Do non-residents pay Israeli tax on interest from an Israeli bank deposit?

You park funds in an Israeli deposit, the bank pays a little interest, and you wonder whether Israel takes a cut before the money is even yours. The honest answer is that it turns on one detail most people overlook: whether the deposit is in foreign currency or in shekels. That single distinction can mean the difference between a clean exemption and tax withheld at source, and it is written into the way Israel chooses to tax non-residents.

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Detailed Explanation

Israel taxes non-residents on Israeli-source income, and interest paid by an Israeli bank is Israeli-source. The Income Tax Ordinance 1961 is the governing statute, and the rate that ordinarily applies to deposit interest for individuals is 15% on a standard non-linked deposit, rising toward 25% where a real or index-linked gain is involved. For a resident, the bank simply deducts this at source. The starting assumption, then, is that interest is taxable unless something takes it out of charge.

For non-residents, that "something" is the long-standing relief for foreign-currency deposits. Interest a non-resident earns on a foreign-currency deposit, the account type Israeli banks label PATACH, is generally exempt from Israeli tax under the Ordinance, provided the conditions are met, including that the deposit is not connected to a business or permanent establishment the holder runs in Israel. This is a deliberate policy to keep Israel attractive for non-resident savings. The practical effect is that a non-resident holding dollars, sterling, or euros on deposit usually receives the interest without Israeli tax taken off, which is one reason the distinction between resident and non-resident accounts matters so much when the account is opened.

Shekel deposits are treated differently. Interest on a non-resident's shekel deposit is taxable, and the bank withholds. Where the holder is resident in a country that has a tax treaty with Israel, the treaty may cut that rate or, for some kinds of interest, remove it, but the relief is not always applied automatically at the counter. If the bank withholds at the full domestic rate, the route to the treaty rate is a refund claim to the Israel Tax Authority rather than a credit you simply assume. Separately, the exemption from Israeli tax does not switch off tax at home. Most countries tax their residents on worldwide income, so the same interest is reportable there, with a foreign tax credit available for any Israeli tax actually paid. The wider picture of how Israel reaches a non-resident's income is set out in our guide to Israeli income tax for non-residents.

In Practice: Under the Income Tax Ordinance 1961, an Israeli bank withholds tax at source on deposit interest, commonly 15% on a non-linked deposit and up to 25% where a real gain is involved. Interest a non-resident earns on a foreign-currency (PATACH) deposit is generally exempt, subject to the Ordinance's conditions, while shekel-deposit interest is taxable and may be reduced by an applicable treaty. The Israel Tax Authority (Rashut HaMisim) handles refunds of over-withheld tax, and a treaty-based refund claim commonly takes several months.

Key Considerations

• Foreign-currency (PATACH) deposit interest for a non-resident is generally exempt from Israeli tax, subject to conditions.
• Shekel deposit interest is Israeli-source and taxable, with the bank withholding at source, commonly 15%.
• A tax treaty may reduce the shekel-deposit rate, but you may have to claim the treaty rate or a refund rather than receive it automatically.
• The exemption from Israeli tax does not remove your home-country obligation to report the interest as worldwide income.
• The deposit must not be tied to a business or permanent establishment in Israel for the non-resident exemption to apply.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• The bank withheld Israeli tax on what should have been an exempt foreign-currency deposit.
• You need to claim a reduced treaty rate or a refund of over-withheld tax from the Israel Tax Authority.
• The interest is large enough that coordinating Israeli and home-country reporting materially affects your position.

A qualified Israeli attorney or tax adviser should confirm the deposit type and treaty position before you assume the interest is either exempt or fully taxed.

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Speak With an Israeli Attorney

We advise non-resident savers on the Israeli tax treatment of deposit interest, recover tax withheld in error on exempt foreign-currency deposits, and coordinate the treaty position with your home-country reporting.

Contact us for a confidential initial consultation.