Israel’s tax system for Israeli tax residents is based on worldwide taxation. For foreign tax residents, as a general rule, Israeli taxes are imposed on their Israeli source income and gains. Further, contrary to tax systems in many jurisdictions internationally, the Israeli tax system is based on withholdings and while there is an annual tax reporting obligation, there are many exceptions to said obligation. As a result, many Israeli residents do not file annual tax returns. 

In addition, new immigrants and long-term returning residents are subject to a special tax regime as mentioned further below. 

As of 2022, the personal income tax rates are as follows:

• Employment income: 10-47% based on progressive rates, depending on the income amount.
• Interest income: 15-25%.
• Capital gains: 25-30% (depending on the % of ownership in the company which is the source of the capital gain). 
• Surtax: An additional tax at the rate of 3% over taxable income in the approximate amount of USD 195,000 is imposed annually on individuals. 
• In addition, there are compulsory payments to the national insurance agency which also covers health insurance. The amounts differ depending on a few factors such as an individual’s employments status, age, marital status and the number of children.   
• Wealth transfer taxes: no estate or inheritance taxes are imposed in Israel. Also, no gift taxes are imposed unless the gift is in kind to foreign residents resulting in capital gains taxes. 

Taxation 

A public committee in the field of international taxation was appointed by the Israel Tax Commissioner in 2021 and comprised governmental tax experts and private sector tax experts, including from the Bar and CPA associations. The purpose of this committee was to simplify as well as grant certainty and efficacy to the Israeli tax system.       

The committee’s report was submitted to the Tax Commissioner in November 2021 and covered various areas including residence, exit taxes, new immigrant tax benefits, CFC rules, relief from double taxes on foreign source income, foreign residents and their tax obligations in Israel and other areas relevant to international taxes.  

This chapter will address a few key points of the report that may be relevant to an international audience with an emphasis on the fact that these are recommendations that have not yet been legislated.

Current legislation: residence

As of January 1, 2003, generally, the tax system in Israel taxes Israeli resident individuals on their worldwide income subject to credits granted in Israel for certain taxes paid in a foreign country in accordance with the provisions of the Tax Ordinance [New Version] (Ordinance) and any relevant tax treaty. 

The Ordinance provides that Israeli residence of individuals is determined based on a qualitative and a quantitative test as set forth below:

• An individual whose center of life is in Israel will be considered an Israeli resident. Criteria reviewed in a determination of one’s center of life includes, but is not limited to, a permanent residence/home of the individual and the individual’s family members, the individual’s place of business or employment, the individual’s place of vital financial interests and activity in organizations or various institutions (the “qualitative test”).
• A rebuttable presumption (the presumption may be rebutted by the Tax Authority or the taxpayer) of Israeli residence is created where an individual is present in Israel for at least 183 days in any tax year or is present in Israel for at least 30 days in a tax year and a total of at least 425 days cumulatively together with the immediately preceding two tax years (the “quantitative test”). A ‘day’ includes any part of a day 

In addition, there is a subjective test of where an individual views their center of life. While this is not a strong test, in some cases it can be a ‘tie breaker’.

The Ordinance further provides the definition of a foreign resident by two options:

• Any individual who is not an Israeli resident.
• An individual is a foreign resident if, over a period of four years, two of the four cumulative tests are satisfied:
  • In the first and in the second year, the individual was present abroad at least 183 days in each year.
  • In the third and fourth year the individual’s center of life was not in Israel. 

The center of life test has resulted in disputes between the Tax Authority and taxpayers, some of which have led to extensive litigation and high-profile precedents. As a result, the committee's objective was to create certainty in the determination of residence by way of irrebuttable presumptions/conclusive determinations of residence, in Israel or abroad. Notwithstanding, the Committee decided to maintain the center of life test, as a rebuttable presumption, where the definitions of an Israeli resident or a foreign resident do not apply.

