GLOBAL FORUM ON TRANSPARENCY AND EXCHANGE OF INFORMATION FOR TAX PURPOSES

Peer Review Report Phase 1 Legal and Regulatory Framework
ISRAEL

Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Israel 2013
PHASE 1

July 2013 (reflecting the legal and regulatory framework as at April 2013)

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD or of the governments of its member countries or those of the Global Forum on Transparency and Exchange of Information for Tax Purposes. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
Please cite this publication as: OECD (2013), Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Israel 2013: Phase 1: Legal and Regulatory Framework, OECD Publishing. http://dx.doi.org/10.1787/9789264202535-en

ISBN 978-92-64-20252-8 (print) ISBN 978-92-64-20253-5 (PDF)

Series: Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews ISSN 2219-4681 (print) ISSN 2219-469X (online)

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

© OECD 2013
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TABLE OF CONTENTS – 3

Table of Contents

About the Global Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Information and methodology used for the peer review of Israel . . . . . . . . . . . . . 9 Overview of Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 General information on legal system and the taxation system . . . . . . . . . . . . . . .11 Recent developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Compliance with the Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 A. Availability of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 A.1. Ownership and identity information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 A.2. Accounting records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 A.3. Banking information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 B. Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 B.1. Competent Authority’s ability to obtain and provide information . . . . . . . . 50 B.2. Notification requirements and rights and safeguards. . . . . . . . . . . . . . . . . . 57 C. Exchanging Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C.1. Exchange-of-information mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C.2. Exchange-of-information mechanisms with all relevant partners . . . . . . . . C.3. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C.4. Rights and safeguards of taxpayers and third parties. . . . . . . . . . . . . . . . . . C.5. Timeliness of responses to requests for information . . . . . . . . . . . . . . . . . . 59 60 67 69 70 71

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4 – TABLE OF CONTENTS Summary of Determinations and Factors Underlying Recommendations. . . . 73 Annex 1: Jurisdiction’s Response to the Supplementary Report . . . . . . . . . . . 79 Annex 2: List of All Exchange of Information Mechanisms . . . . . . . . . . . . . . . 80 Annex 3: List of All Laws, Regulations and Other Material . . . . . . . . . . . . . . . 82

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ABOUT THE GLOBAL FORUM – 5

About the Global Forum
The Global Forum on Transparency and Exchange of Information for Tax Purposes is the multilateral framework within which work in the area of tax transparency and exchange of information is carried out by over 100 jurisdictions, which participate in the Global Forum on an equal footing. The Global Forum is charged with in-depth monitoring and peer review of the implementation of the international standards of transparency and exchange of information for tax purposes. These standards are primarily reflected in the 2002 OECD Model Agreement on Exchange of Information on Tax Matters and its commentary, and in Article 26 of the OECD Model Tax Convention on Income and on Capital and its commentary as updated in 2004. The standards have also been incorporated into the UN Model Tax Convention. The standards provide for international exchange on request of foreseeably relevant information for the administration or enforcement of the domestic tax laws of a requesting party. Fishing expeditions are not authorised but all foreseeably relevant information must be provided, including bank information and information held by fiduciaries, regardless of the existence of a domestic tax interest or the application of a dual criminality standard. All members of the Global Forum, as well as jurisdictions identified by the Global Forum as relevant to its work, are being reviewed. This process is undertaken in two phases. Phase 1 reviews assess the quality of a jurisdiction’s legal and regulatory framework for the exchange of information, while Phase 2 reviews look at the practical implementation of that framework. Some Global Forum members are undergoing combined – Phase 1 and Phase 2 – reviews. The Global Forum has also put in place a process for supplementary reports to follow-up on recommendations, as well as for the ongoing monitoring of jurisdictions following the conclusion of a review. The ultimate goal is to help jurisdictions to effectively implement the international standards of transparency and exchange of information for tax purposes. All review reports are published once approved by the Global Forum and they thus represent agreed Global Forum reports. For more information on the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes, and for copies of the published review reports, please refer to www.oecd.org/tax/transparency and www.eoi-tax.org.

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EXECUTIVE SUMMARY – 7

Executive Summary
1. This report summarises the legal and regulatory framework for transparency and exchange of information in the State of Israel 1 (hereafter “Israel”). The international standard which is set out in the Global Forum’s Terms of Reference to Monitor and Review Progress Towards Transparency and Exchange of Information, is concerned with the availability of relevant information within a jurisdiction, the competent authority’s ability to gain timely access to that information, and in turn, whether that information can be effectively exchanged with its exchange of information partners. 2. Israel is a coastline country in the Middle East region politically organised as a parliamentary democracy. The Israeli economy is highly developed technically and mainly based on the service sector and high-tech technologies. Government expenditure plays an important role in Israeli economy constituting relatively high share of the GDP. 3. Relevant entities include companies, partnerships, trusts and associations. Commercial laws and tax laws ensure availability of ownership and identity information consistent with the standard for all companies, partnerships and associations. Nevertheless, companies other than those registered on the stock exchange may issue bearer shares and no requirements exist to identify the owners of such bearer shares. However, only 12 out of a total of 325 694 companies incorporated in Israel are reported to have issued bearer shares. Ownership information of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents is not fully ensured as they are tax exempt for 10 years. With regards to trusts, obligations exist under the tax and trust law that ensure availability of information on Israeli as well as foreign trusts other than foreign resident settlor trusts.

1.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

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8 – EXECUTIVE SUMMARY
4. The legal framework of Israel contains obligations to keep reliable accounting records and underlying documentation for at least five years in respect of domestic companies, partnerships and associations. Trustees are also required to keep records in accordance with trust law. Companies incorporated in another jurisdiction but managed and controlled in Israel are required by tax law to have adequate accounting books and underlying documentation for at least five years. However, a gap in this regard remains for foreign companies that are managed and controlled by new immigrants and veteran returning residents. Anti-money laundering laws ensure that all records pertaining to the identity of account holders consistent with the standard are kept by all banks operating in Israel. However, some concerns remain about records of transactions below an amount of NIS 10 000 (EUR 2 000). 5. The Israeli tax administration has broad powers to access relevant information from any person including banks and from public authorities. However, there are some limits on these powers in respect of information relating to new immigrants or returning veterans during a 10 year tax exempt period and in respect of foreign resident settlor trusts. Currently, the Israeli competent authority does not have powers to give effect to the agreements solely for the purposes of administrative assistance (e.g. TIEAs). The scope of professional privilege in Israel is consistent with the international standard. 6. Israel has a considerable network of 54 double tax conventions that provide for exchange of information in tax matters. The vast majority of these agreements are in force and to standard. Nevertheless, Israel should continue its program of renegotiation of DTCs to incorporate wording in line with the OECD Model Tax Convention and should ensure that it is able to enter agreements for exchange of information (regardless of their form) with all relevant partners. 7. Israel’s response to the findings in this report, in particular the recommendations made, as well as the application of the legal framework and the implementation of the international standard in practice, will be considered in detail in the Phase 2 review of Israel, which is scheduled to commence in the second half of 2013.

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INTRODUCTION – 9

Introduction

Information and methodology used for the peer review of Israel
8. The assessment of the legal and regulatory framework of Israel was based on the international standards for transparency and exchange of information as described in the Global Forum’s Terms of Reference to Monitor and Review Progress Towards Transparency and Exchange of Information, and was prepared using the Global Forum’s Methodology for Peer Reviews and Non-Member Reviews. The assessment was based on the laws, regulations, and exchange of information mechanisms in force or effect as at April 2013, other materials supplied by Israel, information supplied by partner jurisdictions and information available in the public domain. 9. The Terms of Reference breaks down the standards of transparency and exchange of information into ten essential elements and 31 enumerated aspects under three broad categories: (A) availability of information; (B) access to information; and (C) exchange of information. This review assesses Israel’s legal and regulatory framework against these elements and each of the enumerated aspects. In respect of each essential element, a determination is made that either: (i) the element is in place; (ii) the element is in place but certain aspects of the legal implementation of the element need improvement; or (iii) the element is not in place. These determinations are accompanied by recommendations on how certain aspects of the system could be strengthened. A summary of the findings against those elements is set out at the end of this report. 10. The assessment was conducted by a team which consisted of two expert assessors: Ms. Marlene Parker, Director of Legislation and Treaty Services, Ministry of Finance of Jamaica and Ms. Sarita de Geus, Senior Tax Policy Advisor, Ministry of Finance of the Netherlands; and representatives of the Global Forum Secretariat: Mr. Sanjeev Sharma, Mr. David Moussali and Mr. Radovan Zidek.

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10 – INTRODUCTION

Overview of Israel
11. Israel is a relatively small State located in the Middle East region with an area of 22072 sq km and a population of 8 million (Feb 2013 Central Bureau of Statistics estimate), of which roughly 804 500 reside in the capital city of Jerusalem. Israel lies on the east coastline of the Mediterranean Sea and borders Lebanon, Syria, Jordan and Egypt. Hebrew and Arabic are the official languages; however English and Russian are also widely spoken. The official currency is the New Israeli Shekel (NIS). 12. Israel is a highly developed country with a GDP of NIS 929.8 billion (EUR 187.6 2 billion) in 2011. Sixty-two percent of Net Domestic Product is produced in the service sector, followed by industry with 20% and agriculture 1.8%. In the year 2011, the financial services produced 25% of the services sector contribution to the NDP 3. 13. Israel has a technologically advanced market economy. It depends on imports of crude oil, vehicles, raw materials, and military equipment. Cut diamonds, high-technology equipment, chemicals, medicine and agricultural products (fruits and vegetables) are the leading exports 4. Israel used to post sizable trade deficits, which were covered by tourism and other service exports, as well as significant foreign investment inflows. In 2009-10 Israel recorded trade deficit amounting to about 3% of GDP. Nevertheless, there was a current account surplus in the balance of payments. In 2011, the current account surplus has reduced and leveled off. Natural gas fields discovered off Israel’s coast during the past two years can lead to a further expansion of Israeli exports in coming years and decrease its need for energy source imports. 14. The global financial crisis of 2008-09 spurred a brief recession in Israel, but the country weathered the crisis with solid fundamentals following years of prudent fiscal policy and a resilient banking sector. The economy has recovered better than most advanced and comparably sized economies. GDP grew in 2008 by 4.14 % (in constant prices), followed by 1.1% in 2009. In 2010 and 2011 the GDP growth bounced back to 5 % and 4.6% followed by 3.2% in 2012 5. 15. Government expenditures play a significant role in the Israeli economy. Its share of the GDP peaked at around 70% in the mid-1980s accompanied by high levels of debt. In recent years the Israeli government
2. 3. 4. 5. As of 5 June 2012: EUR 1 = USD 1.2429 and USD 1 = NIS 3.896. Source: European Central Bank. www.cbs.gov.il/shnaton62/st14_02x.pdf. Central Bureau of Statistics press release on 21 August 2011. www.cbs.gov.il/shnaton62/st14_02x.pdf.

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INTRODUCTION – 11

pursued a Stabilisation Programme with an over-arching goal of “smaller government” through privatisation, savings in public spending, lower tax burdens and debt reduction. As a result, expenditures have decreased to around 42% of GDP in 2010-11. The government strongly supports research and development activities. The main research and development projects are in information, communication, medicine, bio and nano technologies. Budget deficits peaked in 2001-03. The economic boom from 2004-08 resulted in rapid growth in tax revenues leading to cuts to corporate and personal income tax rates. In recent years, with the aim of having a responsible fiscal policy, the tax cuts were stopped and even partially reversed. 16. The main trading partners of Israel are the United States as a destination of over 24% of Israeli export (excluding diamonds) and the EU with over 30% (excluding diamonds). With regard to imports, the main trading partner is the EU (35% excluding diamonds). Other important trading partners 6 are: China, India, Japan and Brazil. 17. In 2010, Israel formally acceded to the OECD. Israel is also a member of World Trade Organization, International Monetary Fund and the United Nations. Israel is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and is committed to implement the international standards for transparency and exchange of information for tax purposes.

General information on legal system and the taxation system Legal system
18. Israel is a parliamentary democratic republic with a multi-party system. Israel’s highest legislative body is the 120-seat unicameral Parliament (“Knesset”). Knesset members are elected for a four year term based on the share of total national vote in general elections. The Israeli head of state is the President, elected by the Knesset for a seven year term. Most executive power lies with the Government which is accountable to the Knesset. The Prime Minister, who is the head of government, is appointed by the President on the basis of the general election results. The Prime Minister is responsible for proposing a list of ministers, which is submitted within 28 days to the Knesset for approval. 19. The State of Israel is subdivided into six main administrative districts (known as mehozot): Center, Haifa, Jerusalem, North, Southern, and Tel Aviv Districts. Districts are further divided into fifteen sub-districts (known as nafot), which are themselves partitioned into fifty natural regions. Israel’s
6. www.cbs.gov.il/reader/newhodaot/hodaa_template_eng.html?hodaa=201216012.

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12 – INTRODUCTION
largest and most populated district is Jerusalem. Districts have a certain degree of administrative autonomy however; most of the state policies including levying taxes are centralised in the hands of the Israeli government. 20. Israel’s legal system is strongly influenced by the common law tradition. Israel has no formal constitution. Upon attaining statehood, Israel took over statutes in force during the British mandate, insofar as they were not opposed to the provisions of the Declaration of the Establishment of the State of Israel. The main principles of the state’s power and its functioning are stipulated in number of Basic Laws. Laws are passed by the Knesset. The Government (typically ministers) can issue secondary legislation to implement laws within the limits laid down by the law. In some cases, laws can be conditioned on the adoption of secondary legislation by approval in a Knesset committee or require consultation with other ministers. Laws and secondary legislation come into force on their promulgation. 21. Israel’s judicial branch consists of three levels of courts: Magistrate’s Courts, District Courts and the Supreme Court, which operates also as the High Court of Justice. Civil tax cases are heard by the District Courts and indictments are submitted to the Magistrates Courts. Supreme Court can overrule decision of the District Court based on appeal by the taxpayer or the tax authority. Supervision of the activities of government and other public institutions is also carried out by the State Comptroller.

Taxation system
22. The Israeli taxation system is mainly based on indirect taxation of goods and services and income taxes. Total tax revenue as percentage of GDP was 32.4 % in 2010, which is about the average percentage among the OECD members. The total tax revenue in 2010 was NIS 240 billion (EUR 49.52 billion), out of which taxation of goods and services represented 39%, income taxes 30% and social security contributions 17%. 7 A gradual reduction of tax rates for individuals and companies has been implemented over the past decade. 23. Income tax is levied according to the Israeli Income Tax Ordinance, 5721-1961 (ITO). The ITO contains rules for corporate income tax, individual income tax as well as for the administrative aspects of taxation. Based on the Trachtenberg committee recommendation, ITO amendments were approved in December 2011, which repealed the earlier reduction in tax rates and set higher tax rates for tax year 2012 and later.

7.

OECD (2011), Revenue Statistics 2011, OECD Publishing, http://dx.doi. org/10.1787/rev_stats-2011-en-fr.

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INTRODUCTION – 13

24. As of 2012, corporations in Israel are subject to a tax rate of 25%. Individuals are subject to progressive personal income tax rates ranging from 10% to 48%. Special rules apply among others with regard to passive source income, rental fees, persons aged over 60, new immigrants and returning residents. Personal and corporate income taxes are levied on the worldwide income of individuals or companies who are Israeli tax residents. Non-residents are taxed on Israeli-source income. An individual is an Israeli tax resident if “centre of life” of that person is located in Israel (s. 1(a) ITO). A company is considered as Israeli tax resident if it is incorporated in Israel or it is managed and controlled from Israel 8 (s. 1(b) ITO). 25. Income earned abroad or derived from assets abroad by a new immigrant and a veteran returning resident is exempt from taxes for ten years after the date on which they become resident in Israel. Foreign companies that are managed and controlled in Israel are not considered resident for tax purposes for a period of ten years if they are managed and controlled by new immigrants or veteran returning residents who have spent at least ten consecutive years abroad as a foreign resident. Foreign residents are liable to tax on income generated or derived in Israel, subject to source rules and the respective double taxation treaties. Permanent establishments of foreign companies are generally taxed on Israeli-source income only. The Israeli income tax system includes special rules with regard to foreign professional companies, controlled foreign companies and foreign occupational companies enabling Israel to tax foreign source income in Israel under the defined circumstances. Israel also applies transfer pricing and participation exemption rules. Capital gains, defined as the excess of proceeds from the sale of an asset over its depreciated cost, are taxed at the rate of 25% or 30% based on ownership interest holding with respect to individuals and at the standard income tax rate of 25% with respect to companies. There is no gift tax or inheritance tax in Israel. 26. Companies are required to inform the tax authorities when they start operating and must submit annual tax returns. Upon the formation of a company registered in Israel, the company is required to open a tax file with the tax authorities and file Form 4436 accompanied by its articles of association. 27. The government levies a 15.5% value-added tax (VAT). The VAT rate in Israel is uniform for all taxable transactions. However, exported goods, sale of intangible assets to non-residents, in certain instances sale of goods to licensed warehouses, certain services rendered to non-residents, cross border transport services are among others not subject to VAT. Financial institutions are subject to profit tax instead of VAT at the same rate as VAT. Generally,
8. Based on the prevailing interpretation, this term should be understood in light of the analogous notion of “place of effective management”.

