclosure of which would be contrary to public policy (ordre public).
21
179. The Israeli Ministry of Finance and the tax administration designated
by the Ministry are the Israeli competent authority for EOI purposes (s. 3(1)).
There are no legal restrictions on the ability of the competent authority to
respond to requests within 90 days of receipt by providing the information
requested or by providing an update on the status of the request.
C.1. Exchange-of-information mechanisms
Exchange of information mechanisms should allow for effective exchange of information.
180. The DTCs signed by Israel are given effect by section 196 of the ITO.
Based on the ITO, international treaties override any contradictory domestic
laws concerning issues covered by the international agreement in respect of
income taxes including exchange of information.
20. DTCs with Germany, Jamaica, Luxembourg, the Netherlands, Singapore, South
Africa, Switzerland and the United Kingdom.
21. The agreements with the United Kingdom and with Sweden.
181. Israel has signed 54 DTCs. All DTCs are in force with the exception
of DTC with the FYROM, Malta and Panama.
182. Section 196 of the ITO does not allow Israel to conclude international
agreements solely for the purpose of administrative assistance in tax matters.
It is required that such agreements must also afford double taxation relief. As
a consequence, Israel has not yet concluded any Tax information exchange
agreement (TIEA) or any other instrument providing solely for the admin-
istrative assistance in tax matters.
Foreseeably relevant standard (ToR C.1.1)
183. The international standard for exchange of information envisages
information exchange on request to the widest possible extent, but does not
allow speculative requests for information that have no apparent nexus to
an open inquiry or investigation. The balance between these two competing
considerations is captured in the standard of foreseeable relevance. It does
not allow fishing expeditions.
184. Out of 54 Israeli DTCs, 47 provide for the exchange of information
that is necessary for carrying out the provisions of the agreement or of the
domestic laws of the Contracting States concerning taxes covered by the
agreement. As such, the term necessary is recognised in the commentary to
Article 26 (Exchange of Information) of the OECD Model Tax Convention to
allow for the same scope of exchange as does the term foreseeably relevant.
Two DTCs use the term pertinent.
22
The Israeli authorities indicate that the
term pertinent is interpreted in a manner that allows for exchange of infor-
mation that is in line with the standard of foreseeable relevance. Five most
recently negotiated DTCs employ the term of foreseeably relevant.
185. Israels DTCs with the Netherlands and South Africa contain addi-
tional language, providing that competent authorities of the states shall
exchange information which authorities have in proper order at their disposal
as is necessary for carrying out the provisions of the Convention. These
provisions suggest that Israel may not therefore be able to exchange all infor-
mation consistent with the foreseeably relevant standard. However, the Israeli
authorities have advised that they use their access powers to obtain informa-
tion requested by the Netherlands and South Africa. Similar clarification is
given by the authorities of the Netherlands
23
and South Africa.
24
22. DTC with US (signed 1994) and DTC with Ethiopia (signed 2004).
23. Global Forum Peer Review Report (Combined : Phase 1 and Phase 2), the Netherlands,
paragraph 323.
24. Global Forum Peer Review Report (Combined : Phase 1 and Phase 2), South Africa,
paragraph 194.
In respect of all persons (ToR C.1.2)
186. For exchange of information to be effective it is necessary that
the obligation to provide information is not restricted by the residence or
nationality of the person to whom the information relates or by the resi-
dence or nationality of the person in possession or control of the information
requested. For this reason the international standard for exchange of informa-
tion envisages that EOI mechanisms will provide for exchange of information
in respect of all persons.
187. Twenty of Israels DTCs do not contain a specific reference in the
EOI Article regarding exchange of information not being restricted by
Article 1 (Persons covered) of the respective agreements. However, in prin-
ciple, the absence of this specific provision does not restrict the exchange of
information as long as the agreement allows for the exchange of informa-
tion for carrying out the provisions of the domestic laws of the Contracting
States, as the domestic laws apply to non-residents also. Further, tax treaties
with the Netherlands and South Africa provide for exchange of information
that is necessary for the carrying out of the provisions of the Convention, in
particular for the prevention of the fraud, and for the administration of the
statutory provisions against legal avoidance concerning taxes covered by the
Convention. Israels DTCs with Germany and Switzerland limit the exchange
of information to that necessary for carrying out the provisions of the conven-
tion Therefore, under these four DTCs information concerning non-residents
might not be exchanged.
