Israel: Private Client (3rd edition)

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding Private Client law in Israel.

This Q&A is part of the global guide to Private Client.

For a full list of jurisdictional Q&As visit

  1. Which factors bring an individual within the scope of tax on income and capital gains?

    The State of Israel taxes its individual residents on a personal basis, as per his or her tax residency. Once tax residency is determined, Israeli tax residents are taxed on their worldwide income. In contrast, non-Israeli tax residents are taxed only on their Israeli-sourced income.

    The Israeli Income Tax Ordinance (ITO) defines “Israeli Resident” for tax purposes as an individual whose centre of life is located in Israel. However, in order to determine the venue of the centre of life of a certain individual, various factors ought to be examined and weighted as follows:

    (a) the number of days spent in Israel – according to this factor, an individual is regarded as having a centre of life in Israel, if either (i) the individual has spent in Israel 183 days or more in a given tax year; or (ii) the individual has spent in Israel 30 days or more in a certain tax year, and a total of at least 425 days in the same tax year and its two preceding years (hence, an individual would be considered as an Israeli tax resident, if he or she has spent in Israel an average of 141 days per tax year during 3 consecutive years).

    (b) permanent home – an individual is regarded as having a centre of life in Israel if he or she, or an immediate family member (i.e. wife and minor children), has in Israel an available home (including a room in an apartment) - whether owned, rented or the individual, or his family, has a right to use it - for residence. It should be noted that the Israeli Tax Authorities (ITA) point out that a home can be considered as permanent even if the individual resides in it less than 183 days per tax year.

    (c) country of family’s residence – if the individual’s family resides in Israel the ITO views the individual as having a centre of life in Israel. However, the Israeli Supreme Court ruled in the precedent Sapir Case (filed by our firm) that in today’s global world, an individual who resides abroad can be considered for Israeli tax purposes as having his center of life not in Israel, even if his or her family lives in Israel.

    (d) financial interests - according to this factor, an individual is regarded as having his centre of life in Israel if his or her businesses, and/or active and fundamental economic and financial interests located in Israel are greater, or equal to, his or her businesses and interests in any other country. To this end, place of work, pension, retirement and study funds, savings and current bank accounts, credit cards, medical and life insurances, passive investments and non-commercial real estates are all taken into consideration; and if located in Israel are strong indicatives of the center of life being in Israel.

    (e) social connections – this factor looks for the country where the individual is active in social organizations, societies and institutions. Thus, if an individual is intensively active in an Israeli organisation or is even a passive member of various Israeli organizations, including non-for-profit organizations and consumer clubs, he or she shall more likely be regarded as having a centre of life in Israel.

    It is worth noting that according to the ITA’s position in Circular 1/2011, tax residency in Israel will commence on the earliest of: (a) the date stamped on the certificate issued by the Ministry of Aliyah and Integration of a person immigrating to Israel, (b) the date the individual started living in a permanent home in Israel, (c) the date any member of the individual’s family started living in a permanent home in Israel. Thus, in order to avoid unnecessary classification as an Israeli tax resident, it is important to carefully plan the relocation to Israel prior to the date of arriving.

  2. What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?

    An individual is subject to the following taxes in Israel:

    (a) Income tax: Israel levies personal income tax at a progressive rate, starting at 10% for a gross annual income of approximately USD21,420, and increasing up to a maximum of 47% for a gross annual income of approximately USD144,000 and above. Furthermore, a surtax of 3% is levied when exceeding an annual income of approximately USD185,500. However, certain types of passive income are subject to reduced tax rates; for example, rental income from residential properties under a certain threshold is subject to a 10% flat tax rate, dividends are subject to a 25% tax rate (if received by a person holding less than 10% of the entity shares; otherwise a 30% tax rate applies) and interest income is subject to a 15%/25% tax rate. In addition, Israel does not levy municipal taxes on income. It should be noted that, in principle, income tax is deducted at source by the employer (in case of salary and income payments) or payor (in case of dividends and interest).

    (b) Capital gains tax: Israel levies a capital gains tax at a 25% tax rate on capital gains not derived from inflationary increase in value, but when the capital gain is derived from the sale of shares by a person holding more than 10% of the entity shares, the rate increases to 30%. Capital gains should be reported to the ITA within 30 days of their occurring, and the applicable taxes should be paid thereafter.

