How a Non-Resident Released NIS 167,000 of Forgotten Israeli Savings

Result: NIS 167,000 released and repatriated, and NIS 47,000 preserved instead of being taxed at 35 per cent · Timeline: 9 months · Challenge: Fund would only pay a member with an Israeli bank account · Authority: Israel Tax Authority Withholding and Collection Unit · Financial Impact: NIS 214,000 located, of which NIS 167,000 paid out

Background

The client worked in Israel for nine years, from 2005 to 2014, in operations roles at two technology companies, and left when his employer moved him abroad. He has been a non-resident ever since. In 2015 he closed his Israeli current account because the branch kept charging him for a balance of NIS 300, and after that he stopped thinking about Israel financially altogether. Eleven years later a former colleague mentioned in passing that she had cashed out a keren hishtalmut she had also forgotten about. He had no paperwork, no statements, no idea which company held anything, and a strong assumption that whatever existed had been eaten by fees or absorbed by the state. The total turned out to be NIS 214,000.

The Challenge

Two Israeli savings vehicles accumulate almost invisibly through salaried employment, and neither behaves the way a foreign reader expects. A keren hishtalmut, usually translated as a study or advanced training fund, is a medium-term account funded by employer and employee contributions that becomes withdrawable six years after the first deposit and is exempt from tax on withdrawal, including on the accumulated gains. A kupat gemel le'tagmulim, a provident fund, is a long-term savings account whose rules changed fundamentally on 1 January 2008 under Amendment 3 to the Provident Funds Law 2005. Money deposited before that date can still be taken as a lump sum under the older rules. Money deposited after it is pension money, payable as an annuity from age 60, and a lump-sum withdrawal of it is an unlawful withdrawal (meshicha shelo kadin) taxed at not less than 35 per cent with no right to set off deductions or credits against the charge.

Locating the accounts was the easy part. Har HaKesef, the free locator the Ministry of Finance has run since 2013, aggregates dormant bank accounts, provident funds, pension funds, study funds and life policies against a single identity number, and it returned both accounts within a day. The obstacle was mechanical rather than legal, and it is the obstacle that stops most non-residents: an Israeli managing company pays a withdrawal into a bank account in the member's own name, and in practice it wants that account to be an Israeli one. He had closed his in 2015. Israeli banks are cautious about opening accounts for non-residents with no local address, which is the deadlock at the centre of this file. He was entitled to money he could not be paid.

In Practice: Sums withdrawn from a keren hishtalmut, including linkage differentials, interest and other gains, are exempt from tax once six years have passed since the first deposit, and the exemption does not depend on the member living in Israel. His first deposit was made in 2005, so the account had been liquid since 2011. The managing company nonetheless flagged the foreign address and proposed to withhold, and a written confirmation obtained from the Israel Tax Authority removed the flag from a balance of NIS 138,000 in five weeks.

What We Did

The sequence mattered more than any single step, because each stage produced the document the next stage needed.

We started with identity. His Israeli passport had expired in 2019, and a managing company will not release six figures against a lapsed document. He renewed the passport at the Israeli consulate in his city of residence, which took seven weeks including the appointment wait, and that renewed document then carried him through everything that followed. We also obtained a full account history from the managing company under a power of attorney signed before a notary and apostilled in his country of residence. The history showed something worth knowing: the account had gone inactive in 2014 and the fee rate applied afterwards had never been reviewed. We challenged it and the managing company credited NIS 4,200 rather than argue, which paid for the translation and notarisation of everything else.

Opening the Israeli bank account was the long pole. The file went in with the apostilled power of attorney, the renewed passport, proof of address abroad, two years of foreign tax returns, and a source-of-funds letter explaining that the incoming money was Israeli salary savings rather than anything requiring a story. It took eleven weeks and one rejection at a first bank before a second accepted him as a non-resident customer. The general framework for that process is set out in our guide to opening an Israeli bank account as a non-resident, and the practical point specific to this file is that a pending fund withdrawal helps rather than hinders, because it gives the branch a documented, verifiable reason for the account to exist.

