How an Australian Couple Recovered NIS 247,000 Withheld on an Israeli Share Portfolio

Result: NIS 247,400 of wrongly withheld Israeli capital gains tax refunded to a Melbourne couple, with only NIS 42,000 correctly payable · Timeline: 13 months from first call to refund · Challenge: Israeli broker withheld 25% on a largely exempt portfolio · Authority: Israel Tax Authority (Rashut HaMisim) · Financial Impact: NIS 280,000 withheld, NIS 247,400 recovered

Background

A couple in Melbourne sold down an Israeli securities portfolio in early 2025 to put a deposit on a house in Brighton. He had left Israel in 2011 and had been an Australian tax resident ever since; she was Australian-born and had never lived in Israel. The account sat at a Tel Aviv branch they had not visited in nine years, and it held three quite different things: a spread of Tel Aviv Stock Exchange shares and ETFs, a small stake in a private Israeli software company bought in a friends-and-family round in 2014, and a holding in a tiny company that owned two commercial units in Petah Tikva. Proceeds came to NIS 3,180,000 on a total gain of NIS 1,120,000. When the settlement statements arrived, the bank had deducted NIS 280,000 in Israeli capital gains tax, and the couple assumed that was simply the price of having money in Israel.

The Challenge

It was not. Israel deliberately keeps its hands off most foreign investors' securities gains, and on these facts the great majority of the NIS 1,120,000 was never taxable in Israel at all. Section 97(b3) of the Income Tax Ordinance 1961 exempts a foreign resident from Israeli capital gains tax on shares in an Israeli company acquired on or after 1 January 2009, provided the gain is not attributable to a permanent establishment in Israel, the shares were not bought from a relative or through a tax-free reorganisation, and the company's value does not derive principally from Israeli real estate. The listed portfolio and the 2014 software stake cleared every one of those tests. The Petah Tikva property company did not, and that is where the exemption genuinely failed.

So why did the bank withhold? Because of a piece of paperwork nobody had thought about since 2018. Under Regulation 5 of the Income Tax Regulations (Deduction from Consideration, Payment or Capital Gain on the Sale of a Security, on the Sale of a Unit in a Mutual Fund or on a Future Transaction) 5763-2002, an Israeli bank or broker must withhold at source unless the client's foreign residency is established on the institution's own file. That is done by a signed declaration, Form 2402A, and it does not last forever: banks refresh it roughly every three years. The couple's last declaration had been signed in 2018. The renewal notice went to an Israeli postal address they had given up in 2016. When the sale instruction came through in 2025, the compliance system saw a client with no current foreign-residency declaration and did what the regulation tells it to do.

In Practice: Under Section 97(b3) of the Income Tax Ordinance 1961, an Australian resident is exempt from Israeli capital gains tax on shares of an Israeli company acquired on or after 1 January 2009 unless the company's value comes mainly from Israeli real estate. The Israel Tax Authority (Rashut HaMisim) administers the exemption, but under Regulation 5 of the 2002 withholding regulations an Israeli bank must still deduct 25% at source where no current foreign-residency declaration sits on its file. On this NIS 1,120,000 gain that default cost the couple NIS 280,000 against a true Israeli liability of NIS 42,000, and recovering the difference took eleven months from the date the refund claim was filed.

What We Did

The first job was to work out what Israel was actually owed, because filing a refund claim for the whole NIS 280,000 would have collapsed at the first assessor's query and cost months. We pulled the acquisition records for all three holdings. The listed securities were bought between 2013 and 2022 through the same account, all after the 1 January 2009 cut-off, none from a related party. The software company had been checked at the time of the secondary sale and its balance sheet was overwhelmingly intellectual property and receivables. The Petah Tikva company was the problem: two commercial units and almost nothing else, so its value plainly derived principally from Israeli immovable property, and the Section 97(b3) exemption switched off. We took the position that the NIS 168,000 gain on that holding was taxable in Israel at 25%, or NIS 42,000, and said so in the claim rather than waiting to be caught.

Second, we rebuilt the foreign-residency evidence. The couple obtained a certificate of residency from the Australian Taxation Office, which is issued free and took about three weeks. They signed a fresh Form 2402A for the bank and a power of attorney authorising us to act before the Israel Tax Authority. Both signatures were witnessed before a notary public in Melbourne and apostilled by the Department of Foreign Affairs and Trade at AUD 102 per document, which DFAT turned around in three business days through its Melbourne passport office. Australia has been a party to the Hague Apostille Convention since 1995, so no consular legalisation was needed. The Hebrew translations were done in Israel.