Obligation to exchange all types of information (ToR C.1.3)
188. Jurisdictions cannot engage in effective exchange of information if
they cannot exchange information held by financial institutions, nominees
or persons acting in an agency or a fiduciary capacity, as well as owner-
ship information. Both the OECD Model Convention (Article 26(5)) and the
OECD Model TIEA (Article 5(4)), which are primary authoritative sources of
the standards, stipulate that bank secrecy cannot form the basis for declining
a request to provide information and that a request for information cannot be
declined solely because the information is held by nominees or persons acting
in an agency or fiduciary capacity or because the information relates to an
ownership interest.
189. Except for DTCs with Denmark, FYROM, Georgia, Malta and Panama
which were signed after September 2009 none of Israeli 49 DTCs contain
wording akin to Article 26(5) of the OECD Model Convention. However, the
absence of such a provision in Israels DTCs does not automatically create
restrictions on exchange of bank information. Exchange of information based
on such DTC becomes restricted in line with the standard only if domestic
laws in one of the parties do not allow exchange of information in the scope
of Article 26(5) of the OECD Model Tax Convention.
190. As stated in section B.1 of this report Israels domestic law does not
contain restriction in respect of access to banking information. Nevertheless,
for some of Israels partners which have domestic restrictions on access to
information the absence of a provision akin to Article 26(5) of the OECD
Model Tax Convention means that these agreements do not establish an obli-
gation to exchange all types of information. It is particularly the case with
Luxembourg, Singapore and Switzerland.
191. Luxembourg and Singapores domestic bank secrecy rules restrict
exchange of information based on all DTCs signed prior to March 2009, includ-
ing DTCs with Israel. Similarly, exchange of information with Switzerland
based on DTCs signed prior to October 2010 is limited by its domestic bank
secrecy rules.
192. The DTCs with the Netherlands, South Africa, Sweden, and the
UK (as well as those with Germany and Switzerland which are not to the
standard) include language, noting that exchange of information is restricted
to information which is at their disposal under their respective taxation
laws in the normal course of administration or similar. This wording does
not limit Israels ability to respond to a request from these jurisdictions, as
Israel regards all information they can obtain by using their access powers as
information available under its taxation laws and in proper order at their
disposal. It is noted, however, that while this is not an issue for Israel it may
impose a restriction on the other jurisdictions ability to respond to a request,
as they may interpret this language more restrictively. This is the case with
the UK. Therefore, Israels DTC with the UK is not in line with the standard.
193. The Protocol to the Israels DTC with the Netherlands explicitly
states that the obligation to exchange information does not include informa-
tion obtained from banks or from financial institutions assimilated thereto or
equivalent institutions. Due to this express limitation with regard to banking
information, the DTC with the Netherlands is not in line with the interna-
tional standard.
194. Although the number of Israels DTCs which are not in line with the
standard is relatively low, these DTCs cover Israels important trading part-
ners. It is therefore recommended that Israel updates these DTCs to include
Article 26(5) of the OECD Model Tax Convention and to allow exchange of
information in line with the international standard.
Absence of domestic tax interest (ToR C.1.4)
195. The concept of domestic tax interest describes a situation where a
contracting party can only provide information to another contracting party
if it has an interest in the requested information for its own tax purposes. A
refusal to provide information based on a domestic tax interest requirement is
not consistent with the international standard. Jurisdictions must be able to use
their information gathering measures even though invoked solely to obtain and
provide information to the requesting jurisdiction. This is specifically stated in
both the OECD Model Convention (Article 26(4)) and the OECD Model TIEA
(Article 5(2)), which are primary authoritative sources of the Global standard
for EOI.
196. Only five Israeli DTCs contain the equivalent of paragraph 4 of
Article 26 of the OECD model convention. The most recent five DTCs
25
which
were signed after September 2009 do include express provision relating to the
non-application of the principle of domestic tax interest. In addition, the Israeli
authorities advise that all DTCs are interpreted by Israel as allowing access
to all information also in absence of domestic tax interest even if there is no
explicit reference to that principle in the respective agreement. In practice
Israel does not exercise reciprocity on this basis and therefore does not ques-
tion whether a requesting party has the requirement of a domestic tax interest.
No issue has been reported by peers in this respect. As discussed in section
B.1 of the report, tax authorities are obligated to give effect to the provisions of
tax treaty, however there is a potential ambiguity in relation to some domestic
law provisions with regard to authorities powers to obtain information for EOI
purpose.