With the account open we turned to the tax position, and here the two funds diverged completely. The study fund was clean: liquid since 2011, exempt on withdrawal including gains, and the only real work was persuading the managing company's operations desk that a foreign address is not a reason to withhold. A written confirmation from the Israel Tax Authority settled it and NIS 138,000 was paid across.

The provident fund needed arithmetic before it needed instructions. Of the NIS 76,000 balance, NIS 29,000 was attributable to deposits made before 1 January 2008 and NIS 47,000 to deposits made after it. The pre-2008 slice qualified for lump-sum withdrawal under the rules that preceded Amendment 3, the money from 2005 satisfying the seniority requirement of fifteen years several times over and the 2006 and 2007 deposits qualifying on the benefited-member basis. The post-2008 slice was pension money. He wanted all of it, and the conversation about why he should not take it was the most valuable half hour of the engagement.

In Practice: Money deposited into a kupat gemel from 1 January 2008 under Amendment 3 to the Provident Funds Law 2005 is payable only as an annuity from age 60, and taking it as a lump sum is an unlawful withdrawal taxed at a minimum of 35 per cent with no offsets permitted. On his NIS 47,000 post-2008 balance that charge would have been NIS 16,450, leaving NIS 30,550. Left in place with the managing company, the same money is projected to be worth materially more at 60 and comes out under the pension rules instead.

The Outcome

Nine months after the first search, NIS 138,000 from the study fund and NIS 29,000 from the pre-2008 provident balance were credited to the new Israeli account, a total of NIS 167,000 on which no Israeli tax was paid. The NIS 47,000 of post-2008 pension money stayed where it was.

Moving the money out of Israel was its own step and caught him by surprise, as it catches most people. An Israeli bank transferring funds abroad for a non-resident works within the withholding obligation on payments to non-residents under Section 170 of the Income Tax Ordinance 1961, and it will ask for a certificate before it releases a sum of this size rather than take a view of its own. The application to the Withholding and Collection Unit of the Israel Tax Authority, supported by the fund documents showing an exempt withdrawal, produced the certificate in five weeks, and the funds went out in a single transfer. The mechanics of that stage are covered in our note on tax when a non-resident withdraws an Israeli pension fund.

One point remained open and we flagged it rather than solved it. Israel exempting a study fund withdrawal says nothing about how his country of residence treats the same payment. Most tax systems outside Israel do not mirror the Israeli exemption, and several tax the growth in these funds as it accrues rather than waiting for the withdrawal, which can mean the arrival of an exempt Israeli lump sum is a reporting event in a year when the underlying income was taxable in earlier ones. He took local advice on that before the money landed, which is the right order.

Key Takeaways

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

1. If you were employed in Israel for more than a year, assume something is still there. Har HaKesef searches dormant bank accounts, provident funds, pension funds and study funds against one identity number at no cost, and eleven years of silence is not evidence that an account was closed.
2. A keren hishtalmut is liquid six years after its first deposit and the withdrawal is exempt including gains, wherever the member now lives. A managing company that proposes to withhold because of a foreign address is applying a compliance reflex, not the law, and a written Israel Tax Authority confirmation resolves it.
3. Work out the pre-2008 and post-2008 split of any provident fund before you sign a withdrawal form. Taking post-2008 money as a lump sum is an unlawful withdrawal taxed at a minimum of 35 per cent with no offsets, and the form does not warn you.
4. The Israeli bank account is the bottleneck, not the tax. Budget two to three months, expect one refusal, and use the pending fund withdrawal as the documented reason the account is needed.
5. Ask for the fee history on a dormant account. A fund left inactive for a decade has been charged throughout, and a managing company presented with the history will often credit rather than defend the rate it applied.

---

Facing a Similar Situation?

If you worked in Israel and left, the money that is still sitting there is usually in a study fund or a provident fund rather than a bank account, and the difference between withdrawing it well and withdrawing it badly is a 35 per cent charge on the part of it you were never entitled to take yet. The order of operations is identity first, bank account second, tax confirmation third, withdrawal last.

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