The Committee's Recommendations 

The Committee’s Recommendations relating to Israeli residence of individuals for tax purposes are set forth below. These are each, as a stand-alone, conclusive evidence of Israeli residence:

• An individual is present in Israel at least 183 days per year during two consecutive tax years. Residence will commence in the first year in which the individual was present at least 183 days.
• An individual is present in Israel at least 100 days in any tax year and a total of at least 450 days cumulatively together with the immediately preceding two tax years. This presumption will not result in the individual being an Israeli resident if the individual was present in a treaty country at least 183 days in each of the relevant tax years reviewed subject to providing a residence certificate for tax purposes in the treaty country for the relevant tax years.   
• An individual is present in Israel at least 100 days in any tax year and the individual's spouse or cohabiting partner is an Israeli resident.

In addition, the Committee’s Recommendations include the presumptions listed below which will be irrebuttable/conclusive evidence of the individual’s residence abroad:

1. An individual present in Israel less than 30 days in every tax year during the last 4 consecutive tax years will be considered a foreign resident from the first tax year.
2. An individual present in Israel less than 30 days in every tax year during the last 3 consecutive tax years will be considered a foreign resident from the second tax year. 
   These irrebuttable presumptions (1 & 2) will apply if the individual is not present in Israel at least 15 days in the first month of the first tax year or the last month in the final tax year.
3. An individual and spouse, present in Israel less than 60 days in each tax year during a period of 4 consecutive tax years, will be considered foreign residents from the first tax year.
4. An individual and spouse, present in Israel less than 60 days in each tax year during a period of 3 consecutive tax years, will be considered foreign residents from the second tax year.
   These irrebuttable presumptions (3 & 4) will apply if the individual and spouse are not present in Israel at least 30 days in the first 2 months of the first tax year or the last 2 months in the final tax year.
5. An individual and spouse, present in Israel less than 100 days in each tax year during a period of 4 consecutive tax years, will be considered foreign residents from the first tax year provided that the individual and spouse were present in a treaty country in each tax year at least 183 days and provided a residence certificate for tax purposes in the treaty country for the relevant tax years. 
6. An individual and spouse, present in Israel less than 100 days in each tax year during a period of 3 consecutive tax years, will be considered foreign residents from the second tax year provided that the individual and spouse were present in a treaty country in each tax year at least 183 days and provided a residence certificate for tax purposes in the treaty country for the relevant tax years is presented. 
   These irrebuttable presumptions (5 & 6) will apply if the individual and spouse are not present in Israel at least 50 days during the first 100 days of the first tax year or the last 100 days of the final tax year.

New immigrants/Israeli citizens returning to Israel 

The Ordinance provides special rules for certain residence categories. These include the new immigrant, the long-term returning resident and the returning resident. For the purpose of this chapter, an individual who has never been an Israeli resident in the past and moves to reside in Israel for the first time will be referred to as a “new immigrant”. 

The Ordinance provides, as a general rule, that an individual who has become an Israeli resident for the first time after 2007 is entitled to a tax exemption in Israel for a period of ten years, on all such individual’s foreign source income. This includes income such as active or passive income and capital gains; all as long as the income is derived abroad (the "New Immigrant Benefits"). In addition, new immigrants are not required to file tax returns in Israel in connection with their foreign source income during the 10-year exemption period. The reporting exemption is a topic of great concern to the Tax Authority and a constant demand for its abolishment is voiced, including internationally. The committee's recommendation is that the reporting exemption for new immigrants be abolished while maintaining the tax exemption. 

The Taxation of Trusts

The committee recommended further deliberations and recommendations specifically on the taxation of trusts. 

The Ordinance sets forth the following five categories of trusts.

1. Israeli residents trust (IRT)

The IRT, at the time of its settlement, requires that:

• at least one settlor and one beneficiary are Israeli residents; and
• during the tax year, at least one settlor or one beneficiary is an Israeli resident.

The IRT is the default category for any trust that does not match the definition of any other trust under the Ordinance.

The IRT is subject to annual reporting in Israel and is taxable on its worldwide income. Distributions to beneficiaries are not subject to taxes once the tax payments are made by the trustee. 