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14 – INTRODUCTION
anyone who operates any business activity in Israel must be registered with the local tax administration for VAT purposes. However, there are exceptions from registration for persons whose main income arise from certain services (such as lectures, artistic performances etc.), in these cases the payment obligation transfers to the recipient. There are cases of exempt dealers, in which the dealer will have to be registered yet will not be obligated to issue tax invoices. (A VAT exempt dealer is defined as one having a transaction turnover less than NIS 76 884 [EUR 15 920] per year.) 28. Employers and employees are subject to national insurance (social security) and pension contribution. The employee’s share of national insurance also includes compulsory health insurance. Employee’s contribution to national insurance is applied at rates from 3.5% to 12%, employer’s rates are from 3.85% to 5.43%. In both cases the applied rate is based on the amount of individual’s income which is subject to the insurance. Total pension contribution rate including employee’s and employer’s part is 10%. 29. The government further levies real estate taxes (acquisition tax between 0% to 5% for first apartment and 5% to 7% for a second apartment; betterment levy and land betterment levy at 48% until 7 November 2011 and at 25% after 1 January 2012 and at 20% during intermediate period; customs duties; purchase tax and municipal taxes on real estate. The customs duties rates vary between 0% to 100% on agriculture products, and between 0% and 12 % on industrial products.

Overview of commercial laws and other relevant factors for exchange of information
30. Private and public companies are principally governed by the Israeli Companies Law, 5759-1999. The courts have made a significant contribution to the development of Israeli law by means of judicial interpretation. In their decisions, the courts, to some extent, have been influenced by continental law, although English and American law also has persuasive force. It should be noted that before the Companies Law came into effect, the normative framework was based on the Companies Ordinance, 5743-1983, and much of it has not been repealed upon the coming into effect of the Companies Law, and remains in force even now. 31. The Companies Registrar is part of the Corporations Authority in Israel, which is an administrative body reporting to the Ministry of Justice. The Companies Registrar is in charge of maintaining the Israeli Register of Companies, in accordance with the requirements of the Companies Law and regulations. 32. Partnerships are regulated by Israel’s Partnership Ordinance, 1975. A partnership can be a general partnership or limited partnership. Trusts

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INTRODUCTION – 15

are a type of non-corporate entity and their legal regulation is contained in the Trust law, 5739-1979. Israel’s law does not recognise the concept of a foundation. 33. The main relevant tax rules are stipulated by the Income Tax Ordinance, 5721-1961 and the Income tax regulation (returns and supplementary returns by body of persons, Regulation No. 5724-1963) prescribe its detailed application. Tax laws are enforced by state tax authorities that administratively report to the Ministry of Finance. Accounting obligations follow from Income Tax Ordinance and corresponding Income Tax Rules, 5733-1973. AML/CFT rules are contained in the Prohibition on Money Laundering Law, 5760-2000 (PMLL) and the Prohibition on Terror Financing Law, 2005 (PTFL). Israel’s AML obligations apply to banking corporations, members of stock exchange, portfolio managers, currency service providers, insurers and insurance agents, the postal company and provident funds (pension business). A number of ordinances stipulating detailed rules for AML procedures and obligations have been issued for all of the above mentioned entities 9. The Mutual Evaluation of Israel with regard to its compliance with the AML /CFT obligations is carried out by MONEYVAL 10. 34. Israel’s banking system is small and basically locally owned. In August 2012 11, the banking system in Israel consists of 15 ordinary banking corporations, 5 foreign banks, 2 mortgage banks, 1 financial institution and 2 joint service companies. The banking system in Israel is highly concentrated, with five of the largest banking groups (Bank Hapoalim, Bank Leumi, Discount Bank, Mizrahi Bank and First International Bank of Israel) controlling 94.7 per cent of all bank assets, and the three largest among them
9. These ordinances are: Prohibition of Money Laundering (Obligations of Stock Exchange Members to identify, report and retain lists for the purpose of preventing money laundering and financing terrorism), 5770-2010; Prohibition on Money Laundering (The Banking Corporations’ Requirement regarding Identification, Reporting, and Record-Keeping for the Prevention of Money Laundering and the Financing of Terrorism) Order, 5761–2001; Order on Prohibition on Money Laundering (Obligations of Identification, Reporting and Keeping Records of the Postal Bank to Prevent Money Laundering and Financing Terrorism), 5771–2011; Prohibition on Money Laundering Regulations (Rules for Use of Information Transferred to the Israel Police Force and the General Security Service for Investigation of Other Offenses and for Transferring it to Another Authority), 5766–2006. Third Evaluation Round Report (adopted on 9 July 2008) and Second Progress Report (adopted on 14 December 2011) can be seen at the MONEYVAL website: www.coe.int/t/dghl/monitoring/moneyval/Countries/Israel_en.asp. www.boi.org.il/en/BankingSupervision/Data/Pages/bankcoLists/list11.aspx.

10. 11.

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16 – INTRODUCTION
accounting for over 77.3 per cent 12. A full range of banking services, including private banking, is offered by the banks. The Bank of Israel (Central Bank) is responsible for the supervision of the banking corporations. Its Licenses Committee approves the issuing of licenses to establish or purchase a controlling interest in a banking corporation, as well as approval for establishing a branch. The postal bank is owned by the government and has about 650 branches. It is supervised by the Ministry of Communication. 35. The Tel-Aviv Stock Exchange (TASE) is the only stock exchange operating in Israel. It is supervised by the Israel Securities Authority and offers various products for investors, including the trading of shares, corporate bonds, treasury bills and bonds, index-tracking products and derivatives on shares, indices and currency exchange rates. It provides clearing, settlement and depository services. TASE is the “home market” for Israeli companies, however, companies trading in the USA and on the London Stock Exchange can dual-list their shares on the TASE. At present, 552 equity companies are listed on the TASE, out of which 43 companies are cross-listed abroad.

Recent developments
36. An amendment to the Income Tax Ordinance enabling Israel to conclude international agreements solely for the purpose of exchange of information and clarifying Israel’s tax authority information gathering powers in respect of exchange of information is currently under legislative procedure. 37. A draft bill concerning the application of AML/CFT obligations on DNFBPs such as lawyers, that often provide trust services was approved by the Committee for Legislation and Law Enforcement on the 20th November of 2011 and is awaiting approval by the legislative power to become law. 38. On 19 May 2013 the Israeli Government has taken a decision to eliminate the exemption from filing tax returns by new immigrants and veteran returning residents and this decision is subjected to the further legislation procedure. The obligations will apply to new arrivals to Israel from the date the law comes into force.

12.

Updated 31 December 2011.

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COMPLIANCE WITH THE STANDARDS: AVAILABILITY OF INFORMATION – 17

Compliance with the Standards

A. Availability of Information

Overview
39. Effective exchange of information requires the availability of reliable information. In particular, it requires information on the identity of owners and other stakeholders as well as information on the transactions carried out by entities and other organisational structures. Such information may be kept for tax, regulatory, commercial or other reasons. If such information is not kept or the information is not maintained for a reasonable period of time, a jurisdiction’s competent authority may not be able to obtain and provide it when requested. This section of the report describes and assesses Israel’s legal and regulatory framework on availability of information. 40. Availability of ownership and identity information in respect of companies is generally ensured by the requirement to keep an up to date register of members. However, companies other than those listed on the stock exchange may issue bearer shares and no requirements exist to identify the owners of such shares. As on June 2013 only 12 out of a total of 325 694 companies incorporated in Israel are reported to have issued bearer shares. Ownership information in respect of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents is not fully ensured as they are tax exempt for 10 years. Recommendations have been made in respect of these deficiencies. 41. Partnerships must be registered with the authorities and details of each partner must be furnished upon registration. Any change in this respect

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18 – COMPLIANCE WITH THE STANDARDS: AVAILABILITY OF INFORMATION
must also be registered, ensuring up to date ownership information on partnerships. Associations are required to register and keep an up to date register of its members, and must file a copy of the general meetings and financial reports with the Registrar of Associations. 42. With regards to trusts, obligations exist under the tax and trust law that ensure availability of information on Israeli as well as foreign trusts except in the case of foreign resident settlor trusts. 43. An obligation to keep reliable accounting records including underlying documentation for a period of at least five years is in place in respect of all relevant entities except for foreign resident settlor trusts and foreign companies that are controlled and managed by new immigrants and veterans returning residents. Most of the obligations are based on Israel’s tax law. The requirements to keep underlying documentation cover a wide spectrum of documentation in respect of transactions and collections. A general obligation to keep accounting records separate from the tax law exists for companies, partnerships, associations and trusts. 44. The AML/CFT legislation ensures that all records pertaining to the identity of the account holders consistent with the standard are kept by all banks operating in Israel. The AML/CFT laws require that the documents attesting the instruction to carry out a transaction above the threshold of NIS 10 000 (EUR 2 000) or reported as suspicious transaction to the FIU must be recorded for a period of seven years. However, there are no explicit obligations on the banks to keep financial and transactional information in respect of accounts held by them. 45. Enforcement provisions are in place in respect of the relevant obligations to maintain ownership and identity information for all relevant entities and arrangements. The effectiveness of the enforcement provisions which are in place in Israel will be assessed as part of its Phase 2 review.

A.1. Ownership and identity information
Les juridictions doivent s’assurer que leurs autorités compétentes ont à disposition des renseignements relatifs à la propriété et à l’identité pour l’ensemble des entités et arrangements pertinents.

Companies (ToR A.1.1)
46. Under the Companies Law 5759-1999 (CL) two types of companies may be incorporated (s. 1 CL): • Public Companies: these companies have their shares listed for trading on a stock exchange, or have been offered to the public pursuant to

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a prospectus as defined in the Securities Law, and are held by the public. • Private Companies: these companies are companies that are not public companies.

47. Any person can establish a company, provided that none of the purposes of the company is illegal, immoral or contrary to public policy (s. 2 CL). A company can have a single shareholder (s. 3 CL). There are no limitations on the number of shareholders in either private or public companies. Every security in a company is presumed to be transferable (s. 293 CL), unless contrary provisions are laid down the articles of association (s. 294 CL). The rules described below on the availability of ownership information apply to all companies, unless indicated otherwise. 48. All companies are required to have a registered office in Israel (s. 123(a) CL). Any change of address of the registered office must be notified to the Registrar of Companies (Registrar) within 14 days of the change (s. 123(b) CL). Non-compliance with these provisions can lead to a fine of NIS 6 000 (EUR 1 200) (ss. 140(3), 145(2) and 354(a) CL).

Ownership information held by companies
49. All companies incorporated under the CL are required to keep a register of shareholders (s. 127 CL). Public companies also need to have a register of substantial shareholders in addition to the register of shareholders (s. 128 CL). The register of shareholders should contain the following information (s. 130 CL): (a) In respect of shares registered under a person’s name: (i) the name, identity number and address of the shareholder; (ii) the amount of shares and class of shares held by each shareholder, indicating their nominal value, if any, and if any amount of the consideration fixed for a share in not yet paid, the amount paid; (iii) the date of allotment of the shares or the dates of their transfer to shareholders, as the case may be; (iv) where the shares are marked with serial numbers, the company must note next to the name of each shareholder the numbers of the shares registered in such person’s name; (b) in respect of bearer shares; (i) an indication of the fact of the allotment of bearer shares, the date of their allotment and the number of shares allotted;

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(ii) the numbering of the bearer share and of the share warrant (a document stating that the holder there of is the owner of the bearer share (s. 1 CL)); (c) in respect of dormant shares (own shares purchased by the company (s. 308 CL)), their number and the date on which they became dormant. 50. A company is obliged to alter the registration of ownership of shares in the register of shareholders when a transfer deed of a share is delivered to the company signed by the transferor and the transferee (s. 299(1) CL). A company must keep the register of shareholders in its registered office located in Israel (s. 124 CL). Public companies are also required to keep a register of substantial shareholders (s. 128 CL). Not keeping a register of shareholders or not giving notices or reports to the Registrar of Companies as required under Companies Law or Companies Ordinances is considered a breach of duty (s. 353 CL). A fine of NIS 6 000 (EUR 1 200) may be imposed on a company for the aforementioned breach once the Registrar has made a demand to the company to remedy the breach and the breach is not remedied in a period of forty-five days (sections 354(a) and 356(a) CL).

Ownership information held by the authorities
51. A person seeking to register a company must submit an application to the Registrar in the form prescribed by the Minister of Justice, to which must be attached: (a) a copy of the articles of association; and (b) a declaration by the first directors that they are willing to serves as directors (s. 8 CL). The Registrar will give every company a registration number and shall enter it on the certificate of registration (s. 10 (b) CL). The articles of association must contain the registered share capital of the company, including the number of each class (s. 18 CL). The articles of association of a company must be signed by the first shareholders and the shares allotted to them must be noted therein, as shall be the name, address and identity number of each such shareholder (s. 23(a) CL). 52. Private companies must report annually to the Registrar: (a) the alterations in the articles of association, and increase or decrease of capital; (b) the change of address of its registered office; (c) a notification to the effect of stating that the company has no auditor; (d) appointments to the board of directors and changes in its composition; (e) the allotment of shares; (f) the transfer of shares, fourteen days from the date of transfer; and (g) a merger it will enter into (s. 140 CL). A report on the transfer of shares made to the Registrar would include identity information on the old and new shareholders (s. 299(1)). As the articles of association of a private company include details on the initial shareholders, updated information should be available with the Registrar.

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53. Public companies must report certain information to the Registrar as well, but this does not include ownership information (s. 142 CL). However, ownership information is available through the register of shareholders (s. 127). 54. Non-compliance with yearly reporting by companies can lead to a fine of NIS 6 000 (EUR 1200) (s. 354(a) CL).

Tax law
55. The Income Tax Ordinance (ITO) establishes that residents in Israel are obliged to pay income tax on their worldwide income for each tax year (s. 2 ITO). The ITO defines a company as a company incorporated or registered under any law in effect in Israel or elsewhere, including a cooperative society (s. 1 ITO). Companies are resident in Israel for tax purposes if they are incorporated in Israel or when they are managed and controlled in Israel (s. 1(b) ITO). 56. The ITO determines that companies are required to register no later than they start to operate (s. 134 ITO). Upon the formation of a company registered in Israel, the company is required to open a tax file with the Israel Tax Authority by filing Form 4436 titled “Opening Corporation Tax File with the Israel Tax Authority” accompanied by the articles of association in accordance with the tax authorities’ powers to demand the submission of returns (s. 135 ITO). Form 4436 must include the details of the directors and shareholders of the company such as: name and registration number, address, assessing office, type and amount of shares, holding percentage of shares by the shareholders and whether the shareholder is a director of the company. 57. Companies are required to file an annual tax return (s. 131(a)(5)). The Minister of Finance may, by regulations, prescribe additional returns for a company obliged to file an income tax return (s. 131A ITO). Companies must also file an annual report in Form 1214 reporting its current shareholders. This ensures availability of information on current shareholders annually. Non-filing of these returns attracts sanctions under the ITO (see section A.1.6 below). 58. The ITO obliges all persons 13 to notify the assessing officer about the beginning or change of occupation in time. The defaults of failure to inform the Assessing Officer of this fact in time and also non submission of their first annual tax return after the event are liable to three years of imprisonment or to a fine of NIS 75 300 (EUR 15 100) and to another fine of half the tax to which it was liable (s. 215A(a) ITO).

13.

A person includes a company and a body of persons (s. 1 ITO).

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Ownership information held by service providers
59. Under the Israeli legal framework AML/CFT obligations apply to banking corporations, members of stock exchange, portfolio managers, currency service providers, insurers and insurance agents, the postal company and provident funds. Section 2(a) of the Prohibition of Money Laundering (The Banking Corporation’s Requirement regarding Identification, Reporting, and Record-Keeping for the Prevention of Money Laundering and the Financing of Terrorism) Order (PMLO) of 2001 determines that a banking corporation shall not open an account without recording the following identification particulars in respect of each of the account holders or authorised signatories, and in respect of any other person applying to open an account, and authenticating them as set forth in section 3 of the PMLO: (i) name; (ii) identification number; (iii) date of birth for an individual or date of incorporation for a company; and (iv) address. 60. Further, the Prohibition on Money Laundering Law (PMLL) determines that a banking corporation and any other financial institution to whom these legal provisions apply shall not perform a property transaction unless it possesses the identifying particulars as specified in the PMLO, of the person receiving the service from the banking corporation (s. 7(a)(1), (7)(b) PMLL). The Governor of the Bank of Israel or the relevant Minister are empowered to determine by order who is a recipient of a service of a property transaction performed by a banking corporation; this determination may include a beneficiary of the transaction, and, in addition, where the act is performed at the request of a corporation or by means of a corporate account, it may include the person in control of the corporation (s. 7(a)(1),(7)(b) PMLL). 61. In the case of companies which open an account or realise a property transaction through a banking corporation or other financial institution, there is an obligation to record: (a) the names of the controlling shareholders and their identity numbers; (b) if the banking corporation does not process such an identity number, after having taken reasonable measures to obtain one, it may instead record the date of incorporation; and (c) the country of citizenship (s. 2 PMLO and 7(a)(1)(a) PMLL). Failure to carry out CDD or to maintain the documentation for at least five years can lead to an administrative fine of no more than NIS 2 226 000 (EUR 445 200) (s. 14(a) PMLL). The term “controlling shareholder” is derived from the Securities Law, 5278-1968 and as per the interpretation of the Security Authority controlling shareholder means information on the last individual in the chain of control.

