Israel

Tax benefits for new immigrants to Israel

New immigrants and long-absent returning residents (individuals who return to Israel after more than 10 consecutive years of being foreign residents for Israeli tax purposes (“returning residents”)) are entitled to exemption from Israeli income tax on foreign-sourced income and on capital gains from the sale of foreign assets (the “Exemption”) for a 10-year period from their transfer of residence date (the “Exemption Period”), unless they have requested otherwise.

The Exemption applies to any foreign-sourced income: passive income, earned income (such as employment and business income) and capital gains on the sale of foreign assets. The Exemption does not apply to assets received as a tax-free gift from an Israeli resident.

It should be noted that the capital gains tax Exemption on the sale of foreign assets is subject to the condition that the sale is made within 10 years from the date of change of residency. Having said that, where such an asset is sold more than 10 years after the change of residency, the capital gain is apportioned on a linear basis, such that only the gain attributable (on a linear basis) to the period after the expiration of the 10-year Exemption Period is taxable.

The Exemption does not apply to Israeli-sourced income or capital gains (e.g., an employee who performs their job while they stay in Israel will not be entitled to an exemption on the income allocated to the work performed in Israel). In addition, the Exemption does not apply to a permanent establishment in Israel created by new immigrants and returning residents for foreign companies.

Certain additional benefits are granted to new immigrants and returning residents during the Exemption Period, including the following:

• Management and control of foreign companies. The residency of a company under Israeli tax law is determined, inter alia, on the basis of the “management and control” test. Foreign companies, held by new immigrants and returning residents will not be considered “managed and controlled” from Israel, merely because of the immigration of their controlling members to Israel, for a period of 10 years from such immigration.
• Controlled foreign company. If a foreign company is classified as a controlled foreign company (CFC), the undistributed profits of such company, in a tax year, which are allocated to an Israeli shareholder who is a controlling shareholder (generally, a shareholder that holds 10% or more of one or more of the “means of control” of the CFC), will be deemed as being distributed as a dividend to the Israeli resident shareholders in the same tax year, and will be taxed accordingly (the applicable tax rate is up to 33% as of 2024). New immigrants and returning residents are excluded from the term “Israeli resident” for CFC purposes, and a foreign company will not be considered as a CFC for Israeli tax purposes just because of the holdings of a new immigrant during the 10-year Exemption Period.
• Foreign occupation companies. Generally, a foreign company used by Israeli residents in order to provide services outside of Israel is considered, under certain circumstances, as a foreign occupation company (FOC). Part of the income of an FOC, if derived from services provided by Israeli residents, is subject to tax in Israel. New immigrants and returning residents are not affected by this regime during the 10-year Exemption Period.
• Foreign currency deposits in Israeli bank accounts. Under certain circumstances and conditions, interest received by a new immigrant in respect of a foreign currency deposit in a special kind of Israeli bank account is exempt from tax for a 20-year period following that immigrant’s relocation to Israel.

Until recently, new immigrants and returning residents were also exempt from reporting obligations on their exempt foreign-sourced income and on capital gains for the same Exemption Period.

A new law, enacted on April 2, 2024, cancelled the exemption from reporting obligations for new immigrants and returning residents who will arrive in Israel after January 1, 2026. Although such new immigrants and returning residents will still be entitled to tax exemption on their foreign-sourced income and capital gains, they will no longer be entitled to a reporting exemption and will be subject to the reporting obligations in the same way as any regular Israeli resident, including on their foreign-sourced income and gains and despite such income being exempt. The scope of the reporting obligation is not clear at this stage.

Accordingly, individuals who are considering immigrating to Israel in the near future should take into consideration that, if they immigrate prior to December 31, 2025, the new law will not apply to them, and they will retain the reporting exemption on foreign income and capital gains.

It is important to clarify that the tax exemptions on foreign-sourced assets and income for new immigrants and returning residents will remain intact, and it is just the exemption from reporting that was cancelled.

Tax benefits to trusts of new immigrants to Israel

In certain cases, trusts with settlors or beneficiaries who are new immigrants and returning residents can enjoy the same Exemption from Israeli income tax on the trust’s foreign-sourced income and capital gains from the sale of foreign assets during the new immigrants’ 10-year Exemption Period.

Generally, the taxation of a trust for Israeli tax purposes is determined according to its classification for Israeli tax purposes, which is based on the tax residency of the settlors and beneficiaries. There are five classification categories of trusts, each with specific conditions that should be met.

The residency of the trustee does not affect trust taxation in Israel, and a trust will be subject to the Israeli tax net if it has at least one Israeli settlor or beneficiary, even if the trustee is a foreign trustee. Additionally, all types of trusts are subject to tax in Israel on Israeli-sourced income and capital gains. Accordingly, the different classifications of trusts pertain to the overall reporting obligations of a trust and to its tax obligations with respect to non-Israeli-sourced income.

