Article Israel: Supreme Court Rejects Challenge to Constitutionality of FATCA's Implementation

(Jan. 25, 2018) On January 2, 2018, Israel’s Supreme Court, sitting as a High Court of Justice, issued its reasoning for its decision of September 12, 2016, rejecting a petition challenging the constitutionality of the Income Tax Ordinance (Amendment No. 227) Law, 5776-2016 (Amendment Law). The main decision was rendered by Justice Hanan Melcer, with Justices Menahem Mazuz and Miriam Naor (Ret.) concurring. (HCJ 8886/15 Foreign Republicans in Israel v. the Government of Israel (Jan. 2, 2018) (in Hebrew), State of Israel: The Judicial Authority website; Income Tax Ordinance (Amendment No. 227) Law, 5776-2016 (Amendment Law), SEFER HAHUKIM [BOOK OF LAWS, SH] 5776 No. 2561 p. 954, Knesset website.)

Legal Background

According to explanatory notes of the Amendment Law Draft Bill, the Amendment Law was designed to facilitate implementation of cooperation agreements entered into by Israel under the Organization for Economic Cooperation and Development (OECD) Convention of Mutual Administrative Assistance in Tax Matters and the OECD’s Common Reporting Standard, as well as the cooperation agreement for enforcement of the US Foreign Account Tax Compliance Act (FATCA). (HCJ 8886/15 ¶¶ 2–5.)

Melcer noted that FATCA requires every foreign financial institution to choose whether to engage in an agreement with the US tax authority for information sharing with regard to accounts held by US citizens or residents (US account holders). A financial institution that is subject to FATCA’s requirements but does not comply is subject to a 30% deduction at the source by US financial institutions. (Id. ¶¶ 12–13.) The US has expressed an interest in entering bilateral agreements with any country that would cooperate with it in implementing FATCA. (Id. ¶ 14.)

On June 30, 2014, Israel entered into an agreement with the US on implementing FATCA. The agreement requires that Israeli financial institutions forward information on US account holders to Israeli tax authorities, who then transfer this information to US tax authorities. Under the agreement the information forwarded is to include the name and address of the account holders, account number, name and identifying number of the financial institution, and account balance and “value.” The agreement also includes various provisions for data protection. (Id. ¶¶ 19–21.) The Israeli government ratified the FATCA agreement on August 18, 2016. (Id. ¶ 26.)

Israel is also a signatory to the multilateral OECD treaty. Accordingly it automatically obtains information on financial activities conducted by Israeli residents abroad in exchange for providing similar information conducted by taxpayers of countries that are signatories to the treaty in Israel. Formal announcements regarding the information transfer requirements under the OECD agreement and under FATCA were published on September 5, 2016, and September 18, 2016, respectively. (Id. ¶¶ 27–28.)

Petitioners’ Arguments

The petitioners argued that the Amendment Law unlawfully harms the right to privacy as it enables an automatic transfer of financial information regarding account holders to the US tax authorities. In addition, they argued it harms the right to equal treatment as it subjects US account holders to a different legislative system from that which applies to the rest of taxpayers in Israel. Petitioners also alleged that by enabling financial institutions to close accounts of holders who refuse to fill out or sign forms in connection with the Amendment Law, the petitioners’ right to own property was violated. (Id. ¶ 31.)


  1. Discrimination

Melcer rejected the claim that US account holders were discriminated against in comparison with those not subject to the reporting requirements. In his view, the information sharing with US tax authorities increases equal application of tax obligations, thereby eliminating the distinction between taxpayers who paid tax and those who evaded their tax obligations. (Id. ¶ 57.)

  1. Property Rights

Melcer similarly rejected the claim that the Amendment Law violated the property rights of account holders who refuse to fill out forms. The choice is given to the customer, he determined, to comply and avoid closure of the account. (Id. ¶ 60.)

  1. Right to Privacy

Determining that the Amendment Law harms account holders’ right to privacy, Melcer nevertheless concluded that the Amendment Law was constitutional as it complied with the requirements under section 8 of Basic Law: Human Dignity and Liberty (the limitation clause). According to this section, the violation of basic rights protected under the Basic Law could be authorized if the violation is based on a law that “corresponds to the values of the State of Israel, … serves an appropriate purpose, and [is limited] to an extent that does not exceed what is required.” (Basic Law: Human Dignity and Liberty, §§ 8 & 1A, SH 5752 No. 1391 p. 150, as amended (unofficial English translation), Knesset website; HCJ 8886/15 ¶ 61.)