197. A domestic tax interest requirement may also exist in some of
Israelis partner jurisdictions. In such cases, the absence of a specific provi-
sion requiring exchange of information unlimited by domestic tax interest
will serve as a limitation on the exchange of information which can occur
under the relevant agreement. Based on the peer reviews conducted so far,
domestic tax interest restricts exchange of information in respect to the DTCs
with Singapore and Jamaica. Since the DTC with Singapore was signed
before March 2009, amendment of the Singaporean law allowing exchange of
information in absence of domestic tax interest cannot be applied. In the case
of Jamaica information gathering powers of its tax authorities are subject to
there being a domestic tax interest. Therefore, it is recommended that Israel
continues its program of renegotiation of DTCs including to incorporate
wording in line with Article 26(4) of the OECD Model Tax Convention.
25. DTCs with Denmark, FYROM, Georgia, Malta and Panama.
Absence of dual criminality principles (ToR C.1.5)
198. The principle of dual criminality provides that assistance can only be
provided if the conduct being investigated (and giving rise to an information
request) would constitute a crime under the laws of the requested jurisdic-
tion if it had occurred in the requested jurisdiction. In order to be effective,
exchange of information should not be constrained by the application of the
dual criminality principle.
199. There are no dual criminality provisions in any of Israelis DTCs.
Exchange of information in both civil and criminal tax matters
(ToR C.1.6)
200. Information exchange may be requested both for tax administration
purposes and for tax prosecution purposes. The international standard is not
limited to information exchange in criminal tax matters but extends to infor-
mation requested for tax administration purposes (also referred to as civil
tax matters).
201. As noted previously (see Part C.1.1 of this report), four Israels DTCs
provide for the exchange of information for carrying out the provisions of
the convention and not for administering domestic laws. These agreements
have the potential to limit the EOI to information foreseeably relevant for the
purposes of civil tax matters only.
202. The confidentiality provisions in 13 agreements do not expressly
provide for disclosure of information received to the authorities which are
involved with the prosecution of tax matters. Israel advises that absence
of this express provision does not limit the sharing of information with the
authorities prosecuting tax matters and it places no restriction on the use of
information by the requesting jurisdiction as far as such disclosure is consist-
ent with the international standard with regard to confidentiality. It further,
clarified that non-availability of these express provisions is not interpreted
so as to decline providing information in criminal tax matters. Israel advises
that an assessing officer in Israel may transfer information to an investigat-
ing assessing officer for opening a criminal investigation. After completing
investigation process, the case is transferred to the prosecution for further
treatment of an indictment.
Provide information in specific form requested (ToR C.1.7)
203. There are no restrictions in Israels domestic laws that would prevent
it from providing information in a specific form, so long as this is consistent
with its own administrative practices.
In force (ToR C.1.8)
204. Exchange of information cannot take place unless a jurisdiction has
exchange of information arrangements in force. Where such arrangements
have been signed, the international standard requires that jurisdictions must
take all steps necessary to bring them into force expeditiously.
205. In order to bring the exchange of information agreement into force it
must be given notice by order of the minister of finance upon their signature
and ratification. Out of the 54 DTCs that Israel has concluded, 51 are in force
as of 12 March 2012. The DTCs with FYROM, Malta and Panama which is
not yet in force
26
were signed after July 2011.
206. The process of bringing agreements into force is rather straightfor-
ward. Agreement bill is signed on behalf of the government by the Minister
of Foreign Affairs. Subsequently, the treaty is subject to ratification by the
Knesset. In order for the treaty to come into effect in Israel the Minister of
Finance is required to give notice by an order. This order is published in the
Official Gazette (Reshumot). Most of the treaties are brought into force
expeditiously. However, in some cases time between signature of the DTC
and its coming into force was relatively long. Nine agreements were brought
into force 36 months after their signature. Bringing a treaty into force
requires successful ratification process in both treaty countries. Nonetheless,
considering the comparative length of the period between signature of the
agreement and its coming into force, it is recommended that Israel should
take necessary measures to bring all its exchange of information agreements
into force expeditiously.
In effect (ToR C.1.9)
207. For information exchange to be effective, the parties to an EOI
arrangement need to enact any legislation necessary to comply with the terms
of the arrangement.
208. Exchange of information agreements are given effect in Israel by
s. 196 of the ITO. Once given effect an agreement overrides domestic Israeli
laws. Although the provision of the ITO does not explicitly stipulate that
agreements shall have effect also in relation to exchange of information,
Israeli authorities interpret the wording in relation to income tax as includ-
ing exchange of information.
26. DTCs signing dates: FYROM (23 Aug 2012), Malta (28 July 2011) and Panama
(27 July 2011).
