Israeli court issues temporary injunction against FATCA enforcement

Israel’s High Court of Justice has issued a temporary injunction against the enforcement of the US’s Foreign Account Tax Compliance Act in the country, in response to a suit filed there by the Republicans Overseas Israel, a US Republication party organisation comprised of expatriate Americans.

Marc Zell, co-chairman of the Republicans Overseas Israel (ROI) confirmed reports of the temporary injunction in an email, and noted that an emergency hearing is to be held in connection with the matter “before September 15”.

The ruling occurred on Wednesday, a day before enforcement efforts were formally due to begin, according to Haaretz.com, Israel’s oldest daily newspaper, which is published in both English and Hebrew.

Zell, who is with the Jerusalem law firm of Zell, Aron & Co, which was involved in the action, said the injunction represented a “preliminary but important victory for individual liberty”.

News of the injunction to prevent Israel’s tax authorities from enforcing the American FATCA regulations – signed into law by President Obama in 2010, in order to crack down on the use of offshore accounts to avoid US tax – comes less than two months after Israel’s Knesset paved the way for the legislation that is needed to provide for the disclosure by financial entities in that country of information about their American citizen clients to the US Internal Revenue Service.

FATCA obliges most foreign financial institutions to report to the Internal Revenue Service information about any accounts they have that belong to Americans, whether resident in the US or elsewhere, worth US$50,000 or more.

Around 300,000 to 400,000 US citizens are estimated to live in Israel, which represents roughly 4% to 5% of the total population, according to Zell.

Unknown, for now, is how many green card holders – also considered Americans for FATCA purposes – currently live there.

Richard LeVine, a lawyer with Withers Bergman in New Haven, Connecticut who specialises in cross-border tax planning for owners of privately held companies and other high-net-worth US and non-US foreign individuals, prefaced his remarks by noting that he has no official standing with either the US or the Israeli government “and no inside information as to how this matter will proceed”.

“That said, as a spectator to these events who follows FATCA developments closely, I suspect there is strong political support within Israel to thumb their nose at FATCA,”  he said. “They are fiercely self-protective and have a unique perspective on financial privacy and the need for emergency funds outside of the jurisdiction where one resides or of one’s nationality.  So I imagine there is significant support within Israel for the court’s action.

“Nevertheless, I don’t see how this ends other than [with] Israel capitulating.

“The US Treasury recently announced that they are disappointed with the slow pace of FATCA implementation by many partner countries, and demanded that FATCA partner countries enact local implementing legislation by the end of this calendar year.  Partners that do not implement by year end will have their intergovernmental agreement withdrawn.

“Sixty days later, if each bank in that country has not signed a contractual agreement with the IRS, any bank that did not sign an agreement will be subject to 30% withholding on any US source interest or dividend payments.  This includes payments of interest on US Treasury bonds.

“[So] I imagine the pressure on the Israeli government from their financial industry will become unbearable if any amount of US FATCA withholding is actually imposed.”

Elsewhere, news of the injunction was met with cheers around the world by many American FATCA opponents. including commentators in Canada, where opposition to the law runs high among so-called “accidental Americans”.

It was in Canada that an earlier effort to challenge FATCA in the courts, filed by two American-Canadian dual citizens, was dismissed last year.

Nigel Green, chief executive of the deVere Group, the international financial advisory firm and a long-time critic of FATCA, said in a statement that the Israeli High Court’s temporary injunction “should serve as a wake-up call for other countries to re-think enforcing this toxic, flawed, imperialistic legislation”.