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Foreign companies
62. Foreign companies are considered to be resident for tax purposes in Israel if they are managed and controlled from Israel (s. 1(b)(2) ITO), and are therefore subject to income tax in respect of their worldwide income (s. 2 ITO). Foreign companies are obliged to submit an annual tax return under section 131(a)(5) of the ITO if they are resident in Israel for tax purposes. The Minister of Finance may, by regulations, prescribe additional returns which a company is required to make which shall be attached to the income tax return (s. 131A ITO). Foreign companies which are resident in Israel for tax purposes must attach Form 1214 which contains a report of current shareholders. Foreign companies resident in Israel are also subject to the same penalties as domestic resident companies (see above). A total of 2564 foreign companies are registered in the register of Israeli Corporation Authority. 63. From 2007, foreign companies that are managed and controlled in Israel are not considered resident for tax purposes for a period of ten years if they are managed and controlled by new immigrants or veteran returning residents who have spent at least ten consecutive years abroad as a foreign resident (s. 1(b)(2) ITO). However, as part of a tentative regulation applicable for the years 2007-09 only, the requirement of 10 years consecutive stay abroad was reduced to five years. The tax exemption only applies to income generated outside Israel, however, income earned by these companies from any operation carried on in Israel, including management activities, is taxable. There is no requirement to file tax returns for such companies if they have no Israeli-source income. In the absence of a compulsory requirement to file tax returns by these foreign companies, information on the shareholders of these companies may not be available to Israeli authorities. The Israeli authorities have advised that number of persons managing a foreign company from Israel is uncertain. It is worth noting that only new immigrants and veteran returning residents who came to Israel from 2007 and onwards are eligible to the tax exemption. Since 2007, 92 484 new immigrants have come to Israel. A total of 13 188 veteran returning residents, who are eligible to claim the benefits, arrived in Israel between 2010 and 2012. The information on veteran returning residents for the period of 2007 and 2009 is not available. Israeli authorities advise that such persons are about 20 000. 64. A foreign company which keeps a place of business in Israel, including an office for the transfer of shares or for the registration of shares, must be registered as a foreign company (s. 346(a) CL). The application for registration has to be submitted to the Registrar within one month of setting up a place of business and it must attach the following documents: (a) a copy of the documents under which the company is incorporated or pursuant to which it operates, including its articles of association; (b) a list of the directors of

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the company; (c) the name and address of an authorised person in Israel to receive service of process; and (d) a certified copy of a power of attorney for an authorised agent who is resident in Israel (s. 346(b) CL). The Registrar should be notified within fourteen days if an alteration occurs in a document, a change of the directors of the company, or a change in the name or address of the authorised agent or of the person designated for service of process (s. 346(c) CL). 65. Section 349 of the CL states that foreign companies which have a place of business in Israel and do not register with the Registrar as well as any office holder thereof who is party to such breach, shall be subject to a fine of NIS 26 100 (EUR 5 220) and in the case of an ongoing breach, they shall be subject to a further fine of NIS 1 300 (EUR 260) for every day on which the breach continues, from the date that the foreign company receives a notice from the Registrar. 66. Based on the above, foreign companies which are resident in Israel for tax purposes due to the fact that they are managed and controlled in Israel must maintain information about their shareholders in order to meet their tax obligations, i.e. filing proper income tax returns indicating their current shareholders. However, a gap exists with regards to foreign companies which are managed and controlled in Israel by new immigrants or veteran returning residents subject to a ten year tax exemption and a recommendation is made to cover this deficiency.

Nominees
67. Section 131 of the Company Law provides that a shareholder who is a trustee must be registered on the register of shareholders, with a reference to the trusteeship, and such a person is considered as a shareholder for the purpose of the Company Law. Section 176 of the Company Law establishes that a person in whose name the shares are registered in a private company is the shareholder of the company. Therefore, nominee shareholder is treated as a legal owner of shares in case of a private company. Israeli authorities have advised that nominee shareholders are treated as trustees in Israel and provisions of the Trust Law 5739-1979 of 1980 apply in the matter and trustees must hold information on the persons on whose behalf they hold shares. Israel has further clarified that the definition of trustee and trust under the Income Tax Ordinance is very broad and refer to any kind of relationship in which one person hold assets on behalf of another person no matter how that relationship is classified under Israeli or any other law. Therefore, nominee shareholders are treated as trustees under the provisions of the ITO too. The provisions concerning trusts in Israel are discussed further below in the report.

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68. The provisions with regard to ownership of the shares held by a nominee in a public company are different. When a company’s shares are listed for trading on a stock exchange in Israel, a nominee company may be entered on the register of shareholders, in addition to the information as required in section 130 (a)(1) (s. 132 CL). Section 130 (a)(1) requires information on the name, identity number and address of the shareholder. Further, the nominee company is not considered as a shareholder in the company and the shares entered under its name are considered owned by a person for whose benefit such shares are registered (ss. 132 and 177). Therefore, in case of a company whose shares are listed on stock exchange and shares are held by a nominee, the information on nominee as well as the person on whose behalf such shares are held by such a nominee must be available in the register of shareholders.

Conclusion
69. All companies are required to keep a register of shareholders. Public companies also need to keep a register of substantial shareholders in addition to the register of shareholders. In addition, the Registrar of Companies keeps a register of all companies and the information available includes ownership information for private companies. The Israeli tax authorities also maintain ownership information on all companies that are resident for tax purposes in Israel (including companies formed in Israel and foreign companies that are managed and controlled in Israel), since these companies are required to update shareholder information each year when they file their tax return. However, a gap remains with regards to foreign companies which are managed and controlled in Israel by new immigrants or veteran returning residents subject to a ten year tax exemption. There are no impediments for a person to act as a nominee shareholder for another person and the availability of information on the nominees as well as the persons on whose behalf they hold shares is ensured in Israel.

Bearer shares (ToR A.1.2)
70. The CL establishes that it is possible for companies to issue bearer shares. A bearer share can be issued only after payment of full consideration to the company. A person holding a share warrant is also a shareholder of the company (s. 11, CL). A bearer share is a negotiable instrument, the transfer of which is effected by delivery of a share warrant to the purchaser (s. 297 CL). The holding of a share warrant is considered prima facie evidence of ownership of a bearer share (s. 296(b) CL). Thus, the rights of the bearer shares that are held by the company are executed through the share warrants that represent the bearer shares. Share warrants that represent bearer shares may be returned to the company that issued bearer shares for the purpose of their cancellation and conversion into shares registered under the shareholder’s name (s. 136 CL).

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71. As stated previously, a company is required to keep a register of shareholders (s. 127 CL). The following must be entered in the register of shareholders in respect of bearer shares: (a) an indication of the fact of the allotment of bearer shares, the date of their allotment and the number of shares allotted; and (b) the numbering of the bearer share and of the share warrant that represents it (s. 130(a)(2) CL). The CL requires that companies submit identification details of all founding members at the time of incorporation. Section 135 of the Companies Law provides that, when a share warrant is issued in place of a share registered under a person’s name, the share must be registered, as set out in section 130(a)(2) discussed above, and the name of the shareholder must be removed from the register of shareholders. 72.A company may lay down provisions in its articles of association limiting the transferability of shares, under conditions prescribed in the articles of association. This situation may preclude any company who has such a prohibition in its articles of association to have bearer shares (s. 294 CL). 73. Section 66 of the Corporate Guidance Note issued by the Tel Aviv Stock exchange, as updated on 25 January 2010, prescribes conditions for the registration of companies with the stock exchange. These conditions among other include: • • • all stocks generated in the original capital of the company shall be considered stocks that were fully paid; all stocks generated in the original capital of a new company shall be listed in the company’s stockholders register; and new stock that will be issued in a quoted company shall also be listed in the company’s stock holders register.

74. Israeli authorities have confirmed that issuing securities and offering the option to sell them to public require a formal approval from the Minister of Finance or his authorised representative. They have further confirmed that there are at present no listed bearer shares in Israel Stock Market, and no bearer shares are being traded, except one company with six bearer shares which are not traded. In view of the specific requirements that for seeking a registration of securities with the Stock Exchange such securities must be listed in the company’s stock register ensures that a public company registered on the stock exchange is not allowed to have its shares in bearer form. It is clear that no public company of which shares are in bearer form can register with the Stock Exchange. 75. Companies are required to file an annual report to the Register of Companies. In this annual report the companies must provide information on the capital of the company; authorised and allotted capital; and types and numbers of shares issued. In respect of registered shares, information on the identification of shareholders must also be provided. In respect of bearer

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shares information on the number of warrants issued and number of shares in each warrant is required to be stated but information on the identity of holders is not required. Israeli authorities have advised that 12 companies out of 325 694 companies incorporated in Israel are reported to have issued bearer shares as on June 2013. Based on this information, the authorities report that the use of bearer shares in Israel is negligible. Public companies registered on the stock exchange are not allowed to have bearer shares. The mechanisms to ensure availability of information on the owners of bearer shares issued by other companies are not in place, therefore, it is recommended that Israel establishes suitable legal mechanisms that ensure availability of information on owners of bearer shares in all circumstances.

Partnerships (ToR A.1.3)
76. Partnerships are governed by the Partnership Ordinance (PO). A partnership is defined as “a body of persons engaged in a partnership relationship” (s. 1(a) PO). A partnership relationship is defined as “the relationship between persons managing a business together for the production of profits, excluding the relationship between members of a corporation incorporated under any law” (s. 1(a) PO). Three types of partnerships can be distinguished: • • General partnership: a partnership where all of the partners are liable for the obligations of the partnership, jointly and severally (s. 1(a) PO). Limited partnership: a partnership where a person who brought capital into the partnership, at the time of the engagement, in money or in an asset valued at an express amount, in order to not be liable for the obligations of the partnership in excess of the amount provided; however, the partnership must include at least one general partner (s. 1(a) PO). Foreign partnership: A partnership established outside of Israel (s.74 PO).

77. General and limited partnerships must be registered within one month from the date of formation (s. 4 PO). If a partnership does not register as required by law, then each of its partners is liable to a fine of NIS 15 (EUR 3) for each day on which the offense continues; however, non-registration of a partnership shall not affect the consideration of whether or not the partnership exists (s. 6 PO). 78. Section 7 of the PO establishes that the registration of a general or limited partnership shall be effected by sending a notice to the Registrar, signed by the partners, which must include the following details: (a) the name of the partnership; (b) the general nature of the business;

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(c) the main place of business; (d) the full name, address and description of each partner (including limited partners); (e) the names of the partners who are authorised to manage the affairs of the partnership and to sign in its name, unless all of them are so authorised; and (f) the period determined for the existence of the partnership, if such a period has been determined, and the date of commencement thereof. 79. If any of the registration details is changed, a notice, signed by all the partners, in which such change shall be specified, must be sent to the Registrar within seven days (s. 9 PO). The registration requirement and the obligation to submit any change ensure the availability of ownership information in respect of all partnerships formed under Israeli law with Israeli authorities. Any person failing to submit a notice to the Registrar of a change in any of the details of registration, is liable to a fine of NIS 15 (EUR 3) for each day on which the offence continues (s. 9 PO). 80. A foreign partnership shall not conduct any business in Israel unless it has been registered in Israel (s. 75 PO). In addition, if it is a limited partnership it must obtain registration approval from the Ministry of Justice (s. 75 PO). A foreign partnership doing business in Israel that fails to register with the Registrar or the Ministry of Justice is liable to a penalty of ITA 14 3 750 (NIS 7.55 (1.52 EUR)). 81. Section 76 of the PO establishes that the registration of a foreign general partnership or a foreign limited partnership shall be by delivery of a notice to the Registrar, signed by all the partners and including the following details: (a) the name of the partnership; (b) the nature of the business; (c) the full name, address, description and citizenship of each of its partners; (d) the names of the partners authorised to conduct the partnership’s business and to sign on its behalf, unless all are authorised; (e) the term of existence of the partnership, if such was determined, and the date of commencement thereof;

14.

The last date an exchange rate between Italian Liras and New Israeli Shekels was published was on the 25 January 2002: ITA 1 000 = NIS 2.075. Source Israeli National Bank.

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(f) the name and address of the Israeli citizen authorised to receive legal documents and notifications on behalf of the partnership; and (g) regarding a limited partnership, also a notice that the partnership is a limited one, and the details of each limited partner, the sum inserted by him and if paid in cash or any other way, and if paid in full. 82. In the case of changes in the registration details of a foreign partnership, a notice, signed by all the partners, in which such change shall be specified, must be sent to the Registrar within fourteen days (s. 78 PO). The registration requirement and the obligation to submit any change ensure the availability of ownership information in respect of all foreign partnerships doing business in Israel. Any person failing to submit a notice to the Registrar of a change in any of the details of registration is liable to a fine of NIS 15 for each day on which the offence continues (s. 78 PO).

Tax law
83. Under the Income Tax Ordinance two or more persons carrying on business or vocation jointly are taxed as partnerships. These tax provisions equally apply to foreign partnerships carrying on business in Israel. Partnerships are considered transparent for tax purposes, which mean that the partners are taxed separately for their share in the partnership’s income (s. 63(a)(1) ITO). Nonetheless, partnerships are obliged to register with the tax authorities no later than on the date they start operating by filing Form 4436 (s. 134 ITO) and one of the partners resident in Israel of the partnership at the request of the assessing officer must make and deliver a return of the partnership’s income for every year (s. 63(2) ITO). The return must contain the names and addresses of the other partners together with the amount of the share of the income to which each partner was entitled (s. 63(2) ITO). Where there is no partner resident in Israel, the return must be filed by a representative (e.g. attorney) of the partnership who is resident in Israel upon the request of the tax authorities (s. 63(2) ITO). This means that where a partnership return has been submitted, full ownership information for the relevant year is available with the tax authorities.

Conclusion
84. All partnerships organised in Israel or carrying on a business in Israel must be registered and upon registration details of all partners must be submitted. Any changes must be notified within 7 days in the case of domestic partnerships and 14 days in the case of foreign partnerships. Updated ownership information on partnerships must therefore be available with the registration authorities. In addition, the tax authorities may request that a tax return for a partnership be made including ownership information on all partners.

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Trusts (ToR A.1.4)
85. The legal basis for trusts is found in the Trust Law 5739-1979 of 1980 (TL). Trusts are not a separate legal entity. A trust is defined as a relationship to any property by virtue of which a trustee is bound to hold the property, or act in respect thereof, in the interest of a beneficiary or for some other purpose (s. 1 TL). Israeli law does not require that trust property be owned by the trustee. The trustee must exercise control over assets to fulfil the purpose of the trust, but there are no particular conditions as to the manner of control. Where the trust property includes property that must be registered (such as real estate), the trustee may notify his/her relationship with the property to the Registrar of Lands, and such person shall register the appropriate annotation on the deed of the property (s. 4 TL). Trusts created under Israeli law terminate on the death of the settlor, because the Israeli succession rules override the rules of trusts. There is a need for probate of the will in order to achieve a settlor’s goal of creating a trust that will exist for a number of generations. Trustees of a trust must keep account books in respect of the affairs of the trust (s. 7 TL). The trustee must report to the beneficiaries on the affairs of the trust, annually and upon termination of his/her tenure, and to provide them with any other additional information that they may reasonably request (s. 7 TL). 86. The Trust Law regulates the establishment of private trusts and public purpose trusts. Public trusts are similar to charitable trusts. 87. Under the definition of a trust in section 1 of the TL, private trusts are relationships to any property and may take a wide variety of forms according to the wishes of the parties. The commencement of a trust occurs on the date when the trustee is granted sufficient control of the property for carrying out his functions. A trust can be created by law or through a contract with a trustee or by a trust instrument (s. 2 TL). There is no general legal requirement that a trust arrangement must be evidenced in writing. However, Section 17 of the Trust Law provides for the creation of an endowment trust by means of a written instrument of endowment in which the settlor of the trust expresses his/her intentions to create a trust and determines its objects, property and conditions. In an endowment, the property is transferred for the benefit of a beneficiary or for any other purpose. The trust document can be in one of the following forms: (a) an instrument signed by the settlor of the trust, before a notary; (b) a will of the settlor of the trust, other than an oral will; and (c) an order to make a payment under section 147 of the Succession Law, 5725-1965.