(a) Correspondence to the Values of the State of Israel

The alleged violation of rights was based on the implementation of the Amendment Law. Considering that the parties did not elaborate on the issue of whether the Amendment Law corresponded to the values of the State of Israel as a Jewish and democratic state, Melcer assumed that they did not contest this point. (HCJ 8886/15 ¶ 64.)

(b) Appropriateness of Purpose

Citing precedent decisions previously rendered by the Court, Melcer reiterated that legislation is viewed as serving an appropriate purpose under the limitation clause if the legislation reflects an intention to achieve important public interests. Similarly appropriate would be legislation designed to promote human rights, “including by determining a reasonable and fair balance between rights of individuals that have contradictory interests, in a manner that will lead to a reasonable compromise by granting optimal rights to every individual.” (Id. ¶ 65 (citing HC 4769/95 Menachem v. Minister of Transportation, 57(1) PISKE DIN (PD) (Supreme Court decisions) 235, 264 (2002) (in Hebrew)).)

The first and principal objective of the Amendment Law, according to Melcer, is to ensure that state authorities and financial institutions in Israel apply the provisions of FATCA. According to the respondents, ensuring compliance with FATCA is essential to prevent the imposition of sanctions on financial institutions in Israel under FATCA’s provisions. (HCJ 8886/15 ¶ 66.)

Melcer further noted that an additional objective of the Amendment Law is to enable the State of Israel to take part in the automatic information exchange among countries to fight tax evasion and comply with the OECD Protocol on this issue. The Amendment Law would enable Israeli tax authorities to receive information from US tax authorities on taxable income gained by US account holders and strengthen Israel’s abilities to pursue tax evaders outside of its borders. It would also enable Israel to comply with its international commitments. (Id. ¶¶ 67–68.)

The objectives of increasing international cooperation to combat tax evasion by establishing mechanisms for transparency and information exchange, according to Melcer, were appropriate objectives in evaluating the constitutionality of the Amendment Law. (Id. ¶ 69.)

(c) Proportionality

Melcer then addressed the issue of proportionality—namely, whether the Amendment Law exceeds what is required to reach its goals. He held that the Amendment Law was based on rational considerations and was drafted in a way that fulfills the main objective of FATCA. (Id. ¶¶ 72–76.)

Reflecting on the scope of the Amendment Law’s application, Melcer further decided that it was narrower than the general FATCA’s agreement as it applies to a smaller percentage of accounts in comparison with other countries’ agreements with the US. (Id. ¶¶ 80–81.)

In negotiating with the US, Melcer noted, Israel had managed to exclude a number of bodies and financial products from FATCA’s purview, including pension funds, mutual funds, accounts held by lawyers and accountants, etc. Additionally, the implementation of FATCA under the Amendment Law would be carried out by authorized Israeli authorities, thereby enabling the State of Israel to participate in, supervise, and benefit from the process.  (Id. ¶¶ 78–82.)

In Melcer’s opinion there was no alternative to the Amendment Law, as noncompliance with FATCA would cause greater harm to the Israeli financial system and public than compliance. Melcer explained that refraining from implementing FATCA provisions by Israeli financial institutions would prevent such institutions from maintaining financial relationships with foreign financial institutions. Under such circumstances Israeli financial institutions would be categorized as “noncompliant” and subject to a general deduction of 30% at the source. It is reasonable to believe, Melcer concluded, that if Israel had not signed the bilateral agreement for FATCA’s implementation and adjusted its laws accordingly, significant harm would be inflicted on all account holders in Israel and likely cause serious damage to the Israeli economy and the image of the State of Israel, which would be identified as a country that encourages tax evaders. (Id. ¶ 85.)

In consideration of the reasons described above, Melcer concluded that the benefit offered by the Amendment Law exceeds the harm it allegedly causes and was proportional in accordance with the limitation clause requirements. The Amendment Law was therefore valid. (Id. ¶ 86.)


Having rejected various challenges to specific arrangements under the Amendment Law, Melcer reaffirmed the Court’s rejection of the petition and held that

[by reaching this decision] we have achieved a proper and proportional balance between the need to develop computerized information systems and realize the goal of Israeli cooperation in the global trend of automatic information exchanges among states, and protection of the privacy of an account holder (whose account was classified as reportable), who would be interested in appealing the decision of the financial institution, and this without the information [regarding such an account] being transferred to the US tax authorities before a final decision has been adopted. (Id. ¶ 105 (translation by author).)

The petition was therefore rejected. (Id. ¶ 106.)

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