    (c) Real estate taxes: in principle, purchases of Israeli real estate are subject to a progressive purchase tax that can be as high as 10% for expensive residential properties, whereas profits from the sale of Israeli real estate are subject to tax that is normally 25% for non-Israeli tax residents; although, certain tax reductions and exemptions are available to single home-owners. In principle, all real estate transactions should be reported to the ITA no later than 30-60 days from their occurring, and the applicable taxes should be paid thereafter. It should be noted that upon the sale of Israeli real-estate, a betterment levy of up to 50% of the betterment might be due to the local municipality, if zoning changes undertaken during the seller’s holding period have “bettered” the property (i.e. increased the value of the property being sold).

    (d) National insurance: Israeli residents aged over 18 are also subject to obligatory national insurance contributions and health insurance contributions from their monthly income up to a ceiling of approximately USD12,000 a month, at the following rates: (i) employees – 3.5%-12%, (ii) self-employed – 5.97%-17.83%, (iii) non-working individual with income – 9.61%-12% and (iv) early pension (women below the age of 62 and men below the age of 67) – 3.49%-11.79. Unemployed individuals with no income pay approximately USD50 a month.

    (e) Exit Tax: Individual who becomes a non-Israeli tax resident is deemed to have sold all his or her worldwide assets (including, inter alia, employees’ share options and purchase arrangements) at market value the day before he or she ceased to be Israeli tax resident, and is thus liable to Israeli capital-gains. However, the exit tax is payable upon departure or upon the actual sale of the relevant assets, all at the individual choice.

    (f) Reporting to the ITA: The Israeli tax year starts on 1st of January and ends on 31st of December, and filing an annual tax return and payment of taxes are due by April 30 of the consecutive year, although ample extensions of time are granted.

  3. Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?

    In principle, salaries, bank interest, dividends, and royalties are all subject to withholding tax by the payor, as per certain prescribed tax rates. Payments for various services and assets are also subject to withholding taxes of up to 30%, provided the payor is not an individual with a turnover of less than ILS 5,000,000 a year.

    It should be noted, that as Israel is a party to over 50 double tax treaties, preferable withholding tax rates are available in certain circumstances, including payments of interest, dividends and royalties to non-Israeli tax residents. In addition, under the ITO certain exemptions from tax and hence form withholding tax exist for certain payments of otherwise taxable income to non-residents.

  4. Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?

    Israel does not levy a wealth tax. However, annual income exceeding USD185,500 is subject to a 3% surtax.

  5. Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?

    As of this date, there are no estate, inheritance and generation-skipping taxes in Israel. Moreover, except for real estate transfers, there is also no gift tax on bona fide gifts, provided the donee is an Israeli tax resident. Real estate gifts are only subject to a fraction (up to 1/3) of the ordinary purchase tax rate, provided they are to certain permitted transferees (i.e. spouse, child, grandchild and grandparent; and under certain conditions – siblings).

  6. Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?

    There is no gift tax in Israel, other than in respect of real-estate which are fully taxed, unless given to a permitted transferee (i.e. spouse, child, grandchild and grandparent; and under certain conditions – siblings) and thus subject to a fraction (up to 1/3) of the ordinary purchase tax rate.

  7. Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?

    As is customary worldwide, the ITO provides for a tax deduction for charitable donations to Israeli not-for-profit organisations recognised under Section 46 as being acceptable public institutes, provided the donation does not exceed the lower of (i) ILS 9,322,000 NIS (approximately USD 2,660,000), and (ii) 30% of the donor’s chargeable income for the tax year.

    In addition, the income of a not-for-profit organisation that has at least seven unrelated members, acting in the areas of religion, culture, education, science, health, welfare, sports, or encouragement of populating rural areas, is exempted from income tax, provided that its income does not constitute business income.

  8. How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?

    In addition to the taxation of the sale and purchase of Israeli real estate (described above), every resident or holder of an Israeli real estate property - whether owned or rented - is subject to the local municipal levy, known as “arnona”; although the amounts and rates vary between the different municipalities, it is always levied according to the type of property, its ordinary use, its square-meter area (as measured by the municipality) and the location of the property within the municipality’s boundaries.

