How to Manage Your Overseas Investment Account
US clients should consider moving into US-compliant investments, with a view to avoiding crisis situations when filing tax, other returns.
Most of you have heard about the San Andreas Fault, which runs nearly 1,300 kilometers through California. It is caused by two continental plates colliding against each other and is the cause of earthquakes in the area. Expatriates living in Israel may feel you are caught between two continental plates when you try managing your overseas bank accounts and investment portfolios.
Certain major overseas financial institutions have been requiring their Israeli resident clients to liquidate their accounts. A recent letter from one of these financial institutions situated in the United States says: ‘‘Our records indicate that you are currently a resident of Israel and are affected by recent amendments to Israeli law concerning investment accounts carried by foreign institutions. These amendments place significant restrictions on our ability to service the investment accounts of residents of Israel. Accordingly, your account at…is being restricted to liquidating orders only. This means that you may sell your current investments, but no new investments may be purchased in your account. All decisions relating to the timing of your liquidations must be made without our input.‘‘
The financial institution probably has in mind the Efficiency of Enforcement Procedures in the Securities Authority Law (legislation amendments), 2011 (Book of Laws 2274, passed by the Knesset on January 27, 2011). This is a lengthy piece of legislation aimed making enforcement by the Israel Securities Authority (ISA) of the laws more efficient.
Section 15 of the Securities Law stipulates that it is forbidden to offer securities to the public in Israel without first publishing a prospectus approved by the Israeli Securities Authority.
But there are exceptions. According to Section 15, a public offering does not include an offer to:
35 persons/entities or less in Israel during any given 12 month period and/or
any number of investors of the types listed in an Annex ‘‘classified investors.‘‘
The amendment expands the types of the investors to whom it is permitted to offer securities, without triggering the public-offering rules and the Israeli requirement to publish a prospectus. In particular, classified investors now include ‘‘sophisticated clients.‘‘
Consequently, one alternative being offered by foreign financial institutions not regulated in Israel is for Israeli resident clients to sign a confirmation that you meet the criteria of being a ‘‘sophisticated client‘‘ and consent to being treated as such under the Israeli investment laws. A ‘‘sophisticated client‘‘ is an individual who meets two of the following three criteria:
holds cash, deposits, financial assets and/or securities (excluding properties) worth more than NIS 12 million;
has expertise in the capital markets or was employed for at least a year in a professional role that requires such expertise;
during the four preceding quarters he/she executed at least 30 transactions on average per quarter (not including transactions performed on his/her account by his/her portfolio manager).
These conditions are onerous and probably do not apply to most people.
Investors who are unable to sign such a ‘‘sophisticated client‘‘ confirmation may be asked to liquidate their investment account, as their financial institution is unwilling to be exposed to the requirements of supervision by the Israeli Securities Authority.
Nevertheless, there is an alternative solution available to these ‘‘orphaned investors.‘‘
As long as a non-Israeli portfolio manager and/or financial institution complies with the following conditions, it seems there should be no need for them to be registered in Israel:
be physically out of Israel when service is provided;
be resident out of Israel;
performs service not in a random fashion (which shouldn‘t be a problem if the service provider is regulated abroad);
communication for service is provided out of Israel.
Therefore, a practical arrangement for Israeli resident investors to consider is to appoint an investment professional who is licensed in Israel with the ISA. This investment professional will help you identify your risk profile, investment goals and asset-allocation requirements.
The investment professional will also attend to the Israeli regulatory requirements that need to be attended to.
Thereafter, the investment professional will interface with the non-Israeli portfolio manager and/or financial institution and provide them with the information required to help them effectively manage the client‘s investment requirements. The Israeli resident client continues to be a client of the overseas financial institution, but no investment management services need to be provided in Israel by the non- Israeli portfolio manager and/or financial institution.
The above deals with Israeli Securities Law issues for any Israeli investor who invests abroad.
American citizens or green-card holders in Israel face an additional set of hurdles under US law when you attempt to manage your investment accounts. Here are some of the issues you may face in this regard: US persons are required to file US income-tax returns regardless of their residency status. This reporting is required even if the individual enjoys the 10-year tax exemptions granted by Israel to new resident olim. The reporting requirements are complex, but it is important for US citizens residing outside of America to be familiar with them and to ensure that your financial affairs are reported accurately and on time.
A US taxpayer who has a financial interest or signatory right over financial accounts with an aggregate value exceeding $10,000 in a country outside the US at any time during the taxable year must file a Report of Foreign Bank and Financial Account, known as the FBAR. This must be filed with the IRS on or before June 30 the following year even if no tax is due. Failure to file a FBAR form on time and voluntarily may result in steep penalties.
In addition to the FBAR obligations, US taxpayers are also obligated to inform the IRS about any investments you may have in so-called Passive Foreign Investment Companies (PFICs), which include non-US companies, partnerships, mutual funds and trusts.
US persons invested in PFICs must pay income tax on all distributions and appreciated share values regardless of whether capital-gains tax rates would normally apply. An extra US tax form (Form 8621) must be submitted annually for each PFIC held. These strict guidelines are intended to discourage ownership of PFICs by US investors.
Many expatriate Americans recently have been frustrated because some banks and investment companies in the US will not allow them to open accounts if they have a foreign residence and cannot provide a valid American address. They base this on the extra compliance requirements that US financial institutions face under the Patriot Act. This has resulted in many US expatriates seeking investment solutions outside of the US.
This led to the Foreign Tax Compliance Act (FATCA), signed into law in 2010 by President Barack Obama as part of the US jobs bill known as the HIRE Act. It is intended to crack down on the use of overseas accounts for tax evasion purposes by American citizens.
FATCA will add significantly to the tax-reporting burdens for American citizens, foreign owners of US investments and income-generating assets and all non-American financial-services institutions (such as banks, trusts and investment firms) that have American account holders. Effective from July 13, 2013, foreign financial institutions and banks are obligated to identify any US persons who are account holders and report their accounts to the IRS.
As part of the US authorities‘ quest to obtain information about the assets of US persons, from January 2012 any US persons with foreign financial assets worth more than $50,000 will also have to start filing Form 8938, listing the assets that they have held since January 1, 2011. This form requires a US taxpayer to supply ‘‘the maximum value‘‘ of their assets during the taxable year in question as well as various other details about the asset or account.
The solutions for US persons residing in Israel to check out include:
Ensure that your US tax reporting is up-to-date.
Ensure that you do not have any PFICs in your investment portfolios.
Ensure that the financial institutions hosting your accounts provide proper year-end reporting (Form 1099 – Summary of Income and Form 8938) so that your annual income tax return can be prepared easily.
Ensuring that your portfolio manager is SEC-regulated.
Ensure that you work with professionals in Israel who are licensed by the ISA.
We do not expect Israeli banks or investment companies to be willing to fulfill these new requirements, and some have already started to turn away American customers. These problems are not going to go away, and American clients should consider moving into US-compliant investments as soon as possible, with a view to avoiding crisis situations when it comes to filing your tax and other US returns.
Finally, reporting and paying taxes is bad enough. Always check whether you are eligible for double-tax relief, such as a foreign tax credit, under the tax laws of the relevant countries and/or under a double-tax treaty. Do this early enough, because if you pay tax in the ‘‘wrong‘‘ country, the other country may not allow a foreign tax credit.
As always, consult experienced professional advisers in each country at an early stage in specific cases.
Philip Braude, an accountant, personal financial planner and investment marketer licensed by the ISA, is CEO of Anglo Capital Ltd.
Leon Harris is an Israeli certified public accountant.