How a US Retiree Avoided a Forced Sale of an Israeli Securities Portfolio

Result: A NIS 1.5M Israeli securities portfolio wound down on the client's schedule with zero Israeli capital gains tax · Timeline: 6 months · Challenge: Bank demanded immediate liquidation of a US person's holdings · Authority: Israel Tax Authority (Rashut HaMisim) · Financial Impact: About NIS 150,000 in wrongful withholding avoided

Background

A retired schoolteacher in her seventies, a US citizen living outside Tampa, held an investment account at a large Israeli bank that she had built up over more than thirty years. Part of it came from her late brother's estate, part from her own savings during years she had lived in Israel before returning to Florida. The account held Israeli shares listed on the Tel Aviv Stock Exchange and a block of Israeli government bonds, worth roughly NIS 1.5 million, about USD 410,000 at the time. A letter from the bank's securities department landed with no warning. Because she was a US person, the bank would stop holding and trading securities for her. She had 45 days to sell everything or move it, after which the bank said it would liquidate the positions itself and close the securities account.

The Challenge

Israeli banks have spent the last decade pulling back from US clients who hold securities. Serving a US person in a brokerage capacity pulls the bank into US securities regulation and adds FATCA reporting weight, and many Israeli banks have simply decided the relationship is not worth it. The letters are blunt and the deadlines are short. For a retiree sitting abroad, the demand to liquidate a lifetime's portfolio inside six weeks is not a small administrative note. It is a threat to sell at whatever the market gives on a forced day.

Two fears drove her call to us. The first was price. A fire sale on the bank's timetable, not hers, risked crystallising positions at a low point in the cycle with no room to plan around dividend dates or the bond maturities she had been holding to term. The second was tax, and here the bank's own letter made it worse. It warned that it would withhold Israeli capital gains tax at source on the sale proceeds. She assumed that meant a quarter of her gains would vanish to the Israel Tax Authority before the money ever left the country, on top of whatever the US would want.

The tax fear was the one worth examining first, because it was largely misplaced. A non-resident's exposure to Israeli capital gains tax on Tel Aviv-listed securities is not what most people expect.

In Practice: Under Section 97(b2) of the Income Tax Ordinance, a non-resident is exempt from Israeli capital gains tax on the sale of securities traded on the Tel Aviv Stock Exchange, provided the gain is not connected to a permanent establishment in Israel. The exemption applies as a matter of law, but an Israeli bank's system will still withhold 25% at source unless the client's non-resident status is properly documented in the securities file. On an embedded gain of around NIS 600,000, that is roughly NIS 150,000 the bank would have held back and the Israel Tax Authority (Rashut HaMisim) would only have refunded later, after a filing that typically takes several months to process.

The account had been opened while she was still living in Israel, so her records showed a resident. That stale classification, not the law, was what would have triggered the 25% withholding. The bank was not wrong to withhold on a resident's file. The file was wrong.

What We Did

We ran two problems in parallel: the tax classification and the deadline.

On tax, we corrected her status in the bank's securities records to non-resident, supported by proof of her US residence, and confirmed that the Tel Aviv-listed holdings fell squarely within the Section 97(b2) exemption. Once the non-resident status was recognised in the securities file, the bank had no basis to withhold Israeli capital gains tax at source on those securities, and it did not. That single correction removed the NIS 150,000 the letter had implied she would lose.

On the deadline, we did not accept the 45 days. We wrote to the bank's compliance and securities departments setting out that a forced liquidation of a retiree's portfolio, with no orderly window, was neither required by the FATCA framework nor consistent with the bank's duty to act reasonably toward a long-standing customer. What the bank actually needed was to stop acting as her securities broker, not to dump her holdings on a Tuesday. We negotiated an orderly wind-down window of six months, during which she could sell positions on her own timing and let two bond tranches reach maturity rather than selling them early.

We also cleared the FATCA paperwork that sat underneath all of it. She completed a W-9 confirming her US taxpayer identification number, which we filed with the bank so that the account remained compliant during the wind-down and the outgoing transfers would not be blocked. Throughout, we kept her US position in view. The United States taxes its citizens on worldwide capital gains, so the gains were reportable and taxable in the US regardless of what Israel did. Because Israel imposed no tax under Section 97(b2), there was no Israeli tax to credit and no double-tax tangle to unwind, which simplified her US filing rather than complicating it. Readers holding similar accounts will find the mechanics of these portfolios set out in our guide to Israeli investment accounts for non-residents.

We also set her expectations on US reporting, which did not end when the account did. An Israeli securities account of this size sits well above both the FBAR threshold and the Form 8938 threshold for a US person, so it had been reportable every year it existed and stayed reportable for the year of the wind-down. We confirmed her prior filings were in order, so that closing the account did not invite a question about the years it was open. Closing a foreign account cleanly means reporting it out, not just wiring the balance home.

In Practice: Under the US-Israel FATCA Intergovernmental Agreement (2014), the bank required a signed W-9 before it would process outgoing wires for a US person, and the Bank of Israel's Proper Conduct of Banking Business directives allow a bank to exit a securities relationship but do not compel a forced same-week sale. We converted a 45-day liquidation demand into a six-month wind-down in writing, sold the equity positions across four tranches to smooth pricing, and repatriated the proceeds to her US account by SWIFT wire at a cost of NIS 70 per transfer.

The Outcome

The portfolio was wound down over six months on her schedule, not the bank's. The Tel Aviv-listed securities were sold with no Israeli capital gains tax withheld and none owed, under the Section 97(b2) exemption. The two Israeli government bond tranches were held to maturity and redeemed at par rather than sold early at a discount. The proceeds, close to USD 410,000, were wired to her account in Florida across four transfers, and she reported the gains on her US return as she always would have.

The number that mattered most to her was the NIS 150,000 the bank's letter had told her to expect losing to Israeli withholding. She lost none of it. The forced-sale price hit she had braced for did not happen either, because she chose when to sell.

Key Takeaways

What this case illustrates for US persons whose Israeli bank is exiting the relationship:

1. A non-resident is usually exempt from Israeli capital gains tax on Tel Aviv-listed securities under Section 97(b2). The exemption is a right, but the bank will still withhold 25% at source if the securities file shows a resident. Correcting a stale residency classification is often what stands between you and a large, avoidable withholding.
2. A liquidation deadline is a negotiating position, not a court order. The bank is entitled to stop acting as your broker. It is not entitled to force a same-week sale of a retiree's portfolio without an orderly window. Six weeks can become six months in writing.
3. US tax on the gains applies regardless, and that is not a reason to panic. The United States taxes worldwide capital gains. Where Israel charges nothing under Section 97(b2), there is simply no Israeli tax to reconcile against the US bill, which makes the filing cleaner, not harder.
4. File the W-9 early so the wind-down transfers are not blocked. FATCA documentation must be current for a US person's outgoing wires to clear. Handling it at the start of the process removes a delay that otherwise surfaces on the day you try to move the money.

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Facing a Similar Situation?

A letter demanding that you liquidate an Israeli portfolio in weeks is designed to make you act fast and accept the bank's terms. In most cases the two things that frighten clients most, the forced sale price and the Israeli tax, are the two things that can be managed down with a corrected file and a negotiated timetable.

Contact us for a confidential consultation about winding down or repatriating an Israeli investment account.