How a French Retiree Recovered NIS 71,200 of Israeli Bond Withholding

Result: NIS 71,200 of over-withheld Israeli tax refunded and roughly NIS 18,000 a year of future withholding stopped on an NIS 2.1M bond portfolio · Timeline: 9 months · Challenge: Israeli securities account still coded resident after emigration · Authority: Israel Tax Authority (Rashut HaMasim) · Financial Impact: NIS 71,200 recovered

Background

The client was a retired engineer in his early seventies living outside Nice. He had spent twenty-two years in Israel, left for France in 2012 when his wife's family needed her, and had been a French tax resident ever since. He kept one thing behind: a securities account at a Tel Aviv branch holding about NIS 2.1 million, most of it in index-linked Israeli government bonds and the rest in corporate bonds of large Israeli companies listed on the Tel Aviv Stock Exchange. The portfolio paid him roughly NIS 84,000 a year in coupons, which he treated as his supplementary pension.

He came to us about something else entirely, a small inheritance question, and mentioned in passing that the Israeli bank "takes a quarter of the interest before it sends it." He assumed that was simply what Israel does to foreigners. It is the opposite of what Israel does to foreigners, and he had been paying for the misunderstanding for years.

The Challenge

Israel is unusually generous to non-resident investors, deliberately, because it wants foreign money in its debt markets. Interest paid to a non-resident on Israeli corporate bonds traded on the Tel Aviv Stock Exchange is exempt from Israeli tax, and interest on Israeli government bonds listed there is exempt as well. Neither exemption is discretionary and neither requires a treaty. They are ordinary domestic law, and between them they covered virtually his entire portfolio.

The bank was withholding anyway, and the reason was mundane. His account had been opened in 1998 when he lived in Petah Tikva. It carried his Israeli identity number and his old Israeli address, and nobody at the branch had ever been told he had moved. Israeli banks and brokers withhold at source under the deduction regulations according to how the customer is coded in their systems, so the bank was deducting 25% from his index-linked coupons and 15% from his shekel-denominated ones exactly as it should have done for an Israeli resident. In four years it had taken just over NIS 71,000 from income that Israeli law did not tax at all.

Two further problems surfaced once we opened the file, and both were his, not the bank's. He had never told the bank he had emigrated, which mattered because the exemptions attach to non-resident status and status has to be declared and evidenced, not assumed. And he had never declared the Israeli accounts in France on the annual foreign account form, which carries a penalty of €1,500 per undeclared account per year and had by then been running for well over a decade.

In Practice: Under Section 9(15D) of the Income Tax Ordinance 1961, added by Amendment 169 and applying to interest received from 1 January 2009, a non-resident is exempt from Israeli tax on interest, discount and linkage differentials on bonds issued by an Israeli-resident company and traded on the Tel Aviv Stock Exchange. The exemption is lost where the holder has a permanent establishment in Israel, holds 10% or more of the issuer, is employed by it, supplies it, or has other special relations with it. Interest on Israeli government bonds issued from 8 May 2000 and listed on the exchange is separately exempt for non-residents under the Income Tax Regulations (Exemption from Tax on Interest Paid on a State Loan) 2004. On this client's NIS 84,000 of annual coupons the two exemptions were worth about NIS 18,000 a year, and the bank applied neither of them until it was formally told, in writing and with evidence, that its customer of twenty-eight years now lived in France.

What We Did

We rebuilt his status file before we asked the bank for anything, because a bank compliance officer will not recode an account on a customer's say-so. From France he obtained a certificate of tax residence from his local service des impôts, the standard attestation used for treaty and cross-border purposes, together with his last four French tax assessments, a French utility bill and municipal tax notice for the Nice address, and a copy of his French residence documentation. He signed a declaration of foreign residency on the bank's own tax form and a power of attorney authorising us to correspond with the branch and with the Israel Tax Authority on his behalf.