Determination
Factors underlying
Israels access powers for the purpose
of exchange of information under
international tax agreements are not
provided for explicitly, in all cases, and
are only applicable to requests made
under double tax conventions.
competent authority has the power
to obtain all relevant information
pursuant to requests under all
exchange of information agreements
Eight of Israels DTCs are not in line
with the international standard.
Israel should continue its program of
renegotiation of DTCs to incorporate
wording in line with the OECD Model
Tax Convention.
In some cases time taken by Israel to
bring its signed EOI agreements into
force was more than 36 months.
Israel should take necessary measures
to bring its exchange of information
agreements into force expeditiously.
C.2. Exchange-of-information mechanisms with all relevant partners
The jurisdictions network of information exchange mechanisms should cover
all relevant partners.
209. Ultimately, the international standard requires that jurisdictions
exchange information with all relevant partners, meaning those partners
who are interested in entering into an information exchange arrangement.
Agreements cannot be concluded only with counterparties without economic
significance. If it appears that a jurisdiction is refusing to enter into agree-
ments or negotiations with partners, in particular ones that have a reasonable
expectation of requiring information from that jurisdiction in order to prop-
erly administer and enforce its tax laws it may indicate a lack of commitment
to implement the standards.
210. Israels network of DTCs encompasses a wide range of counterpar-
ties, including
All of its five major trading partners
Almost all EU member states;
16 of the G20 members;
almost half of the Global Forum members and
except for four all OECD members
211. Comments were sought from Global Forum member jurisdictions in
the course of the preparation of this report. One jurisdiction has informed
to have approached Israel and indicated its interest in entering into a TIEA.
However, section 196 of ITO does not allow Israel to conclude international
agreements solely for the purpose of exchange of information. As a conse-
quence Israel cannot conclude any TIEA or other international agreement
covering solely administrative assistance. This fact limits possibility of Israel
and its partners to enter into agreements solely for the purposes of admin-
istrative assistance in tax matters. Therefore, it is recommended that Israel
amends its domestic law to allow it to conclude such agreements and enter
agreements for exchange of information (regardless of their form) with all
partners interested in having such an agreement. An amendment of the ITO
addressing the issue is currently under legislative procedure.
212. The Israeli authorities have an ongoing programme of establishing
agreements and revising agreements where necessary in order to bring them
to standard. This revision includes DTCs that Israel interprets as meeting
the standard. No peers have reported that Israel declined to establish an EOI
agreement with a jurisdiction seeking the same.
Determination
Factors underlying
Israel has been approached by at
least one jurisdiction to negotiate
a TIEA, however, Israels law does
not allow Israel to give effect to
agreements solely for the purpose of
exchange of information.
Israel should enter into agreements
for exchange of information for tax
purposes (regardless of their form)
with all relevant partners, meaning
those partners who are interested in
entering into an information exchange
arrangement with it.
C.3. Confidentiality
The jurisdictions mechanisms for exchange of information should have adequate
provisions to ensure the confidentiality of information received.
Information received: disclosure, use, and safeguards (ToR C.3.1)
213. Governments would not engage in information exchange without the
assurance that the information provided would only be used for the purposes
permitted under the exchange mechanism and that its confidentiality would
be preserved. Information exchange instruments must therefore contain
confidentiality provisions that spell out specifically to whom the information
can be disclosed and the purposes for which the information can be used.
In addition to the protections afforded by the confidentiality provisions of
information exchange instruments, jurisdictions with tax systems generally
impose strict confidentiality requirements on information collected for tax
purposes.
214. All Israelis DTCs have confidentiality provisions to ensure that the
information exchanged will be disclosed only to persons authorised by the
agreements. While wording of the respective articles might slightly vary, its
provisions contain all of the essential aspects of Article 26(2) of the OECD
Model Tax Convention.
215. Israeli tax law requires officials, taxpayers and third parties to keep
confidential all information concerning other persons which they learned
in the course of the tax procedure (ss.231-235 ITO). This confidentiality
obligation covers all types of information obtained in connection with tax
administration, including information obtained in the course of international
cooperation. With regards to information received from other jurisdictions
under a legal instrument, confidentiality provisions of these instruments pre-
vail over the ITO. Penalties for breaches of confidentiality are stipulated by
the Income Tax Ordinance. A person who breaches confidentiality is liable
to six months imprisonment or to a fine of NIS 12 900 (EUR 2 580) (s. 234).
All other information exchanged (ToR C.3.2)
216. The confidentiality provisions in Israelis domestic legislation and
DTCs do not draw a distinction between information received in response
to requests and information forming part of the requests themselves. As
such, these provisions apply equally to all requests, background documents
to such requests, and any other communications between the requesting and
requested jurisdictions.
