Dollar Climbs as Knesset Revokes Tax Breaks for Foreign Investors

New regulations, which will take effect July 1, will revoke the tax exemptions for foreign investors, taxing profits of certain investments at either 15% to 24% or the investor's marginal tax rate instead.

The dollar rose against the shekel yesterday as the Knesset Finance Committee took another step to help the Finance Ministry and Bank of Israel's fight against foreign-currency speculators.

The Finance Committee approved new regulations proposed by the treasury to revoke the tax exemption for foreign investors. Today, foreign investors pay no tax on profits from their sales of certain Israeli securities including government bonds. Foreigners also pay no tax on their investments in mutual funds funds that buy these same securities.

Last week the central bank imposed stricter reporting requirements on foreign currency and derivative transactions, closing loopholes on reporting by subsidiaries. The new taxes, however, will not apply to profits on investments in stocks and corporate bonds.

The dollar rose 0.5% against the shekel yesterday to a representative rate of NIS 3.465. The euro was up 0.3% against the local currency to a representative rate of NIS 4.984. In global markets, the greenback was almost unchanged against the euro at $1.44.

The new tax rules will go into effect July 1, which will give foreigners time to reconsider their investment positions. The new rules also apply to foreigners' favorite investments such as Makams - Israeli T-bills - i.e. short-term, zero-coupon government bonds issued by the Bank of Israel. Speculators often invest in Makams to take advantage of the interest-rate gap between the United States and Israel, which is now about 3%.

The new regulations will tax the profits from such investments at 15% to 24% for foreigners - or at their marginal tax rate if they owe other Israeli taxes.

The tax exemptions were originally granted to attract foreign investment, and now it seems they worked too well as the influx of dollars has strengthened the shekel against the greenback, hurting exporters and forcing the Bank of Israel to buy up massive quantities of foreign currency to support the dollar against the shekel.

Foreign speculators have been selling large amounts of dollars and using the proceeds to buy Makams and other short-term bonds to take advantage of the interest-rate gap, said Nir Halperin, the head of the capital-market department at the Finance Ministry.

"Over the last year, there was a significant rise in foreigners' investments in Makams and Israeli short-term bonds from NIS 10 billion to NIS 40 billion," he said.