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88. If the trust is intended to be executed during the life of the settlor, it must be signed before a notary (s. 17(1) TL). The signing of a document before a notary requires that the person appears before the notary and is identified (Art. 12 Notaries Law 5732-1972). Notaries are licensed in Israel and must not exercise their powers in respect of a document that is not duly stamped (Art. 18 Notaries Law). A notary must also retain a copy of the document in respect of which he or she acts and send it to the central archive for notarial documents at the time prescribed in regulations (Arts. 19, 31 Notaries Law). If it is intended to be executed after the death of the settlor, it must be set out as a testament (s. 17(2) TL) or in the form of a payment order according to section 147 of the Succession Law. Where any property is de facto a private trust but no instrument of trust exists in respect thereof, the court may declare the existence of a trust and may determine its objects, property conditions and the date of commencement (s. 17 TL). Public trusts, of which one of the purposes is to advance public interest, must register with the Registrar of Endowments and also furnish an annual report (s. 26 TL). The Registrar of Trusts keeps a computerised registry of trusts which is open to public subject to the limitations of privacy protection. These trusts are also obliged to furnish annual financial statements to the Registrar. Information on the founders, the trust conditions and trustees of public trusts is available with the Registrar. Private trusts including endowments are not obliged to register with the Registrar. 89. It is conceivable that a trust could be created which has no connection with Israel other than that the settlor chooses the trust to be governed by Israeli law. In that event, there may be no information about the trust available in Israel. In these situations, trust information would have to be available in the jurisdiction where the trustee is located as the relevant records would be situated there.

Foreign Trusts
90. Foreign trusts are not addressed in the Trust Law, so identity information in relation to foreign trusts that have a nexus to Israel would not be available under the provisions of the Trust Law. Israeli law does not prohibit a resident from acting as a trustee or trust administrator for a foreign trust. Israel is not a Party to the Hague Convention on the Law Applicable to Trusts. However, information in respect of such trusts is ensured, with some exceptions, due to the provisions of Israeli’s Income Tax Ordinance discussed below.

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Tax Obligations
91. The Income Tax Ordinance prescribes comprehensive rules with regard to taxation and reporting requirements for trusts governed under Israeli law or foreign law. These rules came into effect on 1 January 2006, however, reporting obligations have been in force since 31 August 2008. Under the taxation rules, it is immaterial that trustees are resident in Israel or not or assets are located within or out of Israel. The ITO classifies trusts into following categories for taxation purposes: • Israeli resident trusts (s. 75G): at the time of creation at least one settlor and at least one beneficiary were Israeli residents, and in the tax year at least one settlor and at least one beneficiary are residents in Israel; further a trust that is not created by foreign residents and is not a foreign resident beneficiary trust is regarded as an Israeli resident trust. The assets and income of an Israeli resident trust are considered as assets and income of the settlor(s). This trust is taxable in Israel. Foreign resident settlor trusts (s. 75I); a trust of which all settlors were foreign residents when created and also in the tax year or during the tax year all settlors and beneficiaries are foreign residents. This trust is exempt from tax in Israel. The assets held by trustee are deemed as owned by the settlor personally. Foreign resident beneficiary trusts (s. 75J): a trust settled by an Israeli resident in favour of non-Israeli beneficiaries. These trusts are not subject to tax in Israel subject to certain conditions including that all beneficiaries are non-Israeli residents and their identity is known. Assets and income of the trust are deemed to be the assets and income of the beneficiaries. Testamentary trust (s. 75L); a trust created under a Will and where all the settlors of the trust are Testators who were residents in Israel at the time of their demise. Assets and income are deemed to belong to the beneficiaries and taxability depends on their residence. A trusteeship created by a Will, in which at least one of the beneficiaries is a resident of Israel, is considered as an Israeli resident trust and provisions of Section 75 G apply.

Tax returns
92. Section 131 (a) (5b) of the ITO provides for the filing of tax returns in respect of a trusteeship. A trustee is obliged to file a tax return of an Israeli resident trust (Form 1327: annual return of a trustee of trusteeship) to the assessing officer of the trust. A trustee must also file a tax return of any trust that has income or assets in Israel. A beneficiary or a settlor who elects to be

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assessable and chargeable to the trust income must also file a tax return of the trust. A trustee of a foreign resident beneficiary trust is required to file a tax return only if the trust has income or assets in Israel. A testamentary trust which has no Israel resident beneficiary is not compulsorily required to file a return and provisions of a foreign resident beneficiary trusteeship apply. 93. The tax return of a trust must contain, among other things, particulars of all settlors, trustees, protectors and beneficiaries and the residential status of each (s. 131 ITO)). These details are required to be submitted in Form 151 H, as an annexure to the annual tax return. Trusts are given a trust file number by the assessing (tax) officer in Israel. Any change in the type of trust or the termination of the trust is also notified through Form 151H. If the reporting trustee is a foreign resident then a mailing address in Israel must be provided. In the case of a foreign resident settlor trust or a foreign resident beneficiary trust, Form 151H must be filed to provide details of vesting and distributions of assets and income in Israel, however, such a form is only required to be filed if these trusts have assets or income in Israel. 94. Section 75 O (e) provides exemption from filing of tax returns under section 131 in respect of income created or accrued abroad by a trusteeship created by foreign residents or by a foreign resident beneficiary trusts or by a trusteeship created under a will in which there is no Israel resident beneficiary. This exemption from filing tax returns to trustees including an Israeli resident applies in respect of foreign sourced income earned by these trusts even if they file tax return about income produced or accrued in Israel. Section 75P (c) provides that, “the fact that a trustee is an Israeli resident does not create a tax liability or an obligation to submit a return in respect of trust income, in addition to the obligations specified in the ITO, such as would not exist if all the trustees were foreign residents.”

Reporting obligations
95. Section 75 P1 of the ITO obliges an Israeli resident settlor to give a notice in Form 147 within 90 days of the creation of a trust or contribution of assets to a trust to the assessing officer of the trust and a copy to the tax officer where the settlor’s tax file is maintained. The form contains details like name of trust; date of creation of trust; details of each of the trust protectors, trustees, beneficiaries, settlors and contributions to the trust. Information on individuals includes name, identifying number and country of residence. An individual’s identifying number is associated with information that identifies the person. However, this obligation does not apply to an Israeli resident settlor who became an Israeli resident for the first time or a veteran returning resident for a period of 10 years from the date on which he/she became an Israeli resident on the condition that only assets abroad or income from assets abroad are vested in such a trusteeship (s. 75P1(a1)).

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Section 75 P 2 obliges a settlor to file Form 147 if a trust is converted to an Israeli Resident Trust or a Foreign Resident Beneficiary Trust. 96. Pursuant to Section 75 P 2 (a), a notice in Form 147 must be submitted within 90 days of the creation of a trusteeship under a will (Testamentary Trust). Form 147 is also filed by a trustee in case of a change in the category of trusteeship, the conclusion of a trusteeship of Israeli resident or the conclusion of a trusteeship that at its conclusion held assets in Israel. 97. Section 75 P 3 of the ITO obligates an Israel resident beneficiary to a give a notice in Form 149 of distributions received in money’s worth in a tax year to the assessing officer of the trust. Such a notice must be given even if the distribution is not liable to tax in Israel. The notice must contain information on the trust, settlors and description of the assets distributed. 98. Pursuant to Section 75 J (f) of the ITO, a reporting trustee is required to submit Form 143 as an appendix to annual tax return of a Foreign Resident Beneficiary Trust. Form 143 must also be submitted by April 30 th of the year following the tax year, if an annual tax return is not required be filed. This Form requires providing information such as name of trust, date of creation, trust file number, identity information on the reporting trustee and all trust protectors, settlors, beneficiaries, trustees and distributions. Change in type of trust and termination of trust must also be intimated by this notice. This Form is also submitted as an attachment to Form 147 by the trust settlor as a onetime notice (s. 75 J (a) (4) (b)). 99. A declaration of an irrevocable trusteeship (Form 141) is filed as an appendix to the annual return of trust.

Conclusion
100. Tax return filing requirements apply to the Israeli resident trusts and all types of trusts that have income or assets in Israel. Information on the settlors, trustees and beneficiaries must also be filed in a separate form attached to the tax return. Tax reporting requirements apply to all beneficiaries and settlors resident in Israel except for new immigrants and veteran returning residents. Further, a reporting trustee of a foreign resident beneficiary trust must submit information on the trust, even if no tax return is required to be submitted. There is no tax filing or reporting requirements in case of foreign resident settlor trusts that have no assets or income in Israel. The tax law exempts the Israeli settlor of trusts who are new immigrants or veteran returning residents from reporting obligations for the first ten years if such a trust has no income or assets in Israel. Therefore, it is recommended that Israel sufficiently ensure the availability of identity information in respect of the settlors, trustees and beneficiaries of the foreign resident settlor trusts and for trusts created by the new immigrants and veteran returning residents which are vested with assets or income from assets abroad.

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Foundations (ToR A.1.5)
101. The Israeli legal and regulatory framework does not provide for the establishment of foundations.

Other relevant entities and arrangements
102. Under the Associations Law (AL), associations can be established. An association is defined as an entity created by two or more persons who wish to incorporate as a body corporate for a lawful purpose not aimed at the distribution of profits to its members (s. 1 AL). An application for registration of an association must be submitted by the founders to the Registrar of Associations, indicating: (i) the name, (ii) objects and (iii) address in Israel of the association and (iv) the names, (v) address and (vi) identity numbers of the founders (s. 2 AL). An association must also keep a register of members in which every member must be registered indicating his address, identity number, date of commencement and date of termination of his membership (s. 18 AL). In addition, an association must keep a register of board members in which the name, address, identity number, date of commencement and termination of service of each member (s. 29 AL).

Enforcement provisions to ensure availability of information (ToR A.1.6)
103. Jurisdictions should have in place effective enforcement provisions to ensure the availability of ownership and identity information, one possibility among others being sufficiently strong compulsory powers to access the information. This subsection of the report assesses whether the provisions requiring the availability of information with the public authorities or within the entities reviewed in section A.1 are enforceable and failures are punishable. 104. Companies must keep a register of shareholders in their registered office located in Israel. Public companies are also required to keep a register of substantial shareholders. Not keeping a register of shareholders or not giving notices or reports to the Registrar is considered a breach of duty. A fine of NIS 6 000 (EUR 1 200) shall be imposed on a company for the aforementioned breach once the Registrar has made a demand to the company to remedy the breach and the breach is not remedied in a period of forty-five days (ss. 354(a) and 356(a) CL). Private companies are obliged to annually report to the Registrar information on certain matters including the allotment of shares and transfer of shares (s. 140 CL). Further, income tax returns of companies must contain a report of its current shareholders (s. 131(a)(5).

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105. A new amendment to the Israeli Companies Law came into effect on 1 January 2010. This amendment allows the Companies Registrar to declare that a company which does not comply with the regulations concerning the payment of an annual fee and submitting an annual report to the Registrar of Companies is a “company in breach”, and as a consequence, several sanctions are imposed on that company, including refusal to register charges on the company’s assets or charges in favour of it, refusal to register a new company to a controlling member of a company in breach and refusal to register a company’s change of name. 106. The ITO obliges all persons including companies to notify the assessing officer about the beginning or change of occupation in time. The defaults of failure to inform the Assessing Officer of this fact in time and also non submission of its first annual tax return after the event are liable to three years of imprisonment or to a fine of NIS 75 300 (EUR 15 100) and to another fine of half the tax to which it was liable (s. 215A(a) ITO). 107. Partnerships formed for the purpose of managing a business must be registered within one month from the date of formation (s. 4 PO).The registration of partnerships ensures availability of information on partners. If a partnership does not register as required by law, then each of its partners is liable to a fine of NIS 15 (EUR 3) for each day on which the offense continues (s. 6 PO). 108. If a property is in effect an endowment and no instrument of endowment exists as required by law, then the court may declare the existence of an endowment trust and may determine its objects, property conditions and date of commencement (s. 17 TL). 109. Non-compliance of the requirements of filing tax returns and other reports to tax authorities as per provisions of sections 131 to 133 of the Income Tax Ordinance are sanctionable with one year imprisonment, or to a fine of NIS 26 100 (EUR 5 220), or both (s. 216(4) ITO). These enforcement measures apply to all persons including domestic and foreign companies, partnerships, trustees, settlors or beneficiaries and individuals. 110.An association must keep a register of members and board members. An association and every person responsible who does not keep a register of members or board members are liable to a fine of NIS 1 000 (EUR 200) (s. 64 AL).

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Determination and factors underlying recommendations
Phase 1 determination The element is not in place. Factors underlying recommendations Israel authorises the issuance of bearer shares by companies other than those registered on the stock exchange without having in place mechanisms for identifying the holders of those shares in all circumstances. Only 12 companies have issued bearer shares. Under the Income Tax Ordinance, foreign companies that are managed and controlled in Israel are considered tax resident in Israel. However, foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents are given an exception from this tax residency rule for a period of 10 years and ownership information on such companies is not ensured in Israel. Israeli law does not ensure the availability of identity information in respect of the settlors, trustees and beneficiaries of foreign resident settlor trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad for a period of 10 years. Recommendations Israel should take necessary measures to ensure that robust mechanisms are in place to identify the owners of bearer shares.

Israel should ensure that ownership information is available to its competent authority in respect of all foreign companies that are managed and controlled from Israel.

Israel should ensure the availability of identity information in respect of the settlors, trustees and beneficiaries of foreign resident settlor trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad.

A.2. Accounting records
Jurisdictions should ensure that reliable accounting records are kept for all relevant entities and arrangements.

111. A condition for exchange of information for tax purposes to be effective is that reliable information, foreseeably relevant to the tax requirements of

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a requesting jurisdiction, is available, or can be made available, in a timely manner. This requires clear rules regarding the maintenance of accounting records.

General requirements (ToR A.2.1)
112. Private companies must keep accounts and are obliged to prepare annual financial reports (s. 171 CL). The financial reports need to be approved by the board of directors and signed in its name (s. 171 CL). A private company shall prepare financial reports for each year, which shall include a balance sheet as of the 31st of December as well as a profit and loss account for the period of a year ending on that date, and other financial reports, in accordance with the requirements of accepted accounting rules (s. 172(a) CL). The reports meet the international standard since they must be prepared in accordance with accepted accounting rules in Israel (s. 172(d) CL) which are in accordance to the Framework for the Preparation and Presentation of Financial Statements (FPPFS) published by the International Accounting Standards Board (IASB) that determine that the objective of financial reports is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions (p. 12 FPPFS). Due to the aforementioned, private companies must keep accounts that (i) correctly explain all of its transactions, (ii) enable the financial position of the company be determined with reasonable accuracy at any time and (iii) allow financial statements to be prepared. 113. The board of directors of a private company must present the reports approved by it to the annual general meeting (173(a) CL). The reports are required to be kept at the registered office of the company for at least seven years from the date on which they were prepared, for the inspection of the directors and shareholders of the company (173(c) CL). A shareholder in a private company may receive a copy of the reports (s. 174(d) CL). Furthermore, the directors of a company must ensure that a full set of financial accounts (financial statement) is drawn up in accordance with accepted accounting rules (s. 92(a)(5) and s. 172(a) CL). If a company does not prepare financial reports it is liable to a fine of NIS 6 000 (EUR 1 200) (s. 354(a) CL). 114. Public companies must keep accounts and are obliged to prepare financial reports in accordance with the Securities Law (s. 171 CL). The Minister of Finance is empowered under the Securities Law (SL) to enact regulations with regard to financial reporting of public companies (s. 17 SL). The Securities Regulations (Preparation of Annual Financial Statements) 57531993 (SR) determine that the financial statements of public companies must be prepared in accordance with the accounting rules and must fairly reflect the position of the corporation’s business on the balance sheet dates, the result of its activities, the changes in its net worth and its cash flow in the reported

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years (s. 3 SR). The financial statements of a company issuing securities in a foreign country may be prepared in accordance with international accounting standards or accepted accounting rules in the United States (s. 3A SR). The assets of the corporation should be classified and presented in the following categories: (i) current assets; (ii) non-current inventory; (iii) investments, loans and long-term debit balances; (iv) fixed assets; and other assets, including intangible assets and deferred expenses (s. 12 SR). Public companies are also obliged to report the details of their investments in controlled companies which should be classified in: (i) shares; (ii) certificates that grant a right to purchase shares; (iii) certificates of indebtedness that can be converted into shares; (iv) certificates of indebtedness that cannot be converted into shares; and (iv) loans and debit balances that are not included in the current assets (s. 22 SR). 115. Public companies are also required to report information on their share capital which should include the number, class, nominal value and main rights (s. 40 SR). The SR also includes an obligation on reporting taxes on income on the current year and previous years (s. 57 SR). With regards to ownership information of a public company, public companies must submit information on their liabilities to their principal shareholder; their investments in a principal shareholder; and the benefits to a principal shareholder and transactions with him (ss. 62, 63 and 64 SR). The accounting records kept by public companies must correctly explain all the transactions of the company, enable the financial position of the company to be determined accurately at any time and allow financial statements to be prepared. 116. The SR defines the international auditing standards as the standards published by the International Federation of Accountants (IFAC) (s. 1 SR). The International Auditing Standard on Auditing (IASA) 200 require financial statements to be a structured representation of the financial information, which ordinarily includes accompanying notes, derived from accounting records and intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework (p. 34 IASA). The International Financial Reporting Standards (IFRS) published by the IFAC require financial statements to provide information about the financial position, performance and cash flows of an entity. The IFRS require financial statements to include a balance sheet; an income statement; a statement of changes in equity; a cash flow statement; and notes, comprising a summary of significant accounting policies and other explanatory notes. Taking into account the requirement that the accounts must be audited under Israeli law, it may be expected that the records to be kept (i) correctly explain all transactions, (ii) enable the financial position of the entity or arrangement to be determined with reasonable accuracy at any time, and (iii) allow financial statements to be prepared.

