In two weeks time, Israelis will go to the polls, in what is expected to be a closely contested election. How should private banks navigate the Israeli wealth management industry in the face of such uncertainty, asks Mishelle Thurai.
Wealth is rising in Israel. In 2018, GlobalData reported there were 33,420 high net worth individuals (HNWIs) in Israeli.
The data firm expects this figure to grow 13% to 37,880 by 2022. Their wealth is due to grow at a faster rate. Total HNWI liquid assets currently stand at $129bn. GlobalData forecasts a rise 22% to $157bn.
These figures give hope to a private banking sector that is mostly home grown. Unlike many other fast growing nations that have seen foreign private banks meet a rise in wealthy individuals, local banks dominate the Israeli market. Bank Leumi, the Israel Discount Bank and Bank Hapaolim command most of the market share. Wealth managers such as Onyx Wealth Management, Anglo Capital Limited (ACL) and Clarity Capital KCPS serve the wealthier set.
Though domestic players dominate private banking in Israel, several foreign private banks maintain a foothold in the country including UBS, Credit Suisse and JPMorgan.
Is there wealth in Silicon Wadi?
Much of Israel’s new found wealth comes from the technology sector according to GlobalData. In 2016 it was estimated 30% of all HNWIs in Israel owed their wealth to the technology and telecoms industry, a figure that is growing 11% year-on-year.
This is understandable. Roughly 4.5% of Israeli’s GDP is invested in research and development and more than 300 global technology companies now have a foothold in Israel. This has fostered a culture of tech startups in the country: around 6,000 are thought to exist within one hour’s drive of Tel Aviv, an area dubbed Silicon Wadi (wadi meaning valley in Arabic).
This high concentration of startups has created a cycle of wealth in the region. In 2017, $6bn worth of startups were sold with most of that cash flowing into the pockets of Israeli HNWIs, or creating them in the process. That same year the industry raised a combined $5.2bn in venture financing, a large percentage of that derived from prior tech liquidity events.
However, the latest data from Start-Up Nation Central, a body promoting technology in Israel, shows that the number of startups being created has fallen since 2014, while the number of closures has also risen.
Employment in the sector has fallen too and many have criticised the mostly foreign investors for cashing in early on their startup investments. Many more are sold to foreign firms than nurtured on home turf.
Is Israel a tax haven?
In recent years, Israel has attracted more and more foreign HNWIs. The country’s high-income economy and low tax rates attract many wealthy individuals and families that can claim Jewish heritage (the critical requirement to become an Israeli citizen).
After Russian billionaire Roman Abramovich was denied residency to both the UK and Switzerland last year he was granted Israeli citizenship, instantly making him Israel’s richest person, with a net worth of $14.9 billion according to Bloomberg. Many others have followed.
This has seen an increase in the number of family offices headquartered in Israel. Sharon Hanam & Co. and Fidelis are examples of local family offices serving the ultra HNWI segment.
Israel’s reluctance to comply with the CRS (Common Reporting Standards) has also been a factor in attracting wealth from other parts of Europe and Russia as well as financial centres such as Monaco and Switzerland.
Israel agreed to automatically exchange financial information under the CRS standards in 2014. However, it has never honoured the agreement.
In the middle of this year, Israel will come up for a biennial review by the OECD’s 154-member Global Forum on Transparency and Exchange of Information for Tax Purposes. It can expect tough questions over its CRS compliance.
A report by the NGO, Tax Justice Network, said, “There is a real risk that if Israel does not improve its ability to collect and exchange information, it is likely to enter the lists of non-cooperative countries maintained by the OECD and the European Union”. This could even lead to a lowering of Israel’s credit rating the report said.
While moving money to a non-CRS country might be attractive to some foreign HNWIs, Israel’s own ‘Milchan Law’ makes things even rosier.
The 2008 law, known as Amendment 168, gives new immigrants and returning residents an exemption from paying taxes on income earned abroad, and even on reporting that income, for a period of 10 years.
Public pressure is weighing on the Knesset (Israel’s parliament) to revoke the amendment. Last year the Israel Tax Authority’s director general, Moshe Asher, said that Israel was one of the world’s “most generous tax havens” as a result of the legislation.
Supporters of Amendment 168 have argued that in fact it is the cause of many new immigrants in Israel, and countries in Europe have similar laws. Moreover, it helps bring the funding that tech startups so desperately need.
Another supporter of the Amendment is Israel’s prime minister Benjamin Netanyahu, who has been accused by Israeli police for attempting to extend the 10 year exemption to 20 years, mostly for the benefit of two businessmen, Arnon Milchan and James Packer.
Israel’s attorney general has said he plans to indict Netanyahu on these and other graft charges. Netanyahu has denied allegations.
How will the scandal affect the election?
These allegations against the prime minister will play out during the run-up to Israel’s elections, which take place on 9th April.
Netanyahu is seeking his third consecutive re-election having served as prime minister for nearly a decade. His party Likud is currently down in the polls but any election victory would not guarantee a government. The Knesset is fraught with a myriad of parties making a coalition essential to governing the country.
Among those vesting their interest in any coalition will be Israel’s wealthy, both local and foreign. Changing Israel’s tax laws is a gambit on whether the country remains a tax haven or not.