As of January 1, Israelis holding US bonds, deposits, or shares through an Israeli or other non-US bank are liable to be subject to 30% or 31% US withholding tax on interest and dividends. Israeli customers declaring that they pay tax in Israel and requesting an exemption from withholding tax will have to agree that the bank transfer their personal details and details of their holdings to the Internal Revenue Service (IRS - the US income tax authorities).
The new situation was created by an IRS ruling obliging any foreign bank dealing directly or indirectly in US assets to assist in tax collection efforts. At the beginning of 2001, the IRS will institute two categories of foreign banks and financial intermediaries: licensed intermediaries and unlicensed intermediaries.
In the case of unlicensed intermediaries, the IRS will require custodial bodies to withhold 30% of interest and dividends at source. Only foreign customers of banks and other intermediaries receiving the status of licensed intermediary will be exempt from paying the tax or providing the information.
In this case, provision of information concerning non-US customers will be global, not personal. Every foreign bank, even those with licensed intermediary status, will be required to provide information about customers, who are US citizens, US residents, holders of US green cards, or anyone else required to report to US tax authorities. The information required includes names, addresses, and details of holdings.
Up until now, the IRS adopted a liberal attitude concerning reporting by foreign banks of their customers' holdings. The Israeli banking system, like other foreign banks around the world, is making an effort to receive, as of next year, the status of licensed intermediary, which will exempt it from high rates of withholding tax and from providing information about non-US customers.
Published by Israel's Business Arena on August 6, 2000