Tax Changes In Israel Spark Exodus Of Foreign Investors

by Carla Johnson, Investors Offshore.com

13 January 2003

Foreign investors in Israel have reportedly withdrawn millions of dollars from foreign resident accounts (known as patah), following the implementation of tax changes at the beginning of this year.

Despite the fact that, even under the new rules, foreign deposits in Israeli banks are not taxable unless they are used as collateral for back-to-back loans, the Ha'aretz news service reported on Friday that many foreign investors have chosen to move their assets overseas.

Explaining the reasoning behind the amended tax reform plan passed by the Knesset last month, Deputy Income Tax Commissioner, Oskar Aburazak told Ha'aretz that:

'When a foreign resident wants to grant a loan to a company that he controls, he should pay a tax of 25%. Foreign residents go to a bank and deposit foreign currency and against this, the company receives a loan. [The investor] enjoys interest on his deposit and the company also requests that the interest [on the loan] be recognized for tax purposes. This is an untenable situation that could not be continued.'

He added that: 'We have not changed the status of foreign resident accounts in the banks nor will we ever touch them. But deposits used as collateral for loans to companies in Israel, while avoiding taxes, is something we will not tolerate. There is no reason why these deposits should be tax exempt.'

Recommended