    Rental income from Israeli residential property is subject to income taxation. However, the taxpayer may choose from the following three different tracks, as per his or her full discretion:

    a) Regular Taxation Track: according to this track, rental income from residential property is taxed at the individual’s progressive income tax rate, but all expenses incurred in the generation of rental income are deductible, including deductions for or depreciation and for interest expense.

    b) Tax Exemption Track: according to this track, an individual who rents property to another individual for residential purposes is exempt from taxation up to a monthly rental income of ILS 5,090. Any monthly income above ILS 5,090 is subject to individual’s progressive income tax rate, after the deduction of all expenses incurred in the creation of rental income.

    It should be noted, that (i) if the monthly income is less then ILS 10,060 a partial exemption is available, but not all expenses deductible (in fact, only an amount limited to the ratio between the amount of taxable rental income and the total income from rent is deductible); (ii) when the property is sold, the acquisition cost is reduced by the depreciation amount allowed to be deducted, as if the tax-payer had not chosen the exemption track.

    c) 10% Track: this track allows for a flat 10% taxation of all rental income, provided it is taxed o the gross income, with no deductions allowed. However, when the property is sold, the acquisition cost is increased by the depreciation amount allowed to be deducted but not used, thereby increasing the capital gain. It should be noted that payment of the 10% tax is due by January 31st of each year.

  9. Are taxes other than those described above imposed on individuals and, if so, how do they apply?


  10. Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?

    New immigrants to Israel (as well as individuals who return to live in Israel after having lived continuously outside Israel for at least ten years) are only subject to income and capital gains taxes on their Israeli-sourced income during the first ten years of living in Israel, and are exempted from taxes on their other worldwide income. After the expiry of the said ten-year period, they continue to enjoy a reduced rate for capital gains tax, computed on a linear basis according to the holding time elapsed before and after the expiry of the ten-year exemption. They are also exempt for those first ten years from reporting to the Israeli tax authorities their tax-exempted foreign-source income (including business income, salaries, dividends, interest, rent, royalties and pensions generated by assets and/or activities held or conducted overseas, regardless of whether acquired or started before or after becoming an Israeli tax resident). New immigrants also benefit from a reduced purchase tax on real estate purchases.

    In addition, individuals who return to live in Israel after having lived continuously outside Israel for at least six years (but less than ten years) are exempt from (a) income tax on foreign income derived from royalties, rent, interest and dividends, provided the income is not business income - during the first five years after returning to Israel; and (b) capital gain tax on the sale of a foreign asset, provided the asset was purchased when the individual was not an Israeli tax-resident – during the first ten years after returning to Israel.

  11. What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?

    The 'new immigrant' regime exempting from taxation and reporting for ten years, together with the fact that Israel is a party to over 50 double taxation treaties and additional tax protocols, make Israel a worthy jurisdiction to consider by wealthy foreign tax residents wishing to relocate as part of their income tax planning. However, it is important to carefully plan the relocation to Israel prior to date of arriving in order to ensure classification as Israeli tax resident, eligibility to 'new immigrant' regime, and maximization of the 'new immigrant' benefits. Obviously, Israel’s quite strict immigration laws also need to be considered.

  12. What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?

    There are no forced heirship rules in Israel. However, in the absence of a valid will, the following default heirship rules apply:

    (a) if the deceased is survived by children and a spouse - the deceased’s spouse receives half of the estate, and the remaining half is divided among the children, equally;

    (b) if there are children, but no spouse - the deceased’s children share, equally, the entire estate;

    (c) if there are no children, but there is a spouse - the spouse receives two thirds of the estate, and the remaining third is inherited by the deceased’s parents, or siblings;

    (d) if there are no children nor a spouse - the deceased’s parents and siblings share the entire estate;

    (e) if there are no children, parents or siblings, but there is a spouse - the spouse inherits 100% of the estate;

    (f) if there are no children, spouse, parents or siblings, - the estate is divided equally between the deceased’s grandparents and their offspring;

    (g) if a deceased’s child is not alive, his or her share of the estate is divided between the deceased’s grandchildren from said child; otherwise, if an heir stated above is not alive, his or /her share of the estate passes on to his or /her legal heirs.

  13. Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?

    The Israeli Property Relations Between Spouses Law, 5733 - 1973 regulates the division of matrimonial property, by distinguishing between spouses that have a property agreement (either prenuptial or postnuptial), and those who do not:

    (a) for spouses who do not enter into an agreement, the principle adopted by the law is that of “property equalisation”. In essence this principle means, that while the mere existence of marriage does not change the status of ownership of properties and the liability to obligations by each spouse, upon termination of the marriage, due to death of one of the spouses or separation, each spouse becomes entitled to half of the value of the spouses’ entire property (including future pension rights, retirement compensation, study funds, pension funds, and other savings), with the exception of: (i) properties owned by a spouse prior to the marriage, (ii) properties gifted to or inherited by a spouse during the marriage, and (iii) payments paid to a spouse by the Israeli National Insurance Agency or in accordance with any law relating to compensation for corporal damage or death.