2. Foreign beneficiary trust (FBT)

The FBT is settled by an Israeli resident for the benefit of individual foreign residents. 

The trust must meet all of the following:

• it is irrevocable;
• all of the beneficiaries are identified individuals and are foreign residents; and
• at least one settlor is an Israeli resident.

If all above conditions are met upon the settlement of the trust, the trust deed must provide that no Israeli beneficiary can be added as a beneficiary of the trust and the settlor must declare that there is no Israeli resident beneficiary or an Israeli resident who may be appointed a beneficiary if they cease to be an Israeli resident. 

If the assets and income of a FBT are derived from sources abroad, there is no taxation in Israel. If the assets and income are derived from sources within Israel, the trust is taxable in Israel. The trust is subject to reporting obligations upon its settlement and annually as confirmation of the beneficiaries’ residence abroad. Exit tax may be applicable upon the settlement of assets in the trust.

3. Foreign resident trust (FRT)

All settlors and all beneficiaries of a FRT are and have always been non-residents of Israel. Recognized Israeli charitable organizations, as beneficiaries, do not change the trust categorization.

The FRT is treated as a foreign resident for tax purposes and is subject to reporting and tax obligations in Israel only to the extent that it holds Israeli assets or derives income from Israeli sources.

4. Israeli resident beneficiary trust (IRBT)

The IRBT is settled by a non-resident of Israel where at least one beneficiary is an Israeli resident.

Two additional criteria must be met for an IRBT to be an Israeli relatives’ trust. First, the settlor and the beneficiaries must be immediate family members. Second, the settlor must be living.

If all criteria are met the IRBT is subject to tax obligations as follows:

• The default option – distributions to Israeli resident beneficiaries are taxed at the rate of 30% of the distribution unless the trustee provides evidence of the income and capital portions of the distribution. A distribution of capital is not taxable. Note that the Tax Authority’s position is that income is distributed first. 
• The trustee may opt to subject trust income allocated to an Israeli resident beneficiary to tax at the rate of 25% in the tax year in which the income is accrued. If the tax payment is made annually, distributions to beneficiaries are not taxable.

Either option chosen by the trustee, either actively or by default, is irreversible.

If even one of the above additional criteria is not met, the IRBT trust will be taxed as an IRT.

5. Testamentary trust

A testamentary trust is settled under an Israeli resident’s last will and testament and subject to the categories above.

Anti-Money Laundering 

The Anti Money Laundering Law 2000 (AML Law) is aimed at the prevention of money laundering, through means such as the imposition of due diligence and know your client requirements on professionals in the private sector. These professionals include banks, credit card companies, investment institutions and lawyers and accountants who provide a business service to clients. The AML Law provides for AML offences to result in criminal prosecutions with between at least 5-10 years of imprisonment as well as fines and asset confiscation if the assets are obtained through criminal activity under the AML Law. The AML Law allows for international cooperation between Israel and foreign authorities in the area of money laundering and terrorist financing. 

In March 2022, the Ministry of Justice published a draft bill amending the AML Law (AML Proposed Amendment) seeking to grant the Anti-Money Laundering Authority supervisory and enforcement authority over financial service providers in the area of money laundering and terror financing. This is not yet legislation but is expected to be passed in the next few months.  

Israel is a small country where there is no division between a federal/state or a national/local system but rather one national government and a national court system.

There have been court precedents relating to the question of tax residence over the past few years. The case of Babachanov issued in 2021, reviewed the question of tax residence where the family unit and thereby the center of life is split between spouses in different jurisdictions. The case involved a wife and children residing in Israel and a claim by the husband to his center of life in a different country, including a cohabitation relationship in said country with another woman.

The court, not impressed by the facts, found the husband to have had his center of life in Israel due to factors such as business activity in Israel, presence in Israel, a close relationship with his wife and children in Israel and therefore taxable in Israel.