We then wrote to the bank's securities department rather than to the branch, which is a small point that saves weeks. The letter set out the two exemptions by name, confirmed in terms that he had no permanent establishment in Israel, held no position of 10% or more in any issuer whose bonds he owned, and had no employment, supply or other special relationship with any of them, and asked the bank to recode the account and cease withholding prospectively. The bank recoded it seven weeks later and stopped deducting from the next coupon date.

Recoding fixes the future. It does nothing about the money already taken, and that required a separate claim. We filed a refund application with the Israel Tax Authority covering the four completed tax years, attaching the bank's annual withholding certificates for each year, the portfolio statements identifying every holding as a TASE-listed government or corporate bond, and the French residence evidence supporting non-resident status across the whole period. Israeli refund claims of this kind are examined rather than rubber-stamped, and the assessing officer came back twice with questions about two corporate holdings before accepting the position in full.

The French side ran in parallel and was not optional. We coordinated with his French accountant to file the missing foreign account declarations and to report the coupon income correctly. This is where a fact that surprises most clients bites: because the Israeli exemptions removed the Israeli tax entirely, there was no longer any foreign tax credit to claim in France, and the income fell to be taxed in France under the flat 30% levy on investment income. He was still substantially better off, because a French tax he was always going to owe replaced an Israeli tax he never owed on top of it, but the net gain is smaller than the Israeli refund alone suggests and we said so at the outset rather than at the end.

In Practice: Section 160 of the Income Tax Ordinance 1961 allows a taxpayer to reclaim tax paid in excess of the amount properly due, and a claim must reach the assessing officer (pakid shuma) at the Israel Tax Authority within six years of the end of the tax year concerned, which is what capped this recovery at four years rather than the ten he had actually been in France. The claim produced a refund of NIS 71,200, paid with statutory interest and linkage, about five months after filing. Where a domestic exemption does not apply, for example on ordinary shekel deposit interest, Article 11 of the France-Israel Convention of 31 July 1995, in force since 18 July 1996, caps Israeli tax on interest at 10% for a French resident, so the fallback position is still far below the 25% a resident-coded account attracts.

The Outcome

The Israel Tax Authority paid NIS 71,200 into his French account nine months after our first meeting, and the bank has withheld nothing on his bond coupons since. On a portfolio of that size and composition the recoding is worth roughly NIS 18,000 every year he holds it, which over the ten years he expects to keep the account is materially more than the refund.

The French regularisation cost him money rather than saving it, and that was the right trade. Voluntarily filing the missing foreign account declarations before any French enquiry began kept a fixed penalty exposure that could have reached five figures in euros from becoming a contested file, and it put his French reporting on a clean footing for the estate his children will one day deal with across two jurisdictions.

Key Takeaways

What this case illustrates for non-residents holding Israeli investments:

1. Tell your Israeli bank you have emigrated, in writing, with evidence. Israeli banks withhold according to the code on the account, and a customer who left in 2012 but whose file still shows a Petah Tikva address will be taxed as a resident indefinitely.
2. Israeli law exempts non-residents from tax on interest from Tel Aviv listed corporate bonds under Section 9(15D) of the Income Tax Ordinance 1961 and from tax on listed government bond interest under the 2004 state loan regulations. These are domestic exemptions and do not depend on any treaty.
3. The exemptions have real conditions. A holding of 10% or more of the issuer, an Israeli permanent establishment, or an employment or supply relationship with the issuer will defeat the corporate bond exemption, and the bank will expect a written confirmation on each point.
4. Recoding the account and reclaiming past withholding are two separate exercises. The refund claim under Section 160 of the Income Tax Ordinance 1961 must reach the assessing officer within six years of the end of the tax year, so every year of delay permanently destroys a year of recovery.
5. Model the home-country result before you celebrate. Removing Israeli tax removes the foreign tax credit with it, and in France the coupons then meet the flat 30% levy on investment income with nothing to offset against it.

---

Facing a Similar Situation?

If you left Israel but kept a bank or securities account there, it is worth checking what code that account carries and what has been deducted from your interest and dividends since you moved. Where tax has been withheld that Israeli law did not impose, the money is recoverable, but only for the years still inside the six-year window.

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