    (b) For spouses who do enter into a property agreement – their legal arrangements prevail, as the law recognizes the spouses’ right to freedom of contract. However, in order for such an agreement to be valid and enforceable, the agreement (and any change thereof) ought to be approved by the competent court, after the court has been convinced that both spouses entered into the agreement out of their free will and that they understand its meaning and implications. In the case of a prenuptial agreement, a notary may replace the court, if the spouses so wish, and if executed during the marriage ceremony, the marrying person, if authorised to do so, can approve the agreement.

    However, if there is an evident contribution by one spouse to the other spouse’s property, the courts tend to regard the assets as joint property (that is as if it had been acquired together and owned jointly with the spouse during marriage). For example, a wife can claim 50% of her husband's pre-nuptial apartment, if she can prove that she contributed to the purchase of the apartment by having paid a certain percentage of a loan taken to finance the purchase of the apartment, and/or by having paid for the apartment’s renovation or maintenance.

    It should be noted that during the life as well as upon death, each spouse is free to transfer, without any restrictions, all of his or her property, including any and all (a) pre-nuptial property, (b) post-nuptial property inherited or received as a gift, as well as (c) his or her part of the marital property acquired together with the spouse during the marriage.

  14. What factors cause the succession law of the jurisdiction to apply on the death of an individual?

    The Israeli courts have jurisdiction to deal with the inheritance of any person who was a resident of Israel at the time of his or her death, or (b) whose estate includes assets situated in Israel. However, the succession rules which will be applied by the Israeli courts are those in force at the country of residence of the deceased at the time of his or her death. Hence, the courts shall only apply the Israeli succession rules if the deceased was an Israeli resident at his or her time of death; otherwise – the applicable foreign succession rules shall be applied.

  15. How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?

    Israeli courts are authorized to judge in matters of inheritance of every person who (a) resided in Israel at the time of death, or (b) left property in Israel.

    While the basic rule is that courts will apply the succession laws of the deceased’s residence at the time of death, the following exceptions apply:

    (a) in case the lex situs expressly excludes the application of any foreign law, the Israeli courts will apply the lex situs laws;

    (b) in case the validity of the Will is contested in an Israeli court arguing that the Will is not valid because (i) the person was incapacitated to bequeath at the first place – the courts shall apply the laws of his or her country of residence at the time the Will was made; or (ii) certain forms and formal features are not met – the courts shall recognize the Will as valid if the formal requirements of either Israel, the country where the Will was made, or the country of residence or usual abode or citizenship of the deceased either upon his or her death or when the Will was made, and, when real estate is involved - the country where the real estate is situated – are met.

    However, Israeli courts shall not apply the applicable foreign law (although required to), if the foreign law refers to a different foreign jurisdiction’s laws (in which case the referral is then ignored, and the court will apply the internal law of the first country; unless the referral is to the Israeli succession law), or if the foreign law discriminates by race, religion, gender or nationality or where it contradicts the Israeli public policy.

  16. In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?

    As forced heirship laws do not exist in Israel, a Will is important to, and should be considered by, any person wishing to divide his or her estate differently than the default heirship rules prescribed by law. Specifically, it is important to consider drafting a Will if one is (i) wishing to bequeath specific shares of his or her estate to persons who are not his relatives or to corporate bodies; (ii) separated from his or her spouse, and has yet to legally divorced; (iii) elderly and childless with no immediate relatives; (iv) a single parent ; (v) married for the second time, or is in a common law relationship ; (vi) wishing to grant to non-legal-heir specific right of use over all or part of the estate’s property; (vii) wishing to donate to charity a portion of his or her estate; (viii) wishing to declare heir to the heirs set by the default heirship law; and (ix) wishing to change in any other manner the default heirship rules as explained in section 12 above.

    An Israeli Will may relate to all or part of the property a person had at the time of his or her death, and may either include precise instructions and conditions for its implementation and division of the estate, or include broad terms and only set out general guidelines for its implementation. Furthermore, there is no limit to the number of Wills that a person may leave after him or her, but the latest valid Will is the one that prevails and revokes all Wills that preceded it.