Determination
C.4. Rights and safeguards of taxpayers and third parties
The exchange of information mechanisms should respect the rights and
safeguards of taxpayers and third parties.
Exceptions to requirement to provide information (ToR C.4.1)
217. The international standard allows requested parties not to supply
information in response to a request in certain identified situations. Among
other reasons, an information request can be declined if the requested
information would disclose confidential communications protected by attor-
ney-client privilege. Attorney-client privilege is a feature of the legal systems
of many countries.
219. However, communications between a client and an attorney or other
admitted legal representative are generally deemed confidential only to the
extent that the attorney or admitted legal representative is acting in that
capacity. When the definition of attorney privilege in domestic legislation of
the requested jurisdiction is broader, this does not constitute valid grounds for
refusing a request for information exchange. Consequently, when a lawyer is
acting as nominee shareholder, trustee, settlor, company director or under a
power of attorney to represent a company in its business affairs, a request for
exchange of information flowing from and related to such activities cannot
be refused on grounds of attorney privilege.
220. All Israeli DTCs contain a provision equivalent to the exemption in
article 26 (3) of the OECD Model Tax Convention allowing the state to refuse
to exchange certain types of information, including that which would disclose
a trade, business, industrial, commercial or professional secret or trade pro-
cess. However, the term professional secret is not defined in the DTCs and
therefore, considering the definition provisions of the DTCs (see Article 3(2)
of the Model DTCs), this term would derive its meaning from the Israels
domestic laws. As discussed in Part B of this report, the definition of the term
professional secret in the ITO is consistent with the international standard.
221. Israeli DTCs with the UK and with Sweden do not contain express
safeguards that allow the contracting parties to decline to supply information
whose disclosure would be contrary to public policy. This is not consistent
with the international standard and it is recommended that Israel renegotiates
these two DTCs to bring them up to the standard.
Determination
C.5. Timeliness of responses to requests for information
The jurisdiction should provide information under its network of agreements
in a timely manner.
Responses within 90 days (ToR C.5.1)
222. There are no provisions in Israelis laws or DTCs pertaining to the
timeliness of responses or the timeframe within which responses should be
provided. As such, there appear to be no legal restrictions on the ability of
Israeli tax authorities from responding to EOI requests within 90 days of
receipt by providing the information requested or providing an update on the
status of the request. A review of the practical ability of Israeli tax authorities
to respond to requests in a timely manner will be conducted in the course of
its Phase 2 review.
Organisational process and resources (ToR C.5.2)
223. The Ministry of Finance is responsible for negotiating DTCs. The
power to sign DTCs lies with the minister of foreign affairs. The treaty
proposal is ratified by the Knesset. Subsequently, the Minister of Finance
gives notice of the ratified treaty by Order which is published in the Official
Gazette. Israels competent authority for purposes of EOI based on its DTCs is
the Ministry of Finance who has delegated this authority to the International
Tax Division of the Israel Tax Authority.
224. A review of Israels organisational process and resources will be
conducted in the context of Israels Phase 2 review.
Absence of restrictive conditions on exchange of information
(ToR C.5.3)
225. Exchange of information assistance should not be subject to unrea-
sonable, disproportionate, or unduly restrictive conditions. There are no
aspects of Israels DTCs or its laws that appear to impose additional restric-
tive conditions on the exchange of information, beyond the ones foreseen by
article 26 of the OECD tax convention or TIEA models.
Determination
The assessment team is not in a position to evaluate whether this element
is in place, as it involves issues of practice that are dealt with in the
Phase 2 review.
SUMMARY OF DETERMINATIONS AND FACTORS UNDERLYING RECOMMENDATIONS 73
Summary of Determinations and Factors
Underlying Recommendations
Determination
Factors underlying
Jurisdictions should ensure that ownership and identity information for all relevant entities
and arrangements is available to their competent authorities (ToR A.1)
The element is not in
place.
Israel authorises the issuance
of bearer shares by companies
other than those registered on
the stock exchange without
having in place mechanisms for
identifying the holders of those
shares in all circumstances.
Only 12 companies have
issued bearer shares.
measures to ensure that
robust mechanisms are in
place to identify the owners of
bearer shares.
Under the Income Tax
Ordinance, foreign companies
that are managed and
controlled in Israel are
considered tax resident in
Israel. However, foreign
companies that are managed
and controlled in Israel by
new immigrants or veteran
returning residents are given
an exception from this tax
residency rule for a period
of 10 years and ownership
information on such companies
is not ensured in Israel.
