Israeli Tax Authority to banks: carry on over-withholding

The District Court has rejected a class action against the Israeli Tax Authority (ITA) that allegedly made Israeli banks withhold excess tax at source from dividends from abroad (Yaacov Hostatzky  vs. ITA, 20739-06-21, handed down May 14, 2023 by Judge Y. Saroussi).

Main Facts:

The case concerned an Israeli resident private individual who received dividends on shares he held in Canadian and Australian companies. Canada received 25% Canadian withholding tax and Australia received Australian withholding tax at rates of 25%-30% tax.

And under Israeli tax regulations, anyone (e.g. a bank) receiving a dividend from a foreign resident for or to the credit if an Israeli resident must withhold Israeli tax at a rate of 25% in the case of an Israeli resident individual. The Court said these regulations do not require the bank to give a foreign tax credit when it withholds tax, meaning that an awful lot of tax gets withheld abroad and in Israel.

Also, the Canadian government should have only received 15% Canadian withholding tax, not 25% under the Canada-Israel tax treaty. And at the time of these dividends, the new Australia-Israel tax treaty had not yet been implemented. All in all, the taxpayer suffered 50%-60% in withholding tax.

The claim:

Against this backdrop, the taxpayer launched a class action against the ITA for not granting double tax relief when the dividends reached an Israeli bank. Instead, the taxpayer had to remain out of pocket (probably many months), until he filed an annual Israeli tax return, claimed a foreign tax credit and received a corresponding tax refund from the ITA.

Israel’s tax treaties with around 60 countries typically allow a foreign tax credit. The domestic Israeli tax law also grants foreign tax credits subject to detailed rules, regardless of whether a tax treaty is applicable or not.

What the court ruled:

As mentioned, the court ruled against the taxpayer and in favor of the ITA. The Court actually criticized the taxpayer for a number of reasons.

First, the taxpayer didn’t apparently make any effort to request a reduction of the Canadian withholding tax rate from 25% under domestic Canadian law to 15% under the Canada-Israel tax treaty. It is a principle of Israeli tax and case law that no foreign tax credit is available in Israeli for excess tax “voluntarily” paid to a foreign government above what the relevant tax treaty specifies.

Second, the Supreme Court has ruled that the only way to obtain double tax relief in Israel is by filing an annual tax return as mentioned above.

Third, in this case, the taxpayer’s class action quoted the Australian tax was 25% in one place and 30% in another place. The court found it unsatisfactory that the taxpayer seemed unsure of his own facts.

Fourth, the court was mindful of the need to protect the public purse. Even if an annual tax return is filed, the ITA must first check that the taxpayer is really entitled to a foreign tax credit and hence a tax refund for excess tax withheld by the Israeli bank. This check was not the Israeli bank’s job.

Fifth. The Court quoted the intention of the Knesset when Israel’s foreign tax credit rules were legislated under Amendment 132 to the Income Tax Ordinance. This said “a foreign tax credit would be a taxpayer’s right if the taxpayer elected it”. In other words, the taxpayer must elect a foreign tax credit on his/her tax return, net merely expect a bank to automatically give a credit at the withholding tax stage.

Suppose the taxpayer was unaware of his elective rights? The court said the taxpayer did know because he expected the bank to allow the foreign tax credit. (Comment: this seems to mix up principle with procedure which maybe the taxpayer didn’t comprehend).

What if the taxpayer cannot wait for a tax refund? The court mentioned in passing that Section 11 of the withholding tax regulations enables a taxpayer to apply to the ITA for written approval to the bank concerned to withhold less. (Comment: the timing of dividends is not always known, making it hard to apply to the ITA about something unknown to you. This ITA approval procedure is normally applied ahead of outbound payments from Israel).

To sum up:

The court ruled the taxpayer had to file a tax return and elect a foreign tax credit, not file a class action.


This case concerned dividends. Many countries don’t withhold tax from capital gains derived by foreign investors (unless the gains relate to real estate)…..

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

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(c) Leon Harris 2023

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