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117. Partners within a partnership are bound by a duty to conduct the business of the partnership for their common benefit, to be honest and trustworthy on another and to provide every partner or his proxy correct accounts and complete information on all matters concerning the partnership (s. 29 PO). Similarly, the Trust Law determines that the trustee of a trust must keep account books in respect of the affairs of the trust (s. 7 TL). A trustee of an Israeli trust must report to the beneficiaries on the affairs of the trust, annually and upon termination of his tenure, and to provide them with any other additional information that they may reasonable request (s. 7 TL).

Tax law obligations
118. The ITO in section 130(a)(1) prescribes that the Director of the Israel Tax Authority (Director) may issue provisions ordering account books be kept in respect of income derived from a business or vocation in Israel, and in those provisions he may prescribe rules on the method of keeping the account books, including the taxpayer’s duty to require a person with whom he maintains any business relationship to deliver his personal particulars to the taxpayer and to identify himself. Any person who fails to keep account books in accordance with the provisions issued by the Director is liable to one year imprisonment, or to a fine of NIS 29 200 (EUR 5 220), or both (s. 216(5) ITO). 119. Section 130 ITO only applies to persons liable to income tax in Israel. This includes all companies organised or managed and controlled in Israel. Although general and limited partnerships organised or managed and controlled in Israel are considered transparent for tax purposes, each partnership is required to file a return on behalf of the partners and so are subject to these record-keeping obligations as well (s. 63(a) ITO). The tax return filing obligations and other reporting obligations on trustees, settlors and beneficiaries ensure that they keep and maintain accounting information of the trusts so as to fulfil their tax obligations properly. However, a gap remains in respect of foreign resident settlor trusts that have no assets or income in Israel. In that case, there is no obligation on a trustee to keep and maintain accounting records of the trust consistent with the standard as trust income derived from non Israeli sources is not taxable in Israel. Similarly, in the absence of any tax return filing requirement or reporting obligations on the trusts created by new immigrants or veteran returning residents which are vested with assets or income from assets abroad, it is unclear that accounting records consistent with the standard will be maintained for those trusts. Foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents are exempt from taxation in respect of foreign source income for a period of 10 years. As there are no obligations to file tax return or keeping

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account books by such companies, the availability of their accounting records in respect of activities outside of Israel is not ensured. 120. The Income Tax Regulations (Returns and Supplementary Returns by Body of Persons) 5724-1963 require corporate entities to attach to their annual tax return (i) a balance sheet as of the last day of the tax year and a profit and loss account for the tax year, together with an auditor’s report; and (ii) an adjustment account of the profit and loss of the income or loss declared in the annual tax return. 121. Under the Income Tax Rules (Bookkeeping) 5733-1973 (ITR) a taxpayer must keep a set of account books in accordance with the provisions of the applicable Schedule depending on the type of business or profession carried on by him (s. 2 ITR). The ITR provides that all taxpayers to whom the provisions of the Schedules apply are obliged to have documentation that would include receipts, a daily intake ledger, cash register, delivery notes, invoices and an inventory list (sections 5 through 10 ITR). These taxpayers are also required to keep account books that should include a cash book (s. 11 ITR), intake and payments book (s. 12 ITR), stock book (s. 13 ITR), goods of entry book (s. 14 ITR) and an order book (s. 15 ITR). Account books required under Israeli tax law meet the international standard since they would enable taxpayers to correctly explain all the transactions they are engaged in, enable the financial position of the taxpayer be determined with reasonable accuracy at any time and allow financial statements to be prepared. 122. Persons who are tax residents but who are not covered by the obligation to keep books and records under section 130 ITO are nevertheless required to submit an income tax return if they receive income (s. 131 ITO). Section 131(b) of the ITO further requires filing of a copy of balance sheet and profit and loss account with the tax return, if the return is based on a complete set of double-entry accounts. In other cases, the basis of declaration of income must be stated. It is noted that companies, partnerships, trusts and associations are subject to obligations to keep books and records separately from tax law.

Underlying documentation (ToR A.2.2)
123. Section 130 of the ITO requires all taxpayers) deriving income to “keep account books”. As mentioned above, these include underlying documentation such as receipts, invoices, a daily intake ledger, cash register tape, delivery notes and an inventory list (ss. 5 to 10 ITR). The ITR describes the aforementioned documentation as internal and external documentation. The ITO exempts certain category of persons from obligations of keeping account books. Section 130(a)(3) of the ITO empowers the Director to exempt a small

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business from the duty of keeping account books if he meets criteria set by the Director in respect of a physical or mental condition or illiteracy. The exemption is granted after receiving the opinion of a committee appointed by him and is on case to case basis. A “small business” is defined as a business whose main income stems from groceries such as vegetables, fruits, cigarettes or light soda and entire business turnover during the year does not exceed NIS 310 000 (EUR 62 000). 124. Account books must comprehend internal documentation that would be underlying documentation that would correctly explain all the transactions of a taxpayer for which he received income (s. 17(a) ITR). Taxpayers are required to keep internal documentation that must be registered near the time when an act was performed regarding an intake, a sale, the shipment or transportation of goods or the provision of a service (s. 17(a) ITR). Internal documentation is defined in the ITR as a record of an act performed by the taxpayer or on his behalf (s. 1 ITR). Section 5 of the ITR determines that internal documentation which is a receipt shall be drawn up for each intake separately, and it must include: (i) a serial number; (ii) the name of the taxpayer, his ID number, entity registration number or registration number for VAT purposes; (iii) the date; (iv) the name and address of the payer; (v) the amount received; (vi) the nature of the intake or the account to be credited; and (vii) the recipient’s signature, unless the receipt was sent as a computerised document. Taxpayers are also required to have a daily intake ledger in their internal documentation that shall be a bound book and must include: (i) the name of the taxpayer; (ii) the date of the beginning of each day; (iii) the amount of each intake received separately for a sale or a service, including a conditional sale or indirect tax; and (iv) the total, in ink, of all the amounts received, that has to be recorded at the end of each day or next morning (s. 6 ITR). Internal documentation requirements are also provided for the cash register tape, delivery notes, invoices and an inventory list that taxpayers are required to have (sections 7 through 10 ITR). 125. In addition, account books must include external documentation on all the transactions in respect of which a taxpayer incurred an expense. Section 14(b)(3) of the ITR establishes that every entry of goods into a business shall be recorded in the goods entry book indicating the specification and quantity of goods that will be supported by external documentation that will specify the goods that were received. The ITR defines the term external documentation as a record of an act, which was received by the taxpayer or on his behalf from an outside factor (s. 1 ITR). If the taxpayer has sent or received the external documentation by computer then the record that is in a computerised document will be considered external documentation (s. 1 ITR). With regards to the goods of entry book taxpayers have an obligation to register the specification and quantity of goods received and this registration should be backed up by external documentation that specifies the goods that were received. Schedule One of the ITR require that bookkeeping by

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producers, retailers, contractors, professionals, physicians and other types of taxpayers include a file of external documentation.

5-year retention standard (ToR A.2.3)
126. For tax purposes, account books are required to be kept for seven years from the end of the tax year to which they refer, or for six years after the day on which the return for that tax year was submitted, whichever is later (s. 25(c) ITR). Since underlying documents form part of the account books the same retention period applies for the underlying documentation required to be kept for tax purposes (invoices and receipts, see ss. 5 to 10 ITR). Since this requirement is linked to the general requirements under section 130 ITO, it covers all relevant entities and arrangements (see A.2.1). The CL contains a minimum retention period of 7 years for accounting records (sections 124 and 173 CL).
Determination and factors underlying recommendations
Phase 1 determination The element is in place, but certain aspects of the legal implementation of the element need improvement. Factors underlying recommendations Israeli law does not ensure the availability of accounting records in respect of foreign resident settlor trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad for a period of 10 years. Israeli law does not ensure availability of accounting records in respect of activities outside of Israel of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents for a period of 10 years. Recommendations Israel should ensure that accounting records consistent with the standard are maintained for foreign resident settlor trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad. Israel should ensure availability of accounting records in respect of activities outside of Israel of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents.

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A.3. Banking information
Banking information should be available for all account-holders.

127. The Banking (Licensing) Law (BL) determines that only banking corporations shall engage in: (i) acceptance of deposits of funds and issuance of credit as one activity and (ii) securities issuance that entails a prospectus under Section 15 of the Securities Law, 5728-1968, and issuance of credit as one activity (Section 21). In addition only banks or foreign banks, licensed by the Governor of the Central Bank, are allowed to engage in acceptance of deposits of funds in current accounts for payout from said deposits by cheque upon demand (Section 13 BL). Banks are allowed to engage only in banking business specified in Section 10 of the Banking Law (s. 3, s. 4 and s. 10 BL). The Bank of Israel is the regulatory and supervisory body for the Israeli banking industry. As at August 2012, a total of 22 banks were operating in Israel. The Postal Bank is Government owned and supervised by the Ministry of Communications.

Record-keeping requirements (ToR A.3.1)
128. The requirements for identity information banks must keep on account holders are primarily provided in the Prohibition of Money Laundering (The Banking Corporation’s Requirement regarding Identification, Reporting, and Record-Keeping for the Prevention of Money Laundering and the Financing of Terrorism) Order, 5761-2001 (PMLO). Section 2(a) of the PMLO establishes that a banking corporation shall not open an account without recording the following identification particulars in respect of each of the account holders or authorised signatories, and in respect of any other person applying to open an account, and authenticating them as set forth in section 3 of the PMLO: (i) name; (ii) identification number; (iii) date of birth for an individual or date of incorporation for a company; and (iv) address. Comparable obligations in case of the Postal Bank are stipulated in the Order No.5762-2001. 129. In addition, the Prohibition on Money Laundering Law (PMLL) requires that the banking corporations must not provide services in connection with a property transaction unless they possess the identifying particulars (CDD) as specified in the PMLO (s. 7(a)(1) PMLL). 130. Banking corporations and other financial institutions have the duty, before opening an account, to receive from the customer a declaration bearing an original signature stating whether he is acting for himself or on behalf of another. If the applicant declares that he is acting on behalf of another person, the declaration must include the name and identity number of the beneficiary of the account (s. 4 PMLO). Banking corporations are obliged to record the name and identity number of the beneficiary of the account in

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accordance with the aforementioned declaration (s. 2 PMLO). Failure to carry out CDD or to maintain the identification documentation for at least seven years after the end of relationship can lead to an administrative fine of no more than NIS 2 260 000 (EUR 452 000) for each default (s. 14(a) PMLL). 131. Even though financial institutions under section 18 of Directive 411 on the Prevention of Money Laundering and Terrorism Financing, and Customer Identification (Directive 411) may have numbered accounts (accounts in which the name of the beneficial owner is known by the banking corporation but is substituted by an account number or code name in some documentation) they must abide by the following rules: (a) numbered accounts shall be subject to customer due diligence procedures applicable to all accounts; (b) the identity of a customer with a numbered account shall be known to a sufficient number of officials to enable a thorough and adequate check of the customer’s identity and to monitor his transactions for purposes of identifying unusual activity; (c) numbered accounts shall not be used to hide a customer’s identity from the compliance or supervisory authorities; and (d) a banking corporation which takes special measures to ensure internal secrecy in regard to customers’ accounts shall ensure that the accounts of these customers are examined and monitored at least as thoroughly as accounts of customers regarding whom no such special measures are taken, and shall ensure that the officer responsible and the internal auditors shall have direct access to the information on these accounts. 132. Due to the legal requirements mentioned above, financial institutions cannot keep anonymous accounts or other types of accounts which are opened on behalf of another person which are not identified and known. 133. Section 7 of the PMLO requires banking corporations to retain identification documents or photocopies thereof for at least seven years after the account is closed or a transaction has been carried out. Banking corporations are obliged to retain the documents attesting to the instruction to the banking corporation to carry out a transaction for the same period in two cases: (a) when the transaction was reported to the Financial Intelligence Unit and (b) when the value of the transaction was equivalent to at least NIS 10 000 (EUR 2 000). This means that the instruction documents for transactions below this threshold may not be retained for at least seven years under the provisions of the PMLO. 134. The Proper Conduct of Banking Business Directive 411 determines that banking corporations must establish procedures for the retention of

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information essential for authenticating customers’ identity and their type of business, the period for which it should be retained, the type of customer (individual, company, etc.), and the expected extent of activity in the account (s. 13(a) Directive 411). The information shall be retained in a manner which will make it readily available and enable efficient retrieval (s. 13(a) Directive 411). 135. Section 13(b) of Directive 411 requires that a banking corporation shall undertake reviews to ascertain the existence of adequate and updated information and that the reviews shall take place at times and on occasions determined by the banking corporation in its procedures, such as when a significant transaction is about to take place, or when the requirements relating to customer documentation change, or when the way the account is managed alters significantly. If a banking corporation discovers that certain significant information about a customer is lacking, it shall take steps to ensure that it obtains the missing information as soon as possible (s. 13(b)(3) Directive 411). 136. Section 16(b) of Directive 411 requires banking corporations to record the identity of the person requesting a transaction in transactions involving sums below NIS 10 000 (EUR 2 000). The Directive has the force of law as it is regarded as a Regulation according to section 5(c 2)(1) of the Banking Ordinance, 1941. 137. Provisions of the PMLL, the PMLO and the Directive creates clear obligations on the banks to keep customer identification information in respect of all the accounts consistent with the standard. 138. The AML/CFT laws require that the documents attesting the instruction to carry out a transaction (above NIS 10 000 (EUR 2 000)) threshold or reported as suspicious transaction to the FIU must be recorded for a period of seven years, however, the Banking Law or the AML/CFT provisions do not explicitly require the banks to keep all the financial and transactional information in respect of transactions carried out by its customers. MONEYVAL 15 adopted an Evaluation report 16 on the anti-money laundering and the financing of terrorism in case of Israel in 2008. This report had identified deficiencies in Israel’s AML/CFT framework with regard to keeping of the documents recording details of transactions carried out by the client in the course of established business relationships. The report also referred to the existence of thresholds for retaining the documents. MONEYVAL

15. 16.

Council of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism. Council of Europe website: www.coe.int/t/dghl/monitoring/moneyval/countries/ Israel_en.asp.

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issued a Second Progress report 17 on 14 December 2011 which states that,“ it appears that the Israeli authorities have taken steps towards meeting the MONEYVAL recommendations, firstly by adopting the obligations to maintain documents on the instruction to carry out any transactions for a period of seven years for Stock Exchange Members and for Portfolio Managers, and secondly, by drafting new provisions on record keeping, applicable to banking corporations, Post Bank, insurers and insurance agents, provident funds and companies managing a provident fund business. However, the latest provisions are not in force yet and thresholds are still applicable.” The Israeli authorities have advised that amendments to the PMLO with regard to record keeping irrespective of threshold are currently pending for discussion of the Knesset committee. The Company Law and the ITO oblige all relevant entities including banks to keep underlying documentation for at least five years, however, this obligation may not meet the requirements of the TOR A.3.
Determination and factors underlying recommendations
Phase 1 determination The element is in place, but certain aspects of the legal implementation of the element need improvement. Factors underlying recommendations The AML/CFT laws only require retention of documents attesting the instruction to carry out transactions above the threshold of NIS 10 000 (EUR 2 000) or reported as suspicious transaction to the FIU. Recommendations Israel should ensure that transactional information consistent with the standard is available in respect of all transactions carried out by the banks.

17.

www.coe.int/t/dghl/monitoring/moneyval/Evaluations/Progress%20reports%202y/ MONEYVAL(2011)28_ProgRep2_ISR_en.pdf.