Third came the claim itself. A foreign resident who has had tax over-withheld does not argue with the bank; the bank has already paid the money to the Treasury and cannot claw it back. The route is a refund claim to the assessing officer under Section 160 of the Income Tax Ordinance 1961, supported by an Israeli annual return, Form 1301, with a capital gains schedule setting out each holding, its acquisition date, its cost, its proceeds and the exemption relied on. We filed in September 2025 through the Tel Aviv assessing office. The assessor came back in December with two questions: proof that neither spouse had been an Israeli resident in the year of sale, and the asset composition of the software company at the acquisition date and in the two preceding years. The entry and exit report from the Population and Immigration Authority answered the first in a page. The second took a letter from the company's Israeli accountant and six weeks.

In Practice: A refund of tax over-withheld from a foreign resident is claimed from the assessing officer under Section 160 of the Income Tax Ordinance 1961, which reaches back six years and adds Consumer Price Index linkage plus 4% annual interest to the sum repaid. On NIS 238,000 held for just over a year, that added NIS 9,400, bringing the refund to NIS 247,400. The Israel Tax Authority paid it in April 2026, eleven months after filing, into the couple's Israeli account, and the Banking Supervision Department's source-of-funds rules then applied to moving it out.

The Outcome

The Israel Tax Authority accepted the analysis in full. NIS 42,000 stayed in Israel as tax properly due on the property company. NIS 247,400 came back, being the NIS 238,000 over-withheld plus NIS 9,400 in linkage and interest. Against Israeli legal and accounting fees of NIS 34,000, the couple were NIS 213,400 better off than if they had treated the withholding slip as a final bill, which is what their first instinct had been.

The Australian side of the file mattered as much as the Israeli one. Australia taxes its residents on gains wherever they arise, so the whole NIS 1,120,000 was assessable in Australia, translated into Australian dollars at the exchange rates applying on the acquisition and disposal dates rather than at today's rate. All three holdings had been held for more than twelve months, so the general 50% capital gains discount halved the assessable amount. The couple's accountant in Melbourne then claimed a foreign income tax offset for the NIS 42,000 of Israeli tax genuinely payable, and only for that amount. This is the point that most often goes wrong. An offset is available for foreign tax you actually owed, not for tax you are entitled to have refunded, so claiming a credit for the full NIS 280,000 would have been an error the Australian Taxation Office could reopen for years. The two claims had to be sequenced: fix Israel first, then report the correct figure to the ATO. Because the bank had already reported the account to the ATO under the Common Reporting Standard, the transaction was visible from both ends anyway. The mechanics of the Israeli exemption are set out in more depth in our guide to Israeli capital gains tax for Australian residents.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. A foreign-residency declaration at an Israeli bank is not permanent. Form 2402A is typically refreshed every three years, and if the renewal notice goes to an address you abandoned a decade ago, the bank will treat you as taxable and withhold 25% at source.
2. Check the asset mix of every Israeli holding before you sell. Section 97(b3) is an all-or-nothing test applied company by company, and a small holding in a property-owning company can be taxable while the rest of the same portfolio is exempt.
3. Filing an honest partial claim beats filing for everything. Conceding the NIS 42,000 that was genuinely due kept the file with a single assessor and avoided the audit that an over-reaching claim invites.
4. Do not claim a home-country credit for Israeli tax you intend to reclaim. The Australian foreign income tax offset covers tax properly imposed, so the Israeli refund has to be settled before the Australian return is finalised.
5. Fix it before the trade, not after. One declaration lodged with the bank in advance keeps the money in your account instead of sending it on an eleven-month round trip through the Israeli Treasury. Our overview of Israeli investment accounts for non-residents sets out what the bank needs on file.

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Facing a Similar Situation?

If an Israeli bank or broker has deducted tax from a securities sale and you are not sure whether you owed it, the answer usually turns on three things: when you bought, what the company actually owns, and whether your foreign residency was on the bank's file at the moment of sale.

Contact us for a confidential consultation about your Israeli legal matter.