As a general rule, when an Israeli resident trust has: (1) a settlor who is a new immigrant; and (2) all the beneficiaries are either new immigrants or non-Israeli residents, then the trust should be entitled to the new immigrants’ benefits, and should be exempt from Israeli tax on foreign-sourced income as well as from capital gains tax on the sale of foreign assets, during the settlor’s Exemption Period, but only as long as all the beneficiaries are also in their Exemption Period or are foreign residents.

Since the taxation of trusts in Israel is a complex issue, the entitlement of a trust which has a new immigrant Israeli resident settlor or beneficiaries to the 10-year Exemption should be specifically examined based on the trust’s classification for Israeli tax purposes and the individual circumstances.

It should be noted that, in accordance with the cancellation of the general exemption for new immigrants from reporting obligations, the reporting exemption for trusts entitled to the Exemption, as well as for settlors and beneficiaries of such trusts who are new immigrants or returning residents, has also been cancelled. As a result, trustees of such trusts will be subject to certain reporting obligations regarding the creation of trusts by or for the benefit of new immigrants and returning residents or regarding the entry of such trusts into the Israeli tax system following the immigration of the settlor or beneficiary to Israel, as well as reporting obligations with respect to the trust’s exempt income and gains. It should be noted that for Israeli tax purposes, the default rule is that the trustee of a trust, in their capacity as trustee, is the taxpayer and is the person responsible for reporting in Israel.

Introduction of beneficial ownership reporting for Israeli companies and trusts

New legislation enacted on April 2, 2024 introduced two key amendments in connection with reporting of beneficial owners of Israeli companies and trusts: reporting in the annual tax return and reporting by Israeli trustees.

Reporting the beneficial owner in the annual tax return. Israeli companies and trusts are now required, as part of their annual tax return, to report the identity of their “controlling persons” down to the level of individuals and to specify the tax residence of each of these. In general, for companies, this includes those individuals who have the ability to direct the activity of the company as well as those who hold at least a 25% interest in the company. For trusts, this term includes the settlors, beneficiaries, trustees and protectors.

This information will be submitted to the Israeli Tax Authority (ITA) but will not be included in any public register. The new legislation will apply with respect to tax returns required to be submitted by Israeli companies and trusts for the tax year 2025 and onwards.

Reporting by Israeli resident trustees. An Israeli resident trustee is required to report the identity of the “controlling persons” of the trust down to the level of the individuals and to specify their tax residencies, even if the trustee is not obligated to submit an annual tax return (e.g., if the trust is a non-Israeli resident trust). This reporting must be done within 90 days from the date of the trust’s settlement or within 120 days of January 1, 2026 if the trust was settled prior to the date on which the new law was published.

There is no division in Israel between national and local legislation. There is one national government and one national court system.

A recent District Court case (T.A. 21579-01-20 Meir v. Eilat Assessing Officer) addressed the limits of legitimate tax planning that utilizes the new immigrants’ exemption. The ITA challenged the taxpayer’s entitlement to the exemption, one claim of several being that it was abused. The District Court ruled against the ITA, emphasizing the purpose of the exemption, which is to encourage the immigration of a qualified population to Israel, and stressed that utilizing an exemption provided under law is not necessarily an abuse of the law. Furthermore, operating through a foreign company, even an offshore company, can be considered legitimate tax planning.

There is one national court system in Israel; therefore, the division into national and local case laws is not relevant to Israel.

The practice of taxation of private clients and trusts has emerged and evolved in recent years. The combination of substantial immigration of new high-net-worth individuals and families to Israel and the increasing number of successful Israeli high-tech entrepreneurs has resulted in substantial and continuing developments of this practice in Israel.

Although the taxation of trusts in Israel is a complex issue, the substantial influx of high-net-worth individuals and families from common law jurisdictions has developed and enhanced trust taxation practice in Israel, as well as other legal and tax services offered to foreign trustees, family offices and trust companies representing high-net-worth families.

Trusts established by high-net-worth individuals and families in Israel are commonly used as an estate tax protection structure, whether as standalone trusts or in conjunction with a special Underlying Trust Holding Company, which serves as a “blocker” for estate taxes in other jurisdictions. In addition, certain types of trust may provide asset protection from creditors, as well as nuptial protection (from spouses). As the Israeli Inheritance Law is conservative, high-net-worth families also use trusts as a vehicle to implement complex estate and inheritance arrangements.

Increasing international philanthropic activity in Israel has also contributed to the development of private client taxation practice. Alongside the achievement of philanthropic purposes and legacies, high-net-worth individuals and families aim to streamline their worldwide charitable structures by creating efficient and tax-optimized cross-border philanthropy networks.