Israel should ensure that
ownership information is
available to its competent
authority in respect of all
foreign companies that are
managed and controlled from
Israel.
74 SUMMARY OF DETERMINATIONS AND FACTORS UNDERLYING RECOMMENDATIONS
Determination
Factors underlying
Israeli law does not ensure
the availability of identity
information in respect of
the settlors, trustees and
beneficiaries of foreign
resident settlor trusts having
a trustee resident in Israel
and for trusts created by
new immigrants and veteran
returning residents which are
vested with assets or income
from assets abroad for a
period of 10 years.
Israel should ensure the
availability of identity
information in respect of
the settlors, trustees and
beneficiaries of foreign
resident settlor trusts and
for trusts created by new
immigrants and veteran
returning residents which are
vested with assets or income
from assets abroad.
Jurisdictions should ensure that reliable accounting records are kept for all relevant entities
and arrangements (ToR A.2)
The element is in
place, but certain
aspects of the legal
implementation of
the element need
improvement.
the availability of accounting
records in respect of foreign
resident settlor trusts having a
trustee in Israel and for trusts
created by new immigrants
and veteran returning
residents which are vested
with assets or income from
assets abroad for a period of
10 years.
accounting records consistent
with the standard are
maintained for foreign resident
settlor trusts having a trustee
resident in Israel and for trusts
created by new immigrants
and veteran returning
residents which are vested
with assets or income from
assets abroad.
availability of accounting
records in respect of activities
outside of Israel of foreign
returning residents for a period
of 10 years.
Israel should ensure
availability of accounting
records in respect of activities
outside of Israel of foreign
returning residents.
Determination
Factors underlying
Banking information should be available for all account-holders (ToR A.3)
The element is in
place, but certain
implementation of
the element need
improvement.
The AML/CFT laws only
require retention of documents
attesting the instruction to
carry out transactions above
the threshold of NIS 10 000
(EUR 2 000) or reported as
suspicious transaction to the
FIU.
transactional information
consistent with the standard is
available in respect of all the
accounts maintained with the
banks.
Competent authorities should have the power to obtain and provide information that is the
subject of a request under an exchange of information arrangement from any person within
their territorial jurisdiction who is in possession or control of such information (irrespective
of any legal obligation on such person to maintain the secrecy of the information) (ToR B.1)
The element is in
place, but certain
implementation need
improvement.
Israels access powers for
the purpose of exchange of
information under international
tax agreements are not
provided explicitly, in all cases,
and are only applicable to
requests made under double
tax conventions.
competent authority has the
power to obtain all relevant
information pursuant to
requests under all exchange
of information agreements
The tax authorities powers to
obtain information from new
immigrants, veteran returning
residents and the trustees of
foreign resident settlor trusts
having a trustee resident in
Israel in respect of foreign
source income are inadequate
authorities have powers to
obtain information from new
immigrants, veteran returning
residents and trustees of
foreign resident settlor trusts
which might be subject of an
information request from its
EOI partners.
The rights and safeguards (e.g. notification, appeal rights) that apply to persons in the
requested jurisdiction should be compatible with effective exchange of information (ToR B.2)
76 SUMMARY OF DETERMINATIONS AND FACTORS UNDERLYING RECOMMENDATIONS
Determination
Factors underlying
Exchange of information mechanisms should allow for effective exchange of information
(ToR C.1)
The element is in
place, but certain
implementation need
improvement.
Israels access powers for
the purpose of exchange of
information under international
tax agreements are not
explicitly provided for and are
only applicable to requests
made under double tax
conventions.
competent authority has the
power to obtain all relevant
information pursuant to
requests under all exchange
of information agreements
Eight of Israels DTCs are not
in line with the international
standard.
Israel should continue its
program of renegotiation of
DTCs to incorporate wording in
line with the OECD Model Tax
Convention.
In some cases time taken by
Israel to bring its signed EOI
agreements into force was
more than 36 months.
measures to bring its
exchange of information
agreements into force
expeditiously.
The jurisdictions network of information exchange mechanisms should cover all relevant
partners (ToR C.2)
The element is in
place but certain
implementation of
the element need
improvement.
Israel has been approached
by at least one jurisdiction to
negotiate a TIEA, however,
Israels law does not allow
concluding agreements solely
for the purpose of exchange of
information.