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B. Access to Information

Overview
139. A variety of information may be needed in a tax enquiry and jurisdictions should have the authority to obtain all such information. This includes information held by banks and other financial institutions as well as information concerning the ownership of companies or the identity of interest holders in other persons or entities, such as partnerships and trusts, as well as accounting information in respect of all such entities. This section of the report examines whether Israel’s legal and regulatory framework gives the authorities access powers that cover the right types of persons and information and whether rights and safeguards would be compatible with effective exchange of information. 140. The Israeli tax administration has broad powers to access information relevant for the tasks of the tax administration from any person and from public authorities. The assessing officer may ask a person for delivery of his return including declaration of the capital and assets and for providing books documents, accounts and returns which the assessing officer deems necessary. The assessing officer is empowered to require relevant tax information also from third parties (e.g. suppliers, customers, payers of taxable income, employers). These information gathering powers include power to enter any place in which a business or a vocation is carried on, and examine and seize stock in trade, the cash box, machinery, books, accounts, vouchers, records and other documents deemed necessary. The assessing officer has also the power to summon any person who has business relations with the assessee and who he believes can testify on his income. Non-compliance can be sanctioned with administrative as well as criminal penalties. However, there are some limits on these powers in respect of information relating to new immigrants or returning veterans during a 10 year tax exempt period and in respect of foreign resident settlor trusts. 141. The Israeli authorities advise that usage of these broad information gathering powers for exchange of information purposes is based on

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integration of agreements affording double taxation relief into domestic law through the ITO. Section 196 of the ITO has the effect of incorporating the information exchange article of the relevant agreement into the tax law, and accordingly exchange of information with foreign authorities is made a purpose of the tax law. That said, the powers of authorities are not explicitly drafted for the purposes of exchange of information and it is recommended that Israel clarify its law in this respect. Moreover, the ITO does not give effect to agreements concluded solely for the purpose of exchange of information (e.g. TIEAs). As a result, Israel’s competent authority does not have the power to obtain and provide information for the purpose of giving effect to a TIEA. It is recommended that Israel rectifies this gap in its laws. The Israeli authorities advise that at present their EOI relationships are based on the DTCs only and an amendment to the ITO to empower its authorities to execute the provisions of such agreements is in the legislative process. 142. There is no limitation to the tax authority’s power to request information imposed by bank secrecy rules. 143. The Income Tax Ordinance empowers the assessing officer to obtain information from advocates. The advocate must provide information but when they claim that information is privileged, the court decides the issue. The definition of professional secrecy in the ITO is consistent with the international standard. 144. The Israel’s law does not contain any notification requirement relating to exchange of information procedures.

B.1. Competent Authority’s ability to obtain and provide information
Competent authorities should have the power to obtain and provide information that is the subject of a request under an exchange of information arrangement from any person within their territorial jurisdiction who is in possession or control of such information (irrespective of any legal obligation on such person to maintain the secrecy of the information).

Ownership and identity information (ToR B.1.1) and Accounting records (ToR B.1.2)
145. The tax administration is under a general duty to systematically ensure taxpayers’ and third parties’ compliance with obligations under the ITO and has necessary powers for that purpose. The administration is required and entitled to assess the correct tax liability of the taxpayer and in order to do so has broad powers enabling it to obtain complete information about person’s income. This information can be gathered from broad variety of persons, sources and by variety of means (s. 135–140A ITO).

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146. In order to obtain complete information about a person’s income the tax administration via assessing officer has power to demand from that person by written notice delivery of his return specified in that notice, including a declaration of the capital and assets of that person or of his spouse and of their children for whom they are entitled to credit points or pension points, or of assets for which he serves as a trustee of another person. The Assessing Officer may also demand that the person appear before him, in person or by a representative, and that he deliver to him all the particulars required by the Assessing Officer in order to ascertain his income and that he produce for examination books, documents, accounts and returns which the Assessing Officer deems necessary (s. 135(1) ITO). 147. The Assessing Officer may enter any place in which a business or a vocation is carried on, and examine stock in trade, the cash box, machinery, books, accounts, vouchers, records and other documents that relate to that business or vocation and demand explanations in connection with them. The assessing officer can also seize books, accounts, vouchers, records and other documents that relate to that business or vocation, if he is convinced that it is necessary in order to ensure compliance with the provisions of the ITO or to prevent an evasion of compliance with those provisions. The assessing officer may summon any person who has business relations with the assessee and who he believes can testify on his income, to appear before him and demand of the said person that he give him documents that relate to that income (s. 135(2-4) ITO). 148. The Israeli tax administration has also the power to demand information about suppliers and customers from a person that owns a business or practices a vocation except for advocates, physicians and psychologists. Upon demand of the assessing officer he must provide to the officer information and documents about his business relations with his suppliers, customers or other persons with whom he has business relations, even though that information and those documents are not required to ascertain his income (s. 135A ITO). Israeli authorities advise that this obligation covers also banks and other financial institutions and prevails over any respective secrecy rules in respect of these entities stipulated in Israeli laws. 18 149. The Assessing Officer may demand a return of income from a person who receives profits or income to which ITO applies and which belong to a certain person, or which pays said profits or income to a certain person. This demand obliges the requested person to submit a return regardless the capacity in which he received or paid the respective income. This return must contain a true and correct disclosure of all those profits and income, and the name and address of that certain person (s. 137 ITO).
18. See section B.1.5.

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150. Public authorities who have at their disposal information relevant for the administration of ITO are under an obligation to provide information to the tax administration if requested to do so (s. 140 ITO). These authorities are the State, anybody subject to audit by the State Comptroller, and any other body which the Minister of Finance, with approval by the Knesset Finance Committee, declared a public body. However, this obligation does not apply on information which cannot be disclosed based on the Statistics Ordinance, the Postal Bank Law, 5711-1951, or the Bank of Israel Law, 5714-1953. Israeli authorities have confirmed that there is no limitation to the tax authority power to request information imposed by bank secrecy rules. 151. The powers of the Israeli tax administration further include the specific power to demand a return about employees from an employer (s. 136 ITO), the power to demand a return from a house occupant (s. 138 ITO) or a return about lodgers and tenants (s. 139 ITO). 152. An individual who became an Israeli resident for the first time and a veteran returning resident shall – during ten years after the date on which they became residents – are exempt from tax on their income from all the sources that were produced or accrued abroad or that are derived from assets abroad, unless they elect otherwise (s. 14(a) ITO). Such persons are not required to submit a return of their capital and assets abroad during ten years after the date on which they became an Israel resident. Trustees of a foreign resident settlor trusts are not subject to any tax return filing or any other reporting obligations. The Israeli authorities advise that, they can use their domestic law powers to gather information for EOI purposes but the new immigrant and veteran returning resident can decline to supply information on capital and assets abroad during the first ten years. Similarly, information from a trustee of a foreign resident settlor trusts cannot be obtained.

Use of information gathering measures absent domestic tax interest (ToR B.1.3)
153. The concept of “domestic tax interest” describes a situation where a contracting party can only provide information to another contracting party if it has an interest in the requested information for its own tax purposes. 154. The information gathering powers of Israel’s tax administration are stipulated under s. 135-140 of the ITO. The respective sections make reference to “assessing officer”, “a person” and “an income”. Section 1 of the ITO defines person to include a company and a body of persons as defined in the Ordinance. Company is defined as a company incorporated or registered in Israel or elsewhere. Income is defined as a person’s total income from the sources specified in section 2 and together with amounts in respect of which

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any statute provides that they be treated as income for the purpose of the Ordinance (s. 1, ITO). 155. Israel’s tax administration has sufficiently broad access powers for domestic tax purposes. Their usage for exchange of information purposes is based on treaties and the way in which they have been given effect in Israel’s law. Provisions concerning double taxation relief are contained in Chapter III (sections 196 through 214) of the ITO. Section 196 in relation to the order that gives effect to agreement reads as: Order that gives effect to agreement “196. (a) When the Minister of Finance has given notice by Order, that an agreement specified in the Order was concluded with a certain state to afford double taxation relief on income tax and on every other tax of a similar character imposed by the Laws of that state (hereafter: reciprocating state) and that it is expedient to give that agreement effect in Israel, then that agreement (hereafter: agreement) shall have effect in relation to income tax, notwithstanding any provision of any statute. 156. Section 196 incorporates the international agreement into the ITO, including the relevant EOI article, so that the treaty has full effect in Israel in relation to income tax. Accordingly, the authorities have an obligation to give effect to the provisions of the exchange of information article in their tax treaties. As described above, the Israeli tax authorities have a number of different powers at their disposal for domestic tax purposes. The provisions themselves are not specifically drafted with exchange of information in mind, and their application for exchange purposes is clearer in some cases than in others. For example, sections 135(2) – (4) empower the Assessing Officer, among other things, may enter any place in which a business or a vocation is carried on and examine any documents and demand explanations. There is no aspect of this provision that is specifically connected to the determination of Israeli tax. On the other hand, section 135 refers to requiring a person to submit a return or provide any information to the Assessing Officer in order to determine that person’s income and it might be argued that this requires a domestic tax interest, although no issues have ever arisen in practice in this regard. Moreover, section 196 of the ITO only refers to double tax conventions and does not apply to TIEAs. Therefore, the Israeli Tax Authorities do not have the power to obtain and provide information for the purpose of responding to a request for information pursuant to a TIEA. 157. Accordingly, it is recommended that Israel clarifies in its laws that the information gathering powers under the Income Tax Ordinance can also be used for exchange of information purposes, pursuant to both a DTC or

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TIEA. The Israeli authorities advise that an amendment of the ITO providing for giving effect to international agreements concluded solely for the administrative assistance, and to clarify that their powers generally can be used for exchange purposes, is currently in the process of being proposed for enactment.

Compulsory powers (ToR B.1.4)
158. Jurisdictions should have in place effective enforcement provisions to compel the production of information. 159. Israel has sufficient compulsory powers to enforce production of the requested information based on administrative as well as criminal penalties. According to s. 215 and s. 216 of the ITO, if a person does not appear, as required by a notification under the ordinance or does not answer a question lawfully put to him, or is guilty of an offence against the Ordinance or against a regulation made there under and for which no specific penalty is provided shall be liable to one year imprisonment, or to the fine as mentioned in section 61(a)(2) of the Penal Law, or to both penalties. Article 61 (a) (2) of the Penal Law, 5737-1977, provides that notwithstanding anything contained in any law, when a court is empowered to impose a fine, it may impose a fine of up to NIS 29 200 (EUR 6 000), in a case an imprisonment for six months to one year is prescribed for the offence. Such an offence is also considered as an administrative offence according to the section two of the Administrative Offences Regulations, 5747-1987, and additional fine between NIS 980 (EUR 195) and NIS 8 500 (EUR 1 700) might be levied. 160. The Minister of Police may also authorise an investigating assessing officer to carry out investigations or searches in order to prevent or to detect offences against the ITO and the authorised officers so appointed are granted certain powers including those vested in a policeman and police officer of the rank of inspector or above under section 2 of the Criminal Law Procedure (Evidence) Ordinance. The authorised officer also has power to seize documents and power to record a statement and arrest a person. Israeli authorities have confirmed that these powers can be used for EOI purposes.

Secrecy provisions (ToR B.1.5) Financial institutions
161. There are no specific bank secrecy rules in Israel and such a secrecy stems from the contractual relationship between the bank and its customers based on the Private Protection Law. Israel’s tax administration has the power to directly request relevant tax information from banks and other financial

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institutions (s. 135A ITO). The Supreme Court has acknowledged 19 that banking secrecy has a unique standing but it does not override disclosure obligation stipulated by the law. Therefore, there are no restrictions on the powers of the tax authorities to obtain information from the banks. 162. Assessing officer is authorised to apply to a bank institution and ask for information regarding accounts and assets which belong to specific clients. Consequently, banks and other financial institutions are required to provide the requested information to the tax administration.

Professional privileges
163. Section 235B of the Income Tax Ordinance empowers the Assessing Officer to obtain information from advocates. The advocates must deliver any document in his possession to the assessing officer, enable him to examine and seize any of the delivered documents and allow him to perform any other act in respect of the said document. The assessing officer is empowered to use all powers available to him under the ITO. These provisions of the ITO specifically override the provisions of Advocates Law 5721-1961. However, the advocate must not deliver the documents if he claims the document is privileged. A document that includes a professional secret is considered a privileged document (s. 235A). The advocate must deliver the document demanded by the assessing officer and if he claims that the document is privileged then the assessing officer must not inspect the document and the claim of the advocate is decided by the court in accordance with the procedure prescribed in sections 235C and 235D of the ITO. 164. Section 235A of the ITO defines professional secret as, “communication between a client and an advocate, whether oral or written, which is substantially connected to the professional service rendered by the advocate to the client, including records prepared by the advocate for his own use, on condition that they are substantially connected to the said professional service”. Professional service is limited to services provided in the advocate’s capacity as an advocate, and does not extend to services rendered in another capacity. 165. Members of the Israeli Bar Association, their staff members or representatives are obliged to maintain confidentiality on all the facts of which they have learnt in connection with provision of their legal services (s. 90 of the Bar Association Law, 1961). They can only be released from this obligation of maintaining confidentiality including for the purpose of judicial proceedings, by their clients’ declaration. However, the members of Bar Association or their representatives are still obliged to maintain confidentiality if it is in the client’s interest (s. 19 of the Bar Association Rules (Professional Ethics), 1986).
19. LCA 1917/92 [1993] Scoler v. Jerabi, IsrSC 47(5) 764.

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Information which is specifically not covered by professional privilege is the identity of the client, the fact that legal advice was sought and information regarding whether or not an attorney has in his possession a specified document. Additionally, advice intended to facilitate commission of a crime and the content of legal services (specifically, a contract is not privileged, although the correspondence relating to it is) are not privileged.

Tax secrecy
166. Sections 231 to 235 of the ITO sets out secrecy provisions concerning the information obtained by Israel Tax Authority. Section 234 states that, “if a person has possession or control of documents, information, returns, assessment lists or their copies, which relate to the income of a person or to a particular of his income, and if he at any time communicates or tries to communicate aforesaid information or any contents of those documents to a person to whom the Minister of Finance did not permit him to communicate it, or if he communicates it not for purposes of this Ordinance, then he shall be liable to six months imprisonment or to a fine…”. However, these secrecy provisions are specifically overridden for disclosing information to an authorised office of the reciprocating state with whom an agreement has been given effect as per provisions of section 196 (section 197 ITO).
Determination and factors underlying recommendations
Determination The element is in place, but certain aspects of the legal implementation of the element need improvement. Factors underlying recommendations Israel’s access powers for the purpose of exchange of information under international tax agreements are not provided for explicitly, in all cases, and are only applicable to requests made under double tax conventions. The tax authorities’ powers to obtain information from new immigrants, veteran returning residents and the trustees of foreign resident settlor trusts, having a trustee resident in Israel, in respect of foreign source income are inadequate. Recommendations Israel should ensure that its competent authority has the power to obtain all relevant information pursuant to requests under all exchange of information agreements (regardless of their form). Israel should ensure that its authorities have powers to obtain information from new immigrants, veteran returning residents and trustees of foreign resident settlor trusts which might be subject of an information request from its EOI partners.

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B.2. Notification requirements and rights and safeguards
The rights and safeguards (e.g. notification, appeal rights) that apply to persons in the requested jurisdiction should be compatible with effective exchange of information.

Not unduly prevent or delay exchange of information (ToR B.2.1)
167. The Terms of Reference provide that rights and safeguards should not unduly prevent or delay effective exchange of information. For instance, notification rules should permit exceptions from prior notification (e.g. in cases in which the information request is of a very urgent nature or the notification is likely to undermine the chance of success of the investigation conducted by the requesting jurisdiction). 168. Israel’s law does not require the tax authorities to notify taxpayers or third parties of an exchange of information request, or when the tax authority collects information from a third party to fulfil an exchange of information request. 169. As explained in Section B.1, Israel’s tax authorities can approach persons holding relevant information to provide it to the assessing officer without prior notice (s. 135-145 ITO). In certain circumstances, however, the law prescribes that the assessing officer specifies that notice be given in order to give the person time needed to provide the requested information (s. 135(1), s. 135A(a), s. 136, s. 137-140 ITO). The time limits, within which information must be provided as stipulated by law are part of the normal procedures for requesting information from taxpayers in particular circumstances and are not specific to EOI. 170. The income Tax Ordinance does not allow any appeal rights against the authorities’ powers to gather information. However, Part IX of the ITO grants appeal rights to taxpayers who dispute tax assessments. Article 253 of the Civil Law order regulation (1984) grants appeal rights to taxpayers to apply to the court against any request, decision or action of authorities. These rights are available to taxpayers in domestic cases and can be equally used to oppose requests for exchange of information. These rights are normal and are available to defend against any unauthorised use of powers by authorities.
Determination and factors underlying recommendations
Determination The element is in place.