Travel restrictions during the COVID-19 pandemic resulted in tax issues and residency exposures for many individuals. For example, due to COVID-19 movement restrictions, individuals who were staying in Israel temporarily found themselves staying in the country for longer periods, individuals who ceased or planned to cease being Israeli residents found themselves forced to stay, and cross-border workers who held management positions in foreign companies who did not reside in Israel found themselves forced to stay in Israel for long periods.

While the OECD published guidance on the application of international tax treaty rules in these circumstances, the position of the ITA is that the OECD guidance is relevant only for the purpose of the interpretation of double tax treaties and does not apply to domestic law. In addition, the ITA did not issue any formal guidance of its own on these issues.

We expect that residency disputes involving pandemic-related circumstances will become more common in the next few years as part of the tax audits concerning the tax years 2020–2022.

An important amendment (number 18) of the Succession Law 5725-1965 (“the Succession Law”), which is the main legislation that regulates succession matters in Israel, came into force on July 1, 2023 (“the Amendment”).

Pursuant to the Amendment, the authorities of the Registrar of Inheritance were expanded and now the Registrar of Inheritance is authorized to grant probate and/or succession orders, as long as no objection has been filed, in the following matters, which previously were under the jurisdiction of the Family Court:

• oral wills;
• wills where there is a fault or shortcoming in their form; and
• cases where the deceased’s last place of residence was outside of Israel.

The Amendment also enables the Registrar of Inheritance to approve the existence of a will by its copy (formerly this was in the authority of the Family Court). Furthermore, an option to file a probate order that was granted outside of Israel by a judicial authority or other competent authority can now replace the filing of the original will (where the original will is outside of Israel and it is not possible to submit it), provided that it is properly verified. This is in addition to the option of submitting a certified copy of the will.

In addition, regarding the supervision of the Guardian General on Estate Executors, the Amendment has significantly reduced the scope of the matters under the supervision of the Guardian General. Under the Amendment, in most cases there will be no supervision by the Guardian General.

There is one legislative system in Israel that applies throughout the entire country; therefore, the division to national and local legislation is not relevant to Israel.

In a judgment granted by the Family Court in Tel Aviv on Estate File 18961-02-22 M v. CH (published in Nevo, June 6, 2024) the court ruled that text messages sent by a deceased who was an Israeli citizen and foreign resident before his passing, while he was hospitalized in isolation due to COVID-19 in his country of residence, cannot be recognized as his handwritten will or his oral will. However, the court noted that if the deceased had recorded voice massages it could have been more helpful for determining if the criteria for an oral will have been met.

There is one national court system in Israel; therefore, the division into national and local case laws is not relevant to Israel.

The question of the correct manner by which to bequest digital assets and rights to such assets, and the definition of such rights, is an issue that has not yet been regulated by legislation and which has prompted discussions in the legal community. On January 1, 2024, the Succession Bill (Amendment: the Succession of Digital Rights), 5784-2024 (the “Bill”) was filed with the Knesset (the Israeli Parliament). The Bill proposed to add the right to operate digital accounts in the possession of the testator as one of the subjects that the testator may bequeath in a will. The Bill has not yet been legislated and may change substantially as part of the legislative process. It is possible that this issue will not be legislated on at all.

In direct continuation of the digitalization process that began with COVID-19, at the end of 2023, a new Amendment of the Succession Regulations (Amendment), 5784-2023 (“the Regulations’ Amendment”) came into force. As part of the Regulations’ Amendment, the notice on the submission of probate and/or succession orders shall be published on the Guardian General’s website instead of in a daily newspaper (in addition to the publication in the public dockets). Additionally, the inventory and reports that estate executors file with the Guardian General shall be filed online.

In January 2024, a new online service became available on the Registrar of Inheritance Affairs website. The new service allows anyone to receive a notice regarding the filing of an application for a probate or succession order concerning a specific decedent. This service enables anyone who wishes to contest a will, for example, to be notified when such a will is submitted for probate.

The service is provided by way of straightforward registration which is valid for two years.

There is one legislative system in Israel that applies to the entire country; therefore, the division into national and local legislation is not relevant to Israel.

In a judgment granted by the Supreme Court in ALA Family Proceeding 7884/23 John Doe v. Jane Doe (published in Nevo, September 10, 2024), the Supreme Court held that spouses that signed reciprocal wills prior to amendment number 12 of the Succession Law, i.e., before August 1, 2005, will not be subject to that amendment. Furthermore, if such wills did not include a provision prohibiting them from changing or amending the wills, the surviving spouse is authorized to change his or her will.

There is one national court system in Israel; therefore, the division into national and local case laws is not relevant to Israel.

Since the enactment of the European Directive allowing people holding more than one nationality to choose any of their nationalities’ laws to apply to their estate, foreign residents who have Israeli citizenship tend to choose Israeli law as the applicable law for their estate as the Israeli law has testamentary freedom. However, we strongly advise people to carefully check and consult with an Israeli lawyer to understand all the potential ramifications.

Not applicable.