Israel should enter into
agreements for exchange of
information for tax purposes
(regardless of their form)
with all relevant partners,
meaning those partners who
are interested in entering
into an information exchange
arrangement with it.
The jurisdictions mechanisms for exchange of information should have adequate provisions
to ensure the confidentiality of information received (ToR C.3)
The exchange of information mechanisms should respect the rights and safeguards of
taxpayers and third parties (ToR C.4)
Determination
Factors underlying
The jurisdiction should provide information under its network of agreements in a timely
manner (ToR C.5)
The assessment team
is not in a position to
evaluate whether this
element is in place, as
it involves issues of
practice that are dealt
with in the Phase 2
review.
ANNEXES 79
Annex 1: Jurisdictions Response
to the Supplementary Report
27
Israel fully supports the objectives of the Global Forum for Transparency
and Exchange of Information (EOI) and is committed towards EOI.
As of June 2013, Israel has a broad EOI network which includes 51 DTCs
in effect. These agreements cover most of the EU members, 16 of the G20
members, almost half of the Global Forum members and all but four of the
OECD members.
It is our interest to broaden the network of EOI arrangements and apply
them as efficiently as possible.
The recommendations made in the report will be studied thoroughly and
Israel will take effective measures to implement them.
We would like to express our thanks to the assessment team for their
intensive and dedicated work on the report.
27. This Annex presents the jurisdictions response to the review report and shall not
be deemed to represent the Global Forums views.
80 ANNEXES
Annex 2: List of All Exchange of Information Mechanisms
Jurisdiction
Type of EOI
arrangement Date signed Date in force
1 Austria
Double Taxation
Convention (DTC)
29-01-1970 26-01-1971
2 Belarus DTC 11-04-2000 01-01-2004
3 Belgium DTC 13-07-1972 01-04-1975
4 Brazil DTC 12-12-2002 21-09-2005
5 Bulgaria DTC 18-01-2000 01-01-2003
6 Canada DTC 21-07-1975 27-07-1976
7 China DTC 08-04-1995 01-01-1996
8 Croatia DTC 26-09-2006 01-01-2008
9 Czech Republic DTC 12-12-1993 23-12-1994
10 Denmark DTC 09-09-2009 29-12-2011
11 Estonia DTC 29-06-2009 28-12-2009
12 Ethiopia DTC 02-06-2004 01-01-2008
13 Finland DTC 08-01-1997 01-01-1999
14 France DTC 31-07-1995 18-07-1996
15 FYROM DTC 23-08-2012 Not in force
16 Georgia DTC 12-05-2010 01-01-2012
17 Germany DTC 09-07-1962 21-08-1966
18 Greece DTC 24-10-1995 06-03-1998
19 Hungary DTC 14-05-1991 13-11-1992
20 India DTC 29-01-1996 15-05-1996
21 Ireland DTC 20-11-1995 24-12-1995
22 Italy DTC 08-09-1995 01-01-1999
23 Jamaica DTC 29-06-1984 03-09-1985
24 Japan DTC 08-03-1993 24-12-1993
ANNEXES 81
Jurisdiction
Type of EOI
arrangement Date signed Date in force
25 Latvia DTC 20-02-2006 01-01-2007
26 Lithuania DTC 11-05-2006 01-01-2007
27 Luxembourg DTC 13-07-2004 22-05-2006
28 Malta DTC 28-08-2011 Not in force
29 Mexico DTC 19-07-1999 01-01-2000
30 Moldova DTC 23-11-2006 01-01-2008
31 Norway DTC 02-11-1966 11-01-1968
32 Panama DTC 27-07-2011 Not in force
33 Philippines DTC 09-06-1992 27-05-1997
34 Poland DTC 22-05-1991 01-01-1992
35 Portugal DTC 26-09-2006 18-02-2008
36 Romania DTC 15-06-1997 01-01-1999
37 Russia DTC 25-04-1994 01-01-2001
38 Singapore DTC 19-05-2005 06-12-2005
39 Slovak Republic DTC 08-09-1999 23-05-2000
40 Slovenia DTC 30-01-2007 01-01-2008
41 South Africa DTC 10-02-1978 27-05-1980
42 South Korea DTC 18-03-1997 01-01-1998
43 Spain DTC 30-11-1999 20-11-2000
44 Sweden DTC 22-12-1959 03-06-1960
45 Switzerland DTC 02-07-2003 22-12-2003
46 Chinese Taipei DTC 24-12-2009 01-01-2010
47 Thailand DTC 22-01-1996 01-01-1997
48 The Netherlands DTC 02-07-1973 09-09-1974
49 Turkey DTC 14-03-1996 01-01-1999
50 U.S. DTC 26-01-1993 01-01-1995
51 Ukraine DTC 26-12-2003 01-01-2007
52 United Kingdom DTC 26-09-1962 13-02-1963
53 Uzbekistan DTC 15-09-1998 01-01-2000
54 Vietnam DTC 04-08-2009 01-01-2010
82 ANNEXES
Annex 3: List of All Laws, Regulations and Other Material
Commercial laws
Associations Law, 5740-1980
Companies Law, 5759-1999
Partnership Ordinance, 1975
Trust Law, 5739-1979
Monetary Law, 5771-2011
Regulated activities and AML/CFT laws
Prohibition on Money Laundering Law, 5760-2000
Bank of Israel Law, 5770-2010
Banking Ordinance, 1941
Capacity and Guardianship Law, 57221962