Israel is a small country where there is no division between a federal/state or a national/local system but rather one national government and a national court system.

The issue of residence and the rebuttable presumptions under the current legislation has resulted in litigation over the past few years. If passed as drafted, the Ordinance will provide clearer guidance and certainty on this point.  

Questions of residence in Israel during the COVID-19 pandemic by those that were unable to travel have been arising and will continue to arise. One of the areas where this issue will be most relevant relates to new immigrants. As mentioned above, the Ordinance provides that new immigrants are entitled to a tax exemption on their foreign source income.

Ethics- Attorney Duty of Confidentiality 

While not specifically connected to private client practice, an important ethics opinion was issued by the Ethics Committee of the Bar Association in January 2022 impacting the legal profession at large. The main recommendations of the Ethics Committee are:

• The requirement that attorneys review the service providers and the licenses of their computer software programs and the security of email servers.
• Protection and security of all digital activities including email, internet and desktop stations.
• Review of all software used by the attorney and the relevant security updates.
• Review and updates of passwords including remote access.
• Confirmation that video conferences and meetings are adequately secure to avoid access by third parties and/or unauthorized recoding without the knowledge of the participants.
• Regular participation in seminars on cyber security during 2022 and thereafter at least bi- annually.   
• Maintaining firm policy/guidelines for employees.
• Having a cyber-attack and/or privacy breach plan for a quick recovery therefrom, including a policy of client updates.

There is no recognition of foreign probate proceedings in Israel and orders granted by such proceedings abroad are invalid in Israel (The Attorney General v. Agam; C.A. 970/93). As a result, probate proceedings must be filed in Israel for the distribution of a foreign resident’s Israeli estate. For administrative purposes, it is advisable for foreign residents, during their planning, to execute a separate Israeli will to govern Israeli assets. Such a will is generally shorter than foreign wills as Israel does not impose estate or gift taxes and will allow probate in Israel to commence with the Israeli will without the need to obtain exemplified court copies of the foreign will from abroad. 

Israel is a small country where there is no division between a federal/state or a national/local system but rather one national government and a national court system.

The appointment of an executor is not obligatory for Israeli estates. The appointment process requires the consent of all heirs and a specific application for such appointment. While a named executor in a will is relevant, it is not a determinative factor in an appointment, in general, or in the appointment of the named individual. A court decision from July 2022 affirmed the court’s authority not to appoint an individual named in a will as the executor of the estate under the specific circumstances of the case. These facts included a complicated and untrustworthy relationship between the parties and the concern for no cooperation, conflicts and controversies and the need to have the court involved on a regular basis to resolve these conflicts. 

Israel is a small country where there is no division between a federal/state or a national/local system but rather one national government and a national court system.

Where a decedent executed a separate Israeli will, probate proceedings can commence in Israel more efficiently. In addition, the translation of a foreign will to Hebrew for the Israeli proceedings will be more expensive than the translation of a shorter Israeli will. Foreign estate planners advising clients owning assets in Israel should advise that clients receive local advice. 

Amendments in the areas of document execution were adopted during the pandemic by the Ethics Committee of the Israel Bar Association, initially as emergency and temporary solutions but thereafter remained valid for powers of attorney, affidavits and durable powers of attorney. There is no remote witnessing for wills or notarization of documents (which the Israeli Bar strongly opposes).

Execution of Durable Powers of Attorney

The completion, execution and filing of a durable power of attorney (DPA) are governed by the Legal Capacity and Guardianship Law 1962. The DPA allows a competent adult to appoint an agent to act on behalf of said adult in the event of the loss of legal capacity. The forms are completed by a duly qualified attorney who also witnesses and confirms the signatures of principals and agents. The executed forms are filed in a database of the Guardian General. 

As part of the remote signature witnessing passed during the pandemic, the attorney must witness and confirm the signature of a principal in person. The signature of agents may be witnessed remotely and a specific procedure must be followed when filing a DPA witnessed remotely. 

