Should Dual US/Israeli/Citizens move their investment accounts to Israel ?

There are 2 fundamental principles to investments which are essential to successful long term success: controlling taxes and expenses. Based on those 2 criteria alone the case for US/Israel dual citizens maintaining their investment accounts with US brokerage firms is a very strong one.

Beware the dreaded PFIC

PFIC Passive Foreign Investment Company is the biggest potential pitfall for US Citizens investing in non US mutual funds. A summary of the PFIC rules is here more information is available on the IRS website.

The bottom line for investors is that foreign mutual funds including Israeli funds and  ETNS (teudat sal) fall in the category of PFICs. As a consequence investors face far higher taxes and more complicated reporting requirements when investing in Israeli mutual funds. This is the case even if the Israeli fund invests in the same strategy as the alternative US fund.

The tax paid on the Israeli mutual fund that is a PFIC can be more than twice the tax compared to US  funds which are not PFICs. Also investments in PFICs require additional reporting to the IRS which may create additional expenses.

The lowest cost investment alternative to create a diversified portfolio is through US based exchange traded funds (ETFs). These can be purchased in a self directed account at minimal cost at a discount brokerage firm or through a managed account of ETFs offered through investment advisors/asset managers.

Can I purchase US exchange traded funds in an Israeli account ?  Yes, one can purchase US ETFs in Israeli brokerage accounts or find an asset manager that manages a portfolio of US exchange traded funds. However, not all Israeli brokerage firms will open accounts for dual US/Israeli citizens because of the paperwork/reporting requirements.

Generally speaking the expenses associated with investment accounts and asset management are significantly higher in Israel than the United States. There ae a few discount brokers in Israel that do have fees and commissions lower than those charged by the major banks’ investment departments asset management services are generally higher in Israel than can be found in the United Staes..

Individual stocks and bonds purchased outside of the US do not create PFIC issues.

As a dual US/Israeli citizen can I open a US brokerage account ? Yes, although there are many US brokerage accounts that are no longer interested in opening accounts for US citizens residing abroad there are others that will. However, many US mutual funds will not accept investments from non US residents…that is not the case for exchange traded funds.

Special Tax Status for New Immigrants to Israel (Olim Chadashim)

New immigrants are exempt for ten years from Israeli taxes on foreign passive (investment) income and capital gains including those on assets acquired after the date of immigration. Such income of course is subject to US taxes. Returning Israelis that fall into the category of “toshav chozair” receive such beneftits for ten years.

Additionally proper tax sensitive management of the account can reduce potential Israeli tax liabilities at the end of that ten year period.  This exemption gives a significant tax advantage Israeli tax liabilities at the end of the exemption period.

(None of this is to be considered authoritative tax advice or recommendation of specific securities or investment strategies you should consult the appropriate professional(s) for advice taking into consideration your specific circumstances)

Mr. Weinman offers a full range of services related to investments for dual US/Israeli citizens and can be reached at lweinman@lweinmanadvisor.com