    Israeli Law recognizes the following types of Wills:

    (a) A handwritten Will, which in order to be valid ought to be handwritten entirely, signed and dated by the individual;

    (b) a Will made in the presence of witnesses, which in order to be valid can be either handwritten or printed, and should be signed and dated by the individual, who must also declare in the presence of at least two witnesses that this is his or her last Will; thereupon the witnesses attest with their signatures upon the Will itself that the individual has made the declaration and has signed the Will;

    (c) a Will executed before an authority (i.e. court’s clerk, Succession Registrar’s clerk, member of a religious court(, which in order to be valid should be stated orally before the authority, written down by and read out to the individual by the applicable person of authority, declared by the individual that this is indeed his or her Will, and thereafter signed and certified by the applicable person of authority that the Will is made as aforesaid by the individual;

    (d) a Deathbed Will (can only be made if the individual is on his or her deathbed, or views himself or herself as being in such a situation), which in order to valid must be made before two witnesses, that understand the individual’s language - who must record its contents and the individual’s instructions in a memorandum, as well as the date and the circumstances in which the Will was made, and thereafter the Will must be deposited with the Succession Registrar. A Deathbed Will becomes void if the individual is still alive on the expiration of one month after the circumstances which warranted its making have changed and the individual is still alive.

    Israeli real estate property may be bequeathed using a foreign valid Will (i.e. valid in the country of residence or usual abode or citizenship of the deceased either upon his death or when the will was made), provided the Will is also valid under Israeli law. Therefore, in order to avoid errors being made by the testator which might, after his or her death, lead to the invalidation of the foreign Will, it is highly recommended that an Israeli Will is made by foreign resident individuals owning real estate in Israel.

    It should be remembered that, if an individual has died without a valid Israeli Will, the default heirship law (described above) apply.

  17. How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?

    In principle, and unless an administrator is appointed by the court, the heirs are responsible for collecting the assets and paying the deceased’s debts prior to the distribution of the estate among them.

    However, and although not required by law, in order to ensure that the estate is managed legally and efficiently, wealthy testators tend to specify in their Will the appointment of a specific, named administrator, whose duties by law are to gather the estate’s assets, to manage the estate, to pay the estate’s obligations and debts, to distribute the assets and to take all legal steps towards the execution of the approved Will or the default heirship order. As such, the administrator must publicly invite all the deceased’s creditors to file their claims, and only after clearing all debts, may the administrator distribute the estate to the legal heirs.

    It should be noted that , the administrator should be appointed by the court within the probate, and it must obtain the family court’s approval for any real estate property transactions as well as other actions specified by the court in the letter of appointment; and the court may, at its own discretion, or as a result of an application by an interested party, instruct the administrator in any matter related to the administrator’s duties.

  18. Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?

    Israel’s Companies Law, 5759 - 1999 regulates the incorporation and administration of companies, including those set for the purpose of holding family assets, whereas the Israeli Trust Law, 5739 – 1979 legally recognises and regulates the establishment and administration of trusts. In parallel, the Israeli ITO regulates the taxation of trusts, including private foundations established under foreign laws, and “family companies”, which are transparent for tax purposes with the main shareholder being taxed on the company’s entire income.

    In general, due to absence of inheritance tax, Israeli families tend to favour family companies as succession structure, although some families choose to separate voting rights from property rights, thus bestowing wealth in the hands of the younger generation without burdening them with the responsibility of managing a business, with an aim to pass on control and responsibility at a later point in time.

    More sophisticated families use trusts as a means for executing a measured and regulated transfer of family’s wealth. Sometimes a trust is combined with strategies originating in the Israeli Companies Law, 5759 – 1999: mainly, the transferring owners would create a family holding company distinguishing between property rights and control rights; while the property rights are settled into a trust, the controlling interests are either left with the transferring owners or granted to the more suitable next generation member(s), thus retaining equality in the property rights.

    Nonetheless, families putting in place succession plans using trusts or similar vehicles should be aware of the complex and strict taxation rules of trusts in Israel, which, inter alia, subject the trust’s worldwide income to full Israeli taxation in the event that there is even one Israeli tax resident beneficiary. Such taxation exists even where the trust’s settlor has not been an Israeli tax resident ever since the settlement of the trust, or has passed away, regardless of the settlor’s tax residency, the situs of the trust’s assets, the trust’s revocability, the number of foreign beneficiaries and the beneficiaries’ right to claim a distribution.

