After much debate, the Gemachim Law was passed by the Knesset and published on January 13, 2019 (Book of Laws 2782). A Gemach is a Jewish free-loan fund which subscribes to the positive Torah Commandment regarding lending money (Exodus 22:24) and the Torah prohibition against charging interest (Leviticus 25:37). That is unless a business exception applies.
The Gemachim Law is formally know as the Law For Arranging the Provision of Deposit Services and Credit Without Interest By Institutions For Acts of Kindness, 2019.
Until it was enacted, the Knesset Finance Committee refused to ratify the OECD Common Reporting Standard regarding information exchange between financial institutions and tax authorities in around 100 countries.
The effective date of the law is 3.5 years after its publication, but this may be delayed by the Knesset Finance Committee and the Finance Minister, to allow additional preparation time. In the meantime, interim provisions apply which effectively may effectively allow the present societies to continue to operate without a formal license, without a fine or filing of an indictment (see Section 110).
Once the effective date arrives, a detailed regulatory regime is prescribed.
What about tax?
On the tax side, in the period from August 1, 2018 to the effective date of the law, an Amutah Society or a Public Benefit Company which provide interest-free loans to an individual or to another party giving such loans, will be regarded as a public institution when applying an international treaty, information exchange agreement, an implementation agreement and FATCA. This apparently means they will receive favorable treatment like a pension fund.
But this is conditional on providing the reporting financial institution confirmation from an accountant regarding filing as a public institution with the Israeli Tax Authority (ITA). (See Section 103 which inserts a new Section 135E1 to the Income Tax Ordinance).
An information exchange agreement is an agreement between the State of Israel and a foreign country for giving assistance regarding information exchange for the purpose of tax enforcement in Israel or the other country.
An implementation agreement is one published by the OECD for automatic information exchange regarding financial accounts, i.e. the OECD Common Reporting Standard. FATCA is a similar mechanism of the USA.
What is interest?
For these purposes “interest” is defined as any consideration regarding credit or a deposit which increases its amount, however labelled….excluding: fees, reasonable cost reimbursement following any repayment delay, and linkage to an exchange rate or the consumer price index.
The Gemachim Law appears to be a work-in-progress. It may yet be modified or clarified before its eventually becomes effective. But the bare bones have been laid down and Israel is set to participate in the OECD common reporting standard.
Anyone with an unreported financial account should urgently consider requesting a voluntary disclosure procedure, commonly known as a tax amnesty. A tax amnesty may still be requested in Israel from the ITA until the end of 2019. But this will be on a named basis as the anonymous tax amnesty procedure was withdrawn by the ITA at the end of 2018.
As always, consult experienced tax advisors in each country at an early stage in specific cases.