Your Taxes: Foreign Securities – Your Tax Goes Up With The Shekel

The Israeli Supreme Court has just ruled how to translate foreign securities investment dealings by Israeli resident individuals into Shekels. The result is complex and may affect your Israeli tax bill significantly if you are Israeli resident.


In 2003, Israeli residents began reporting and paying Israeli tax on worldwide income and capital gains. To help avoid double taxation, foreign taxes are creditable against Israeli taxes. Olim and senior returning residents (who lived abroad 10 years) in their ten year tax holiday are exempt from this.

In the case of foreign securities, such as investments in Apple or Google, the tax law says the cost is index linked to the relevant exchange rate, rather the Israeli consumer price index. And over the years, the Shekel has actually strengthened – in US dollar terms the rate has fluctuated from around US$1 = NIS 5 to nearly NIS 3.

So if you paid $100, can you deduct a cost of NIS 500 or only NIS 300 when calculating the capital gain? And to what extent can losses be utilized? Currently the USD/NIS exchange rate is around 3.76. We could, of course, have a similar discussion about the

Shekel vis a vis the Euro, Pound or Rand among others.

For many years, we didn’t know, but many theories abounded.

There was a series of District Court rulings over the last 2 – 3 years, which left lingering doubts.

Now the Israeli Supreme Court has ruled decisively on the subject of translating foreign securities into Shekels in the case of Moses/Arkin Vs. Large Enterprises Assessing Officer (Supreme Court 12.9.16, Civil Appeals 3555/15, 3723/15, 5447/16).

What are the issues?

The main complication is that Section 92(a)(1) of the Income Tax Ordinance (ITO) says that a loss cannot be utilized if a gain would have been exempt. And ITO Section 9(13) says that individuals are generally exempt from Israeli tax on indexation differences, which means forex differences in the case of foreign securities.

What are the possibilities?

Let’s take an example the Supreme Court discusses in its judgment.

An Israeli resident individuals sells an investment for $50 when the exchange rate is 3, resulting in shekel sale proceeds of NIS 150. But he bought that investment for $100 when the exchange rate was 5 so the shekel cost was NIS 500. So the dollar loss is $50 (=$100-$50) and the shekel loss is NIS 350 (=NIS 500-NIS 150).

All in all, the investor got out of a pretty bad investment. But what gets reported on the Israeli tax return?

One possibility is to apply some currency conversion tax regulations (Income tax Rules (Conversion to New Shekels of amounts Derived Outside Israel), 2003).  These regulations say translate the cost at the purchase or payment date exchange rate and sale proceeds at the sale or receipt date exchange rate.

Under this approach, the Shekel result would be: sale proceeds NIS 500 minus cost NIS 150 giving a tax loss of NIS 350.  But the Supreme Court rejected this, because regulations cannot change the main ITO provisions cited above.

A second possibility is calculate the gain or loss in foreign currency terms and translate the result into Shekels all at the sale date rate. Under this approach, in the above example, there would be a tax loss of $50 = NIS 150 at the rate of 3 on the sale date. The Supreme Court rejected this too.

A third possibility is to say that there are two asset sales – of a security and of a currency. The District Court adopted this approach conceptually, but the Supreme Court did not.

The Supreme Court accepted a fourth possibility which involves disallowing forex differences on the cost and allowing any remaining loss. The Court said this was closest to the law. In this example, the nominal loss is NIS 350. The forex difference on the cost is $100 * (3 – 5) giving a disallowable forex loss of NIS 200. The allowable loss is therefore only NIS 150 (=NIS 350 – NIS 200).

Note that the fourth possibility is really a longer version of the second possibility – where the sale date exchange rate is applied to the cost, instead of the purchase date rate.

Other possibilities were also considered and rejected by the Court.


The bottom line is if the Shekel strengthens while you hold a foreign security, your cost goes down and your tax bill goes up (or your losses shrink), in Shekels.

With Mediterranean gas set to boost the Israeli economy and presumably strengthen the Shekel, this phenomenon of more taxes and less losses may continue. However, this phenomenon only applies to individuals, not securities traders or companies….

And the Tax Authority loses out if the Shekel weakens while you hold a foreign security. In that case your cost goes up and your tax bill goes down, in Shekel terms.

What about other assets, for example US real estate? The Israeli consumer price index is used instead, adding to these issues.

In short, Israeli capital gains tax is more of an art than a science.

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

[email protected]

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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