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C. Exchanging Information

Overview
171. Jurisdictions generally cannot exchange information for tax purposes unless they have a legal basis or mechanism for doing so. In Israel, the legal authority to exchange information derives from double tax conventions as well as from domestic law. This section of the report examines whether Israel has a network of information exchange that would allow it to achieve effective exchange of information in practice. 172. In Israel, the legal authority to exchange information is derived from double tax conventions upon their signature by the Minister of Foreign Affairs and upon their ratification by the Knesset. DTCs are given effect by order of the Minister of Finance. International agreement prevails when in conflict with domestic legislation concerning issues covered by the international agreement in respect of income taxes including exchange of information. 173. Israel has a developed network of bilateral agreements that provide for exchange of information in tax matters. This network currently covers 54 jurisdictions through double tax conventions (DTCs). All DTCs are in force with the exception of DTCs with the Former Yugoslav Republic of Macedonia (FYROM), Malta and Panama. 174. Israel’s DTCs cover most of its major trading partners including almost all EU member states, 16 of the G20 members almost half of the Global Forum members and all, except for four, OECD members. Israel has an ongoing treaty negotiation program. In addition, Israel is currently updating its older agreements by establishing amendments to the DTC and Protocols to bring the exchange of information articles to the international standard. 175. Out of the 54 signed DTCs, five DTCs (Denmark, FYROM, Georgia, Malta and Panama) contain the full text of Article 26 of the OECD Model

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Tax Convention. Due to various deficiencies, eight 20 of the 54 DTCs do not provide for exchange of information consistent with the standard. 176. Israel’s agreements affording double taxation relief are given effect by s. 196 of the ITO. Although Israel’s law does not explicitly stipulate information gathering powers of the tax authority in relation to exchange of information based on international agreements, the wording “shall have effect in relation to income tax” is interpreted by Israeli authorities as including authority to use information gathering powers in relation to exchange of information. Further, Israel has never encountered any problem in this respect. 177. Israel cannot give effect in its domestic law to international agreement solely for the purpose of exchange of information. As a consequence Israel cannot conclude any TIEA or other international agreement including the Convention on Mutual Administrative Assistance in Tax Matters that cover administrative assistance. This fact limits possibility of Israel and its partners to enter into agreements solely allowing exchange of information for tax purposes. 178. All of Israel’s DTCs contain confidentiality provisions to ensure that the information exchanged will be disclosed only to authorised persons. All Israeli DTCs ensure that the contracting parties are not obliged to provide information which would disclose trade, business, industrial, commercial or professional secrets or information which is the subject of legal professional privilege. As noted in Part B of this report, the scope of information subject professional privilege in Israel is wide and goes beyond the international standard. All but two DTCs do not oblige the parties to provide information the disclosure of which would be contrary to public policy (ordre public). 21 179. The Israeli Ministry of Finance and the tax administration designated by the Ministry are the Israeli competent authority for EOI purposes (s. 3(1)). There are no legal restrictions on the ability of the competent authority to respond to requests within 90 days of receipt by providing the information requested or by providing an update on the status of the request.

C.1. Exchange-of-information mechanisms
Exchange of information mechanisms should allow for effective exchange of information.

180. The DTCs signed by Israel are given effect by section 196 of the ITO. Based on the ITO, international treaties override any contradictory domestic laws concerning issues covered by the international agreement in respect of income taxes including exchange of information.
20. 21. DTCs with Germany, Jamaica, Luxembourg, the Netherlands, Singapore, South Africa, Switzerland and the United Kingdom. The agreements with the United Kingdom and with Sweden.

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181. Israel has signed 54 DTCs. All DTCs are in force with the exception of DTC with the FYROM, Malta and Panama. 182. Section 196 of the ITO does not allow Israel to conclude international agreements solely for the purpose of administrative assistance in tax matters. It is required that such agreements must also afford double taxation relief. As a consequence, Israel has not yet concluded any Tax information exchange agreement (“TIEA”) or any other instrument providing solely for the administrative assistance in tax matters.

Foreseeably relevant standard (ToR C.1.1)
183. The international standard for exchange of information envisages information exchange on request to the widest possible extent, but does not allow speculative requests for information that have no apparent nexus to an open inquiry or investigation. The balance between these two competing considerations is captured in the standard of “foreseeable relevance”. It does not allow “fishing expeditions”. 184. Out of 54 Israeli DTCs, 47 provide for the exchange of information that is “necessary” for carrying out the provisions of the agreement or of the domestic laws of the Contracting States concerning taxes covered by the agreement. As such, the term “necessary” is recognised in the commentary to Article 26 (Exchange of Information) of the OECD Model Tax Convention to allow for the same scope of exchange as does the term “foreseeably relevant”. Two DTCs use the term “pertinent”. 22 The Israeli authorities indicate that the term “pertinent” is interpreted in a manner that allows for exchange of information that is in line with the standard of “foreseeable relevance”. Five most recently negotiated DTCs employ the term of “foreseeably relevant”. 185. Israel’s DTCs with the Netherlands and South Africa contain additional language, providing that competent authorities of the states shall exchange information which authorities have in proper order at their disposal as is necessary for carrying out the provisions of the Convention. These provisions suggest that Israel may not therefore be able to exchange all information consistent with the foreseeably relevant standard. However, the Israeli authorities have advised that they use their access powers to obtain information requested by the Netherlands and South Africa. Similar clarification is given by the authorities of the Netherlands 23 and South Africa. 24
22. 23. 24. DTC with US (signed 1994) and DTC with Ethiopia (signed 2004). Global Forum Peer Review Report (Combined : Phase 1 and Phase 2), the Netherlands, paragraph 323. Global Forum Peer Review Report (Combined : Phase 1 and Phase 2), South Africa, paragraph 194.

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In respect of all persons (ToR C.1.2)
186. For exchange of information to be effective it is necessary that the obligation to provide information is not restricted by the residence or nationality of the person to whom the information relates or by the residence or nationality of the person in possession or control of the information requested. For this reason the international standard for exchange of information envisages that EOI mechanisms will provide for exchange of information in respect of all persons. 187. Twenty of Israel’s DTCs do not contain a specific reference in the EOI Article regarding exchange of information not being restricted by Article 1 (Persons covered) of the respective agreements. However, in principle, the absence of this specific provision does not restrict the exchange of information as long as the agreement allows for the exchange of information for carrying out the provisions of the domestic laws of the Contracting States, as the domestic laws apply to non-residents also. Further, tax treaties with the Netherlands and South Africa provide for exchange of information that is necessary for the carrying out of the provisions of the Convention, in particular for the prevention of the fraud, and for the administration of the statutory provisions against legal avoidance concerning taxes covered by the Convention. Israel’s DTCs with Germany and Switzerland limit the exchange of information to that necessary for carrying out the provisions of the convention Therefore, under these four DTCs information concerning non-residents might not be exchanged.

Obligation to exchange all types of information (ToR C.1.3)
188. Jurisdictions cannot engage in effective exchange of information if they cannot exchange information held by financial institutions, nominees or persons acting in an agency or a fiduciary capacity, as well as ownership information. Both the OECD Model Convention (Article 26(5)) and the OECD Model TIEA (Article 5(4)), which are primary authoritative sources of the standards, stipulate that bank secrecy cannot form the basis for declining a request to provide information and that a request for information cannot be declined solely because the information is held by nominees or persons acting in an agency or fiduciary capacity or because the information relates to an ownership interest. 189. Except for DTCs with Denmark, FYROM, Georgia, Malta and Panama which were signed after September 2009 none of Israeli 49 DTCs contain wording akin to Article 26(5) of the OECD Model Convention. However, the absence of such a provision in Israel’s DTCs does not automatically create restrictions on exchange of bank information. Exchange of information based on such DTC becomes restricted in line with the standard only if domestic

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laws in one of the parties do not allow exchange of information in the scope of Article 26(5) of the OECD Model Tax Convention. 190. As stated in section B.1 of this report Israel’s domestic law does not contain restriction in respect of access to banking information. Nevertheless, for some of Israel’s partners which have domestic restrictions on access to information the absence of a provision akin to Article 26(5) of the OECD Model Tax Convention means that these agreements do not establish an obligation to exchange all types of information. It is particularly the case with Luxembourg, Singapore and Switzerland. 191. Luxembourg and Singapore’s domestic bank secrecy rules restrict exchange of information based on all DTCs signed prior to March 2009, including DTCs with Israel. Similarly, exchange of information with Switzerland based on DTCs signed prior to October 2010 is limited by its domestic bank secrecy rules. 192. The DTCs with the Netherlands, South Africa, Sweden, and the UK (as well as those with Germany and Switzerland which are not to the standard) include language, noting that exchange of information is restricted to “information which is at their disposal under their respective taxation laws in the normal course of administration” or similar. This wording does not limit Israel’s ability to respond to a request from these jurisdictions, as Israel regards all information they can obtain by using their access powers as information “available under its taxation laws” and “in proper order at their disposal”. It is noted, however, that while this is not an issue for Israel it may impose a restriction on the other jurisdiction’s ability to respond to a request, as they may interpret this language more restrictively. This is the case with the UK. Therefore, Israel’s DTC with the UK is not in line with the standard. 193. The Protocol to the Israel’s DTC with the Netherlands explicitly states that the obligation to exchange information does not include information obtained from banks or from financial institutions assimilated thereto or equivalent institutions. Due to this express limitation with regard to banking information, the DTC with the Netherlands is not in line with the international standard. 194. Although the number of Israel’s DTCs which are not in line with the standard is relatively low, these DTCs cover Israel’s important trading partners. It is therefore recommended that Israel updates these DTCs to include Article 26(5) of the OECD Model Tax Convention and to allow exchange of information in line with the international standard.

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Absence of domestic tax interest (ToR C.1.4)
195. The concept of “domestic tax interest” describes a situation where a contracting party can only provide information to another contracting party if it has an interest in the requested information for its own tax purposes. A refusal to provide information based on a domestic tax interest requirement is not consistent with the international standard. Jurisdictions must be able to use their information gathering measures even though invoked solely to obtain and provide information to the requesting jurisdiction. This is specifically stated in both the OECD Model Convention (Article 26(4)) and the OECD Model TIEA (Article 5(2)), which are primary authoritative sources of the Global standard for EOI. 196. Only five Israeli DTCs contain the equivalent of paragraph 4 of Article 26 of the OECD model convention. The most recent five DTCs 25 which were signed after September 2009 do include express provision relating to the non-application of the principle of domestic tax interest. In addition, the Israeli authorities advise that all DTCs are interpreted by Israel as allowing access to all information also in absence of domestic tax interest even if there is no explicit reference to that principle in the respective agreement. In practice Israel does not exercise reciprocity on this basis and therefore does not question whether a requesting party has the requirement of a domestic tax interest. No issue has been reported by peers in this respect. As discussed in section B.1 of the report, tax authorities are obligated to give effect to the provisions of tax treaty, however there is a potential ambiguity in relation to some domestic law provisions with regard to authorities’ powers to obtain information for EOI purpose. 197. A domestic tax interest requirement may also exist in some of Israeli’s partner jurisdictions. In such cases, the absence of a specific provision requiring exchange of information unlimited by domestic tax interest will serve as a limitation on the exchange of information which can occur under the relevant agreement. Based on the peer reviews conducted so far, domestic tax interest restricts exchange of information in respect to the DTCs with Singapore and Jamaica. Since the DTC with Singapore was signed before March 2009, amendment of the Singaporean law allowing exchange of information in absence of domestic tax interest cannot be applied. In the case of Jamaica information gathering powers of its tax authorities are subject to there being a domestic tax interest. Therefore, it is recommended that Israel continues its program of renegotiation of DTCs including to incorporate wording in line with Article 26(4) of the OECD Model Tax Convention.

25.

DTCs with Denmark, FYROM, Georgia, Malta and Panama.

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Absence of dual criminality principles (ToR C.1.5)
198. The principle of dual criminality provides that assistance can only be provided if the conduct being investigated (and giving rise to an information request) would constitute a crime under the laws of the requested jurisdiction if it had occurred in the requested jurisdiction. In order to be effective, exchange of information should not be constrained by the application of the dual criminality principle. 199. There are no dual criminality provisions in any of Israeli’s DTCs.

Exchange of information in both civil and criminal tax matters (ToR C.1.6)
200. Information exchange may be requested both for tax administration purposes and for tax prosecution purposes. The international standard is not limited to information exchange in criminal tax matters but extends to information requested for tax administration purposes (also referred to as “civil tax matters”). 201. As noted previously (see Part C.1.1 of this report), four Israel’s DTCs provide for the exchange of information for carrying out the provisions of the convention and not for administering domestic laws. These agreements have the potential to limit the EOI to information foreseeably relevant for the purposes of civil tax matters only. 202. The confidentiality provisions in 13 agreements do not expressly provide for disclosure of information received to the authorities which are involved with the prosecution of tax matters. Israel advises that absence of this express provision does not limit the sharing of information with the authorities prosecuting tax matters and it places no restriction on the use of information by the requesting jurisdiction as far as such disclosure is consistent with the international standard with regard to confidentiality. It further, clarified that non-availability of these express provisions is not interpreted so as to decline providing information in criminal tax matters. Israel advises that an assessing officer in Israel may transfer information to an investigating assessing officer for opening a criminal investigation. After completing investigation process, the case is transferred to the prosecution for further treatment of an indictment.

Provide information in specific form requested (ToR C.1.7)
203. There are no restrictions in Israel’s domestic laws that would prevent it from providing information in a specific form, so long as this is consistent with its own administrative practices.

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In force (ToR C.1.8)
204. Exchange of information cannot take place unless a jurisdiction has exchange of information arrangements in force. Where such arrangements have been signed, the international standard requires that jurisdictions must take all steps necessary to bring them into force expeditiously. 205. In order to bring the exchange of information agreement into force it must be given notice by order of the minister of finance upon their signature and ratification. Out of the 54 DTCs that Israel has concluded, 51 are in force as of 12 March 2012. The DTCs with FYROM, Malta and Panama which is not yet in force 26 were signed after July 2011. 206. The process of bringing agreements into force is rather straightforward. Agreement bill is signed on behalf of the government by the Minister of Foreign Affairs. Subsequently, the treaty is subject to ratification by the Knesset. In order for the treaty to come into effect in Israel the Minister of Finance is required to give notice by an order. This order is published in the Official Gazette (“Reshumot”). Most of the treaties are brought into force expeditiously. However, in some cases time between signature of the DTC and its coming into force was relatively long. Nine agreements were brought into force 36 months after their signature. Bringing a treaty into force requires successful ratification process in both treaty countries. Nonetheless, considering the comparative length of the period between signature of the agreement and its coming into force, it is recommended that Israel should take necessary measures to bring all its exchange of information agreements into force expeditiously.

In effect (ToR C.1.9)
207. For information exchange to be effective, the parties to an EOI arrangement need to enact any legislation necessary to comply with the terms of the arrangement. 208. Exchange of information agreements are given effect in Israel by s. 196 of the ITO. Once given effect an agreement overrides domestic Israeli laws. Although the provision of the ITO does not explicitly stipulate that agreements shall have effect also in relation to exchange of information, Israeli authorities interpret the wording “in relation to income tax” as including exchange of information.

26.

DTCs signing dates: FYROM (23 Aug 2012), Malta (28 July 2011) and Panama (27 July 2011).

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Determination and factors underlying recommendations
Determination The element is in place, but certain aspects of the legal implementation of the element need improvement. Factors underlying recommendations Israel’s access powers for the purpose of exchange of information under international tax agreements are not provided for explicitly, in all cases, and are only applicable to requests made under double tax conventions. Eight of Israel’s DTCs are not in line with the international standard. Recommendations Israel should ensure that its competent authority has the power to obtain all relevant information pursuant to requests under all exchange of information agreements (regardless of their form). Israel should continue its program of renegotiation of DTCs to incorporate wording in line with the OECD Model Tax Convention. Israel should take necessary measures to bring its exchange of information agreements into force expeditiously.

In some cases time taken by Israel to bring its signed EOI agreements into force was more than 36 months.

C.2. Exchange-of-information mechanisms with all relevant partners
The jurisdictions’ network of information exchange mechanisms should cover all relevant partners.

209. Ultimately, the international standard requires that jurisdictions exchange information with all relevant partners, meaning those partners who are interested in entering into an information exchange arrangement. Agreements cannot be concluded only with counterparties without economic significance. If it appears that a jurisdiction is refusing to enter into agreements or negotiations with partners, in particular ones that have a reasonable expectation of requiring information from that jurisdiction in order to properly administer and enforce its tax laws it may indicate a lack of commitment to implement the standards. 210. Israel’s network of DTCs encompasses a wide range of counterparties, including • • • All of its five major trading partners Almost all EU member states; 16 of the G20 members;

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• • almost half of the Global Forum members and except for four all OECD members

211. Comments were sought from Global Forum member jurisdictions in the course of the preparation of this report. One jurisdiction has informed to have approached Israel and indicated its interest in entering into a TIEA. However, section 196 of ITO does not allow Israel to conclude international agreements solely for the purpose of exchange of information. As a consequence Israel cannot conclude any TIEA or other international agreement covering solely administrative assistance. This fact limits possibility of Israel and its partners to enter into agreements solely for the purposes of administrative assistance in tax matters. Therefore, it is recommended that Israel amends its domestic law to allow it to conclude such agreements and enter agreements for exchange of information (regardless of their form) with all partners interested in having such an agreement. An amendment of the ITO addressing the issue is currently under legislative procedure. 212. The Israeli authorities have an ongoing programme of establishing agreements and revising agreements where necessary in order to bring them to standard. This revision includes DTCs that Israel interprets as meeting the standard. No peers have reported that Israel declined to establish an EOI agreement with a jurisdiction seeking the same.
Determination and factors underlying recommendations
Determination The element is in place, but certain aspects of the legal implementation of the element need improvement. Factors underlying recommendations Israel has been approached by at least one jurisdiction to negotiate a TIEA, however, Israel’s law does not allow Israel to give effect to agreements solely for the purpose of exchange of information. Recommendations Israel should enter into agreements for exchange of information for tax purposes (regardless of their form) with all relevant partners, meaning those partners who are interested in entering into an information exchange arrangement with it.

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C.3. Confidentiality
The jurisdictions’ mechanisms for exchange of information should have adequate provisions to ensure the confidentiality of information received.