  19. How is any such structure constituted, what are the main rules that govern it, is there any requirement for registration with or disclosure to any authority or regulator, and what information about the structure is available to the public?

    Whereas companies ought to register with the Israeli Companies Register and to submit annual returns, there is currently no trusts’ registry in Israel. Both companies and trusts must register and report to the Israeli Tax Authorities. Nonetheless, only the Israeli Companies registry is available to the public, who can access general information such as the family company’s address, share capital, directors and shareholders’ identities, applicable liens and terms of the article of associations.

  20. How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    Trusts (including foundations) are subject to Israeli taxation and reporting obligations if they have at least one Israeli tax resident settlor, or beneficiary, or have an Israeli asset. Whereas the extent of the taxation depends upon the type of the trust taxed, as further described below, in principle and similar to the taxation of individuals described above an Israeli tax resident trust is liable to tax on its world-wide income, while a non-Israeli tax resident trust (i.e., a trust that has no Israeli tax resident settlor and/or Israeli tax resident beneficiaries, and never had any Israeli tax resident beneficiary) is only subject to tax on its Israeli-sourced income.

    Following are the different types of trusts for tax purposes and their applicable tax regimes:

    (a) Israeli Resident Trust: A trust qualifies as an Israeli Resident Trust, and thus subject to tax in Israel on its worldwide income (as per the applicable individual’s tax rate, detailed above), if: (i) at the date of the trust’s settlement there was at least one Israeli tax resident settlor and one Israeli tax resident beneficiary, and in the assessed tax year there is one Israeli tax resident settlor, or one Israeli tax resident beneficiary; or (ii) all the trust’s settlors have passed away, and in the assessed tax year at least one beneficiary is an Israeli tax resident.

    (b) Israeli Beneficiary Trust: A trust qualifies as an Israeli Beneficiary Trust, and thus subject to tax in Israel on its worldwide income (as per the applicable individual’s tax rate, detailed above), if it: (i) was settled by a non-Israeli tax resident who continued to be a foreign resident from the date of the trust’s settlement until the date of tax assessment and (ii) has at least one Israeli beneficiary.

    (c) Relatives Trust: A trust qualifies as an Israeli Relatives Trust, and thus enjoys reduced tax rates, if: (i) the settlor is the beneficiaries’ parent, grandparent, spouse, child or grandchild; if the settlor and the beneficiaries are relatives of second degree, including siblings, siblings' issues, or parents' siblings, the assessing officer is to check and confirm that the trust and any contributions thereto were made in good faith and that no beneficiary has paid any consideration in order to be entitled to the trust's assets; and (ii) the settlor of the trust is still alive in the relevant tax year.

    At the trustee’s irrevocable election, a Relatives Trust is subject to tax in Israel of either: (i) 30% of all distributions sourced from income generated and produced outside of Israel and distributed to Israeli beneficiaries, unless the distribution originates from the principal funds of the trust, which distribution is tax exempt; or (ii) 25% of all the trust's income generated or produced outside of Israel; and in such a case, any distributions made therefrom are tax-exempt. Income generated or produced in Israel is subject to tax in Israel at the tax rates applicable to individual taxpayers (described above).

    (d) Foreign Resident Beneficiary Trust: A trust qualifies as a Foreign Resident Beneficiary Trust, and thus enjoys a tax exemption, if: (i) it is not an Israeli Resident Trust or a Testamentary Trust; (ii) it is deemed an irrevocable trust under the Israeli Income Tax Ordinance; (iii) all its beneficiaries are identified non-Israeli tax residents (in this respect, a yet to be born beneficiary is deemed to be identified); (iv) at least one of its settlors is an Israeli tax resident (including, a settlor who was an Israeli tax resident upon passing away); and (v) the trust’s terms specifically state that an Israeli beneficiary cannot be added to the class of beneficiaries. However, a Foreign Resident Beneficiary Trust is subject to Israeli taxation on its income generated or produced in Israel as per the tax rates applicable to individual taxpayers (described above).

    (e) Testamentary Trust: A trust qualifies as a Testamentary Trust if: (i) it was settled under a deceased person’s valid will; and (ii) all the deceased settlors were Israeli tax-residents when passing away.

