The phenomenon of foreign residents buying homes in Israel, which has become increasingly prevalent in recent years, is not only because of Israel’s attractive real estate market. Another reason is new limitations on European and American bank accounts and the need to empty them so as to avoid pay taxes and fines on previously undeclared funds.
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For some Europeans, a crackdown in the European banking sector on undeclared assets is driving them to move their money, and sometimes the destination is Israel, according to tax lawyer Leor Nouman. In addition, American tax authorities are pursuing undeclared assets in accounts held by Americans outside the United States. Over the past two years, Israeli and European banks have pressured their American clients to either withdraw their money from banks or provide confirmation from the U.S. Internal Revenue Service that the funds on hand have been declared to the tax authorities.
This is all the result of American legislation, the Foreign Account Tax Compliance Act, which requires banks outside the U.S. to report accounts held by American citizens. Banks that fail to cooperate are subject to harsh sanctions. In Israel, companion legal provisions requiring banks to comply will take effect next month.
An estimated 300,000 to 350,000 people in Israel have dual U.S. and Israeli citizenship. In addition to those who openly declare their overseas accounts to the American authorities, some, it is thought, have either transferred the funds held here into the names of non-American relatives or have withdrawn the funds and bought real estate in Israel.
“After the big wave of Americans, now it’s the turn of the French, Germans and British,” says Nouman. “The Swiss banks have taken the decision that only money that has been declared can be held with them.”
In the process, he says, Swiss banks are telling their French, German and British clients that if they don’t confirm that the funds have been declared, they must take their money elsewhere. The crackdown has led Israeli clients who have undeclared funds to voluntarily disclose them or find real estate to buy, Nouman adds.
In addition to its current international obligations, Israel is expected shortly to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which will require Israel to provide foreign governments additional information in the tax sector and in return receive similar information from the other signatory countries.
When asked how funds are being squirreled away in real estate when the ownership of real estate assets is a matter of public record, Nouman says some people record the property in the name of off-shore companies or in a relative’s name. “Most of the transactions that we are seeing now for the purchase of full-floor apartments for 40 million shekels ($11.6 million) are not with Israelis. In many cases they are foreigners who were required to withdraw the money from the Israeli financial system.”
Nouman also says that the increase in the number of European Jews immigrating to Israel is due to the crackdown by European authorities on undeclared income. His impression is an anecdotal one, based on what he has been seeing at his Tel Aviv law firm, S. Horowitz, but the issue deserves to be put in context.
There has been a modest stream of Jewish immigration from Western Europe, particularly from large communities such as France and Britain, for decades, without any connection to recent tax enforcement changes. French immigration has been particularly on the rise this year, and the increase is not being generally attributed to tax enforcement, but to rising anti-Semitism and a depressed French economy.
In the first two months of the year 854 French immigrants arrived in Israel, more than three times the number in the same two-month period last year. In 2013, almost 3,300 French Jews immigrated to Israel, an increase of 70% compared with the previous year – and the first time that Jewish immigration from France outstripped that from the U.S.
As a tax lawyer, Nouman says he is seeing a significant number of immigrants coming for tax reasons. “Following the new banking policy, there has been a major rise in the number of French, Belgian and German Jews immigrating to Israel,” he says. “They are being told in Switzerland: ‘Take your money or we will report you,’ so one family member moves to Israel, buys a home, lives here 180 days a year and becomes an Israeli resident. Due to the Law of Return [which grants Jews and their relatives the right to Israeli citizenship], within a month he gets an Israeli passport.
“New immigrants and returning Israelis get a 10-year exemption from tax on assets that they hold abroad, and that has made Israel the best off-shore location in the world. It’s a legitimate off-shore location that is not on any blacklist, because Israel does not appear on the list of countries that are not combating money laundering. We have treaties with the whole world, and you can hold money outside Israel without reporting it and without paying a thing.”
How does the system work exactly?
“Let’s assume that a Belgian family of diamond merchants has a problematic $10 million hidden away in Switzerland. The Swiss pressure them to withdraw the money. They can’t transfer the money to Belgium, because they’re afraid of the tax authorities. So they emigrate to Israel and get a 10-year exemption from tax payments and reporting the assets in Israel. From that point, they can go to Switzerland with an Israeli passport. Because they have the 10-year tax exemption, they have no problem with the Swiss reporting the money in the account to Israel. In Israel, the money is totally legal. Israel has explained the tax exemption as something provided for Zionist motives.” Nouman notes that the huge wave of immigrants from Russia in the 1990s, who for the most part were of very modest means, contributed tremendously to Israel’s development. But he adds: “Wealthy Jews who immigrate to Israel buy real estate here, bring business activity with them and contribute to the economy. If the owner of a company decides to immigrate to Israel and then moves its offices here, in the end Israel benefits.”
Nouman also notes the concern at the influx into the real estate sector of foreign buyers, boosting demand at a time when the government is under pressure to bring down housing costs. He thinks the concern is misplaced, saying that if a wealthy foreign buyer purchases a full floor of a high-rise apartment in a luxury building, it does not affect the price of apartments that the average Israeli would be in the market for.
“As far as I’m concerned, let [the foreign purchasers] buy every floor of the building and let them stand empty. What does it matter? Sixty to 70% of the price of the apartment is taxes going to the government. There are Jews who want to buy homes here and we are driving them away. It’s absurd. It’s a mistake.”
And what are the consequences in Israel of voluntary disclosure of previously undisclosed assets?
“Voluntary disclosure in Israel is absolutely fine. Up to now I haven’t had a single case of voluntary disclosure in which the client didn’t come out smiling. The Tax Authority usually demands 10% to 12% of the sum and you can sleep soundly. People currently living in fear are deciding to go ahead with it. The procedure is very reasonable, and I haven’t heard of anyone who was sorry that they got into it. Usually it involves people who stumbled into it: dormant accounts that their parents still had, accounts that they held in the past during a time when they lived abroad, and so forth. On the other hand, there are also diamond merchants who had a lot of money that they didn’t report abroad, and now they can continue to hold onto it. Now they can make substantial use of the money. After voluntary disclosure, they can start to enjoy the money.”
With reporting by Judy Maltz.