Information received: disclosure, use, and safeguards (ToR C.3.1)
213. Governments would not engage in information exchange without the assurance that the information provided would only be used for the purposes permitted under the exchange mechanism and that its confidentiality would be preserved. Information exchange instruments must therefore contain confidentiality provisions that spell out specifically to whom the information can be disclosed and the purposes for which the information can be used. In addition to the protections afforded by the confidentiality provisions of information exchange instruments, jurisdictions with tax systems generally impose strict confidentiality requirements on information collected for tax purposes. 214. All Israeli’s DTCs have confidentiality provisions to ensure that the information exchanged will be disclosed only to persons authorised by the agreements. While wording of the respective articles might slightly vary, its provisions contain all of the essential aspects of Article 26(2) of the OECD Model Tax Convention. 215. Israeli tax law requires officials, taxpayers and third parties to keep confidential all information concerning other persons which they learned in the course of the tax procedure (ss.231-235 ITO). This confidentiality obligation covers all types of information obtained in connection with tax administration, including information obtained in the course of international cooperation. With regards to information received from other jurisdictions under a legal instrument, confidentiality provisions of these instruments prevail over the ITO. Penalties for breaches of confidentiality are stipulated by the Income Tax Ordinance. A person who breaches confidentiality is liable to six months imprisonment or to a fine of NIS 12 900 (EUR 2 580) (s. 234).

All other information exchanged (ToR C.3.2)
216. The confidentiality provisions in Israeli’s domestic legislation and DTCs do not draw a distinction between information received in response to requests and information forming part of the requests themselves. As such, these provisions apply equally to all requests, background documents to such requests, and any other communications between the requesting and requested jurisdictions.

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Determination and factors underlying recommendations
Determination The element is in place.

C.4. Rights and safeguards of taxpayers and third parties
The exchange of information mechanisms should respect the rights and safeguards of taxpayers and third parties.

Exceptions to requirement to provide information (ToR C.4.1)
217. The international standard allows requested parties not to supply information in response to a request in certain identified situations. Among other reasons, an information request can be declined if the requested information would disclose confidential communications protected by attorney-client privilege. Attorney-client privilege is a feature of the legal systems of many countries. 219. However, communications between a client and an attorney or other admitted legal representative are generally deemed confidential only to the extent that the attorney or admitted legal representative is acting in that capacity. When the definition of attorney privilege in domestic legislation of the requested jurisdiction is broader, this does not constitute valid grounds for refusing a request for information exchange. Consequently, when a lawyer is acting as nominee shareholder, trustee, settlor, company director or under a power of attorney to represent a company in its business affairs, a request for exchange of information flowing from and related to such activities cannot be refused on grounds of attorney privilege. 220. All Israeli DTCs contain a provision equivalent to the exemption in article 26 (3) of the OECD Model Tax Convention allowing the state to refuse to exchange certain types of information, including that which would disclose a trade, business, industrial, commercial or professional secret or trade process. However, the term “professional secret” is not defined in the DTCs and therefore, considering the definition provisions of the DTCs (see Article 3(2) of the Model DTCs), this term would derive its meaning from the Israel’s domestic laws. As discussed in Part B of this report, the definition of the term professional secret in the ITO is consistent with the international standard. 221. Israeli DTCs with the UK and with Sweden do not contain express safeguards that allow the contracting parties to decline to supply information whose disclosure would be contrary to public policy. This is not consistent with the international standard and it is recommended that Israel renegotiates these two DTCs to bring them up to the standard.

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Determination and factors underlying recommendations
Determination The element is in place.

C.5. Timeliness of responses to requests for information
The jurisdiction should provide information under its network of agreements in a timely manner.

Responses within 90 days (ToR C.5.1)
222. There are no provisions in Israeli’s laws or DTCs pertaining to the timeliness of responses or the timeframe within which responses should be provided. As such, there appear to be no legal restrictions on the ability of Israeli tax authorities from responding to EOI requests within 90 days of receipt by providing the information requested or providing an update on the status of the request. A review of the practical ability of Israeli tax authorities to respond to requests in a timely manner will be conducted in the course of its Phase 2 review.

Organisational process and resources (ToR C.5.2)
223. The Ministry of Finance is responsible for negotiating DTCs. The power to sign DTCs lies with the minister of foreign affairs. The treaty proposal is ratified by the Knesset. Subsequently, the Minister of Finance gives notice of the ratified treaty by Order which is published in the Official Gazette. Israel’s competent authority for purposes of EOI based on its DTCs is the Ministry of Finance who has delegated this authority to the International Tax Division of the Israel Tax Authority. 224. A review of Israel’s organisational process and resources will be conducted in the context of Israel’s Phase 2 review.

Absence of restrictive conditions on exchange of information (ToR C.5.3)
225. Exchange of information assistance should not be subject to unreasonable, disproportionate, or unduly restrictive conditions. There are no aspects of Israel’s DTCs or its laws that appear to impose additional restrictive conditions on the exchange of information, beyond the ones foreseen by article 26 of the OECD tax convention or TIEA models.

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Determination and factors underlying recommendations
Determination The assessment team is not in a position to evaluate whether this element is in place, as it involves issues of practice that are dealt with in the Phase 2 review.

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Summary of Determinations and Factors Underlying Recommendations
Factors underlying recommendations

Determination

Recommendations

Jurisdictions should ensure that ownership and identity information for all relevant entities and arrangements is available to their competent authorities (ToR A.1) The element is not in place. Israel authorises the issuance of bearer shares by companies other than those registered on the stock exchange without having in place mechanisms for identifying the holders of those shares in all circumstances. Only 12 companies have issued bearer shares. Under the Income Tax Ordinance, foreign companies that are managed and controlled in Israel are considered tax resident in Israel. However, foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents are given an exception from this tax residency rule for a period of 10 years and ownership information on such companies is not ensured in Israel. Israel should take necessary measures to ensure that robust mechanisms are in place to identify the owners of bearer shares.

Israel should ensure that ownership information is available to its competent authority in respect of all foreign companies that are managed and controlled from Israel.

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Factors underlying recommendations Israeli law does not ensure the availability of identity information in respect of the settlors, trustees and beneficiaries of foreign resident settlor trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad for a period of 10 years.

Determination

Recommendations Israel should ensure the availability of identity information in respect of the settlors, trustees and beneficiaries of foreign resident settlor trusts and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad.

Jurisdictions should ensure that reliable accounting records are kept for all relevant entities and arrangements (ToR A.2) The element is in place, but certain aspects of the legal implementation of the element need improvement. Israeli law does not ensure the availability of accounting records in respect of foreign resident settlor trusts having a trustee in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad for a period of 10 years. Israeli law does not ensure availability of accounting records in respect of activities outside of Israel of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents for a period of 10 years. Israel should ensure that accounting records consistent with the standard are maintained for foreign resident settlor trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets or income from assets abroad. Israel should ensure availability of accounting records in respect of activities outside of Israel of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents.

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Determination The element is in place, but certain aspects of the legal implementation of the element need improvement.

Factors underlying recommendations The AML/CFT laws only require retention of documents attesting the instruction to carry out transactions above the threshold of NIS 10 000 (EUR 2 000) or reported as suspicious transaction to the FIU.

Recommendations Israel should ensure that transactional information consistent with the standard is available in respect of all the accounts maintained with the banks.

Banking information should be available for all account-holders (ToR A.3)

Competent authorities should have the power to obtain and provide information that is the subject of a request under an exchange of information arrangement from any person within their territorial jurisdiction who is in possession or control of such information (irrespective of any legal obligation on such person to maintain the secrecy of the information) (ToR B.1) The element is in place, but certain aspects of the legal implementation need improvement. Israel’s access powers for the purpose of exchange of information under international tax agreements are not provided explicitly, in all cases, and are only applicable to requests made under double tax conventions. The tax authorities powers to obtain information from new immigrants, veteran returning residents and the trustees of foreign resident settlor trusts having a trustee resident in Israel in respect of foreign source income are inadequate Israel should ensure that its competent authority has the power to obtain all relevant information pursuant to requests under all exchange of information agreements (regardless of their form). Israel should ensure that its authorities have powers to obtain information from new immigrants, veteran returning residents and trustees of foreign resident settlor trusts which might be subject of an information request from its EOI partners.

The rights and safeguards (e.g. notification, appeal rights) that apply to persons in the requested jurisdiction should be compatible with effective exchange of information (ToR B.2) The element is in place.

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Factors underlying recommendations

Determination

Recommendations

Exchange of information mechanisms should allow for effective exchange of information (ToR C.1) The element is in place, but certain aspects of the legal implementation need improvement. Israel’s access powers for the purpose of exchange of information under international tax agreements are not explicitly provided for and are only applicable to requests made under double tax conventions. Eight of Israel’s DTCs are not in line with the international standard. Israel should ensure that its competent authority has the power to obtain all relevant information pursuant to requests under all exchange of information agreements (regardless of their form). Israel should continue its program of renegotiation of DTCs to incorporate wording in line with the OECD Model Tax Convention. Israel should take necessary measures to bring its exchange of information agreements into force expeditiously.

In some cases time taken by Israel to bring its signed EOI agreements into force was more than 36 months.

The jurisdictions’ network of information exchange mechanisms should cover all relevant partners (ToR C.2) The element is in place but certain aspects of the legal implementation of the element need improvement. Israel has been approached by at least one jurisdiction to negotiate a TIEA, however, Israel’s law does not allow concluding agreements solely for the purpose of exchange of information. Israel should enter into agreements for exchange of information for tax purposes (regardless of their form) with all relevant partners, meaning those partners who are interested in entering into an information exchange arrangement with it.

The jurisdictions’ mechanisms for exchange of information should have adequate provisions to ensure the confidentiality of information received (ToR C.3) The element is in place. The exchange of information mechanisms should respect the rights and safeguards of taxpayers and third parties (ToR C.4) The element is in place.

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Determination

Factors underlying recommendations

Recommendations

The jurisdiction should provide information under its network of agreements in a timely manner (ToR C.5) The assessment team is not in a position to evaluate whether this element is in place, as it involves issues of practice that are dealt with in the Phase 2 review.

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ANNEXES – 79

Annex 1: Jurisdiction’s Response to the Supplementary Report 27

Israel fully supports the objectives of the Global Forum for Transparency and Exchange of Information (EOI) and is committed towards EOI. As of June 2013, Israel has a broad EOI network which includes 51 DTCs in effect. These agreements cover most of the EU members, 16 of the G20 members, almost half of the Global Forum members and all but four of the OECD members. It is our interest to broaden the network of EOI arrangements and apply them as efficiently as possible. The recommendations made in the report will be studied thoroughly and Israel will take effective measures to implement them. We would like to express our thanks to the assessment team for their intensive and dedicated work on the report.

27.

This Annex presents the jurisdiction’s response to the review report and shall not be deemed to represent the Global Forum’s views.

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Annex 2: List of All Exchange of Information Mechanisms
Type of EOI arrangement Double Taxation Convention (DTC) DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC

Jurisdiction 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 21 Austria Belarus Belgium Brazil Bulgaria Canada China Croatia Czech Republic Denmark Estonia Ethiopia Finland France FYROM Georgia Germany Greece Hungary Ireland

Date signed 29-01-1970 11-04-2000 13-07-1972 12-12-2002 18-01-2000 21-07-1975 08-04-1995 26-09-2006 12-12-1993 09-09-2009 29-06-2009 02-06-2004 08-01-1997 31-07-1995 23-08-2012 12-05-2010 09-07-1962 24-10-1995 14-05-1991 29-01-1996 20-11-1995 08-09-1995 29-06-1984 08-03-1993

Date in force 26-01-1971 01-01-2004 01-04-1975 21-09-2005 01-01-2003 27-07-1976 01-01-1996 01-01-2008 23-12-1994 29-12-2011 28-12-2009 01-01-2008 01-01-1999 18-07-1996 Not in force 01-01-2012 21-08-1966 06-03-1998 13-11-1992 15-05-1996 24-12-1995 01-01-1999 03-09-1985 24-12-1993

20 India 22 Italy 23 Jamaica 24 Japan

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ANNEXES – 81

Jurisdiction 25 Latvia 26 Lithuania 27 Luxembourg 28 Malta 29 Mexico 30 Moldova 31 Norway 32 Panama 33 Philippines 34 Poland 35 Portugal 36 Romania 37 Russia 38 Singapore 39 Slovak Republic 40 Slovenia 41 42 South Africa South Korea

Type of EOI arrangement DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC DTC

Date signed 20-02-2006 11-05-2006 13-07-2004 28-08-2011 19-07-1999 23-11-2006 02-11-1966 27-07-2011 09-06-1992 22-05-1991 26-09-2006 15-06-1997 25-04-1994 19-05-2005 08-09-1999 30-01-2007 10-02-1978 18-03-1997 30-11-1999 22-12-1959 02-07-2003 24-12-2009 22-01-1996 02-07-1973 14-03-1996 26-01-1993 26-12-2003 26-09-1962 15-09-1998 04-08-2009

Date in force 01-01-2007 01-01-2007 22-05-2006 Not in force 01-01-2000 01-01-2008 11-01-1968 Not in force 27-05-1997 01-01-1992 18-02-2008 01-01-1999 01-01-2001 06-12-2005 23-05-2000 01-01-2008 27-05-1980 01-01-1998 20-11-2000 03-06-1960 22-12-2003 01-01-2010 01-01-1997 09-09-1974 01-01-1999 01-01-1995 01-01-2007 13-02-1963 01-01-2000 01-01-2010

43 Spain 44 Sweden 45 Switzerland 46 Chinese Taipei 47 Thailand 48 The Netherlands 49 Turkey 50 U.S. 51 52 Ukraine United Kingdom

53 Uzbekistan 54 Vietnam

PEER REVIEW REPORT – PHASE 1: LEGAL AND REGULATORY FRAMEWORK – ISRAEL © OECD 2013

82 – ANNEXES

Annex 3: List of All Laws, Regulations and Other Material

Commercial laws
Associations Law, 5740-1980 Companies Law, 5759-1999 Partnership Ordinance, 1975 Trust Law, 5739-1979 Monetary Law, 5771-2011

Regulated activities and AML/CFT laws
Prohibition on Money Laundering Law, 5760-2000 Bank of Israel Law, 5770-2010 Banking Ordinance, 1941 Capacity and Guardianship Law, 5722–1962 Regulation of Investment Advising, Investment Marketing and Investment Portfolio Management Law, 5755-1995 Securities Law, 5728-1968

Tax laws
Income Tax Ordinance, 5721-1961 Income Tax Regulations, 5724-1963

PEER REVIEW REPORT – PHASE 1: LEGAL AND REGULATORY FRAMEWORK – ISRAEL © OECD 2013

ANNEXES – 83

Other relevant laws, regulations and other material
Administrative Offences Law, 5746–1985 Administrative Offenses Regulations, 5747-1987 Archives Law, 5715-1955 Archives Regulations, 5746–1986 Bar Association Law, 1961 Bar Association Rules, 5731-1971 Capacity and Guardianship Law, 5722–1962 Protection of Privacy Law, 5741-1981 Succession Law, 5725-1965

PEER REVIEW REPORT – PHASE 1: LEGAL AND REGULATORY FRAMEWORK – ISRAEL © OECD 2013

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
The OECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Union takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

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Global Forum on Transparency and Exchange of Information for Tax Purposes

PEER REVIEWS, PHASE 1: ISRAEL
The Global Forum on Transparency and Exchange of Information for Tax Purposes is the multilateral framework within which work in the area of tax transparency and exchange of information is carried out by 120 jurisdictions, which participate in the Global Forum on an equal footing. The Global Forum is charged with in-depth monitoring and peer review of the implementation of the international standards of transparency and exchange of information for tax purposes. These standards are primarily reflected in the 2002 OECD Model Agreement on Exchange of Information on Tax Matters and its commentary, and in Article 26 of the OECD Model Tax Convention on Income and on Capital and its commentary as updated in 2004. The standards have also been incorporated into the UN Model Tax Convention. The standards provide for international exchange on request of foreseeably relevant information for the administration or enforcement of the domestic tax laws of a requesting party. Fishing expeditions are not authorised but all foreseeably relevant information must be provided, including bank information and information held by fiduciaries, regardless of the existence of a domestic tax interest or the application of a dual criminality standard. All members of the Global Forum, as well as jurisdictions identified by the Global Forum as relevant to its work, are being reviewed. This process is undertaken in two phases. Phase 1 reviews assess the quality of a jurisdiction’s legal and regulatory framework for the exchange of information, while Phase 2 reviews look at the practical implementation of that framework. Some Global Forum members are undergoing combined – Phase 1 and Phase 2 – reviews. The Global Forum has also put in place a process for supplementary reports to follow-up on recommendations, as well as for the ongoing monitoring of jurisdictions following the conclusion of a review. The ultimate goal is to help jurisdictions to effectively implement the international standards of transparency and exchange of information for tax purposes. All review reports are published once approved by the Global Forum and they thus represent agreed Global Forum reports. For more information on the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes, and for copies of the published review reports, please refer to www.oecd.org/tax/transparency and www.eoi-tax.org.

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