Regulation of Investment Advising, Investment Marketing and Investment
Portfolio Management Law, 5755-1995
Securities Law, 5728-1968
Tax laws
Income Tax Ordinance, 5721-1961
Income Tax Regulations, 5724-1963
ANNEXES 83
Other relevant laws, regulations and other material
Administrative Offences Law, 57461985
Administrative Offenses Regulations, 5747-1987
Archives Law, 5715-1955
Archives Regulations, 57461986
Bar Association Law, 1961
Bar Association Rules, 5731-1971
Capacity and Guardianship Law, 57221962
Protection of Privacy Law, 5741-1981
Succession Law, 5725-1965
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where governments work together to address the
economic, social and environmental challenges of globalisation. The OECD is also at the
forefront of efforts to understand and to help governments respond to new developments
and concerns, such as corporate governance, the information economy and the challenges of
an ageing population. The Organisation provides a setting where governments can compare
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co-ordinate domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the
Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,
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OECD PUBLISHING, 2, rue Andr-Pascal, 75775 PARIS CEDEX 16
(23 2013 23 1 P) ISBN 978-92-64-20252-8 No. 60835 2013
GLOBAL FORUM ON TRANSPARENCY AND EXCHANGE
OF INFORMATION FOR TAX PURPOSES
Peer Review Report
Phase 1
Legal and Regulatory Framework
-:HSTCQE=WUWZW]:
ISBN 978-92-64-20252-8
23 2013 23 1 P
Global Forum on Transparency and Exchange of Information
for Tax Purposes
PEER REVIEWS, PHASE 1: ISRAEL
The Global Forum on Transparency and Exchange of Information for Tax Purposes is the
multilateral framework within which work in the area of tax transparency and exchange of
information is carried out by 120 jurisdictions, which participate in the Global Forum on an
equal footing.
The Global Forum is charged with in-depth monitoring and peer review of the implementation
of the international standards of transparency and exchange of information for tax purposes.
These standards are primarily reected in the 2002 OECD Model Agreement on Exchange
of Information on Tax Matters and its commentary, and in Article 26 of the OECD Model
Tax Convention on Income and on Capital and its commentary as updated in 2004. The
standards have also been incorporated into the UN Model Tax Convention.
The standards provide for international exchange on request of foreseeably relevant
information for the administration or enforcement of the domestic tax laws of a requesting
party. Fishing expeditions are not authorised but all foreseeably relevant information must be
provided, including bank information and information held by duciaries, regardless of the
existence of a domestic tax interest or the application of a dual criminality standard.
All members of the Global Forum, as well as jurisdictions identied by the Global Forum
as relevant to its work, are being reviewed. This process is undertaken in two phases.
Phase 1 reviews assess the quality of a jurisdictions legal and regulatory framework for
the exchange of information, while Phase 2 reviews look at the practical implementation of
that framework. Some Global Forum members are undergoing combined Phase 1 and
Phase 2 reviews. The Global Forum has also put in place a process for supplementary
reports to follow-up on recommendations, as well as for the ongoing monitoring of
jurisdictions following the conclusion of a review. The ultimate goal is to help jurisdictions
to effectively implement the international standards of transparency and exchange of
information for tax purposes.
All review reports are published once approved by the Global Forum and they thus represent
agreed Global Forum reports.
For more information on the work of the Global Forum on Transparency and Exchange of
Information for Tax Purposes, and for copies of the published review reports, please refer to
www.oecd.org/tax/transparency and www.eoi-tax.org.
ISRAEL
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Consult this publication on line at http://dx.doi.org/10.1787/9789264202535-en.
This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and
statistical databases.
Visit www.oecd-ilibrary.org for more information.
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