How is interest income from an Israeli bank account taxed for a non-resident foreigner?

The withholding rules for interest income are set out in Sections 125C and 161A of the Income Tax Ordinance 5721-1961. Israeli banks are required to withhold tax on every interest payment made to a non-resident account holder — the withholding operates within the bank's own systems and requires no separate action by the account holder. The distinction between deposit types matters: savings accounts with CPI linkage carry a lower 15% rate because the inflation-adjustment component of the return is not taxed at the standard rate. The 25% rate applies to standard shekel savings accounts, term deposits, and foreign-currency deposits. These rates function as a final tax for non-residents — the withheld amount fully discharges the Israeli tax obligation on that interest, and no Israeli tax return needs to be filed unless the non-resident has other Israeli-source income requiring reporting.

Non-residents who believe they qualify for a reduced treaty rate must act before the interest is credited. The process requires applying to the Israel Tax Authority for a withholding certificate (tofes bitzua nikui) supported by a certificate of tax residency from the home-country tax authority. Without that certificate in place, the Israeli bank is legally required to withhold at the full statutory rate. Applying retroactively is possible — a refund claim may be submitted within five years — but the process requires Hebrew-language correspondence with the ITA and typically takes 6–18 months to resolve. A common compliance error for non-residents who open accounts to manage Israeli rental income or property proceeds is failing to notify the bank of their non-resident status, which causes the bank to apply incorrect withholding rates. Non-resident status must be declared at account opening and updated whenever residency changes.

From the full guide: Opening a Personal Bank Account in Israel as a Foreigner: A Practical Guide

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