Execution of Powers of Attorney

Unlike the DPA, the validity of a power of attorney that is not a DPA will lapse upon the loss of capacity by the principal. The remote execution of a power of attorney in favor of an attorney, as agent, may be permitted if the client is an existing client of the attorney and both are present in Israel at the time of the remote execution. Any power of attorney in favor of third parties requires an in-person signature before an Israeli notary as mentioned above. 

Execution of Affidavits

The remote execution of affidavits is permitted pursuant to guidance issued by the Ethics Committee of the Israel Bar Association under the circumstance below:

• The client must be identified through an identification process via a website managed by the government (the Governmental Identification System).
• Both the client/affiant and the attorney are present in Israel at the time of the video call.
• The affiant presents an identification document during the video call.
• The attorney reads a warning to the client which the affiant confirms.
• The attorney must record the meeting pursuant to the affiant’s consent. The recording should include a declaration of the date, time, subject matter and the attorney's identifying details.
• The attorney receives a copy of the affiant’s identification document and the client’s signature on the document (whether by scan or signed digitally) and confirms said signature.

No foreign probate order is recognized in Israel to transfer assets owned by a foreign decedent. As such, a separate will relating solely to assets in Israel will simplify the local probate process.

Israel is a small country where there is no division between a federal/state or a national/local system but rather one national government and a national court system.

An important decision in the area of trusts, gifts, corporate laws, contract laws and other legislation was issued by the Tel Aviv District Court (Markus et al v. Pat; Tel Aviv Financial Court 20569-07-17). The case involved the applicant, David Markus, Deceased (the “Deceased”), whose heirs succeeded him in the procedure as of June 3, 2018 when he passed away (the "Applicants") who filed a claim for the court to assert that the respondent, Ms. Pat, had no proprietary rights in certain shares of the Applicants (the “Corporate Shares”) despite the formal registration thereof in her name. Following a long and arduous court process, the court found that the Corporate Shares were registered jointly in the Deceased’s and Ms. Pat’s name for the purpose of Ms. Pat holding said shares in trust without granting her proprietary rights in the Corporate Shares.  

Israel is a small country where there is no division between a federal/state or a national/local system but rather one national government and a national court system.

There is a trend for a separate will referring to Israeli assets.

As mentioned above, foreign probate court orders are not valid in Israel. Pursuant to the Succession Law 1965 (Section 137), (Succession Law), as a general rule, the governing law of the distribution of a foreign resident’s estate is the law of the decedent’s jurisdiction of residence. 

Also, the Succession Law (Section 140) provides that a last will will be recognized as a valid will in Israel under the following circumstances:

• If the will is valid under Israeli law.
• If the will is valid under the laws of the country where it was executed.
• If the will is valid under the laws of the country of domicile or residence of the testator at the time of its execution or at the time of the testator’s death.
• If the will is valid under the laws of the testator’s country of citizenship at the time of its execution or at the time of the testator’s death.

As to the legal capacity to execute a last will, it will be recognized if the will is valid under the laws of the testator’s country of domicile at the time of its execution.

As part of the probate proceedings, a legal opinion is submitted in Israel opining on the validity of a non-resident’s foreign will and the distribution of the Israeli estate. The issues of remotely executed wills and their validity in Israel will likely appear before the Israeli courts during local probate proceedings over the next few years when non-resident testators pass away with a valid remotely executed foreign will. 

1. As a foreign resident, will the last will executed in my country of residence be recognized in Israel? 

As no foreign probate order is recognized in Israel to transfer assets owned by a foreign decedent, the foreign last will will be submitted to probate in Israel. While it will be valid in Israel, if valid in the country of residence, the process will be simpler with a separate will relating only to Israeli assets. 

2. As a grantor/settlor of a foreign trust, what should I consider if one of my children, a beneficiary of the trust immigrates to Israel?

Any trust in which there are foreign resident beneficiaries together with Israeli resident beneficiaries will ultimately create an unwanted tax result. A separate trust for Israeli resident beneficiaries should be created prior to immigration to Israel.