    A Testamentary Trust is subject to Israeli taxation depending on the beneficiaries’ tax residency. If at least one beneficiary is an Israeli tax resident, the trust is subject to tax in Israel on its worldwide income (as per the tax rates applicable to individual taxpayers); otherwise - it is tax-exempt in Israel, except for income generated or produced in Israel which is subject to the tax rates applicable to individual taxpayers (described above).

    (f) Foreign Residents Trust: A trust qualifies as a Foreign Residents Trust, and thus enjoys a tax exemption, if (i) all its settlors and beneficiaries are non-Israeli tax residents, and there were no Israeli tax resident beneficiaries since the settlement of the trust; or (ii) all its settlors passed away, and there were no (and currently are not) Israeli tax resident beneficiaries since the settlement of the trust. A Foreign Settlor Trust is tax-exempt in Israel on its worldwide income, except for income generated or produced in Israel which is subject to the tax rates applicable to individual taxpayers (described above).

    It should be noted that in addition to the taxation of trust’s income, distributions from the trust are taxed separately. While distributions from a Foreign Resident Beneficiary Trust, as well as from Testamentary Trust, are tax exempt in Israel, the distributions from an Israeli Resident Trust, an Israeli Beneficiary Trust, and a Foreign Residents Trust are subject to Israeli taxation in the same manner as if the assets or funds distributed were transferred directly from the settlor to the beneficiaries (currently, except for real estate transfers, there is no gift tax on bona-fide gifts, provided the donee is an Israeli tax-resident).

  21. Are foreign trusts, private foundations etc recognised?

    Foreign trust, private foundations and establishment are all legal structures that are recognised in Israel.

  22. How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    Unless otherwise elected by the trustee together with the consent of the settlor or beneficiaries, the taxpayer is the trustee. However, the ITA may collect the trustee’s tax debt from (a) Israeli Resident Trust’s settlor, even if he or she has ceased being an Israeli tax resident; (b) each beneficiary that received a distribution following the beginning of the debt’s tax-year, even if the trust has been liquidated, provided, however, that each beneficiary shall not be responsible to pay more then the lower of (i) the trustee’s tax debt, and (iii) the amount, or value, of the distribution received by the applicable beneficiary.

  23. To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?

    An irrevocable and discretionary trust (as well as a private foundation) is a suitable tool to shelter assets from creditors, if properly set and administrated by an independent trustee, without the involvement of the settlor and/or beneficiaries. Nonetheless, since the legal structures available under Israel’s Trust Law are insufficient, under-developed and under-protected from creditors’ and beneficiaries’ claims, foreign common law trust structures (including private foundation) are better suitable to ensure assets protection. In the event that the owner of an asset is reluctant to hand over control to an independent trustee, it is common to use offshore holding structures that make it difficult (although not impossible) for creditors to track and locate the assets and link them to the ultimate beneficial owner.

  24. What provision can be made to hold and manage assets for minor children and grandchildren?

    As Israel sees a rapid growth of high individual wealth, as a result of large-scale sales of companies and businesses to global corporations, especially in the hi-tech industry, younger first generations of means, with young children or in their second marriage, tend to prefer setting up trusts for the regulation of wealth transfers and for the protection of their children. These trusts, although discretionary and irrevocable, are often set up for a limited period of time, until the minor has reached maturity and is able to cope with large amounts of funds.

  25. Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?

    In Israel, it is recommended that adult person shall prepare oneself for the unfortunate event he or she may become mentally incapacitated, by signing a Durable Power of Attorney appointing one or more agents to act on his or her behalf in all his or her financial, medical and personal affairs when said person shall no longer be able to make decisions and act in such matters. Subject to the discretion of the appointor, the Durable Power of Attorney can include explicit instructions as to the extent of authority of each agent, and the standard of medical care the person wishes to receive, as well as other preliminary instructions.

    A Durable Power of Attorney is particularly important if guardianship is required. In fact, upon receiving a guardianship request from a spouse, parent, or any other family member of the ward, or from the Israeli Attorney General, the court examines whether a Durable Power of Attorney, instructions for the appointment of a guardian, or any other expression of wish, have been prepared or registered by the intended ward in any registry. If a Durable Power of Attorney has indeed been granted then consent is needed from the appointed person for the guardianship appointment, and if there are instructions for the appointment of a guardian, or any other document expressing a relevant wish, the guardian mentioned in those documents should be included in the process as well.

  26. What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?

    There are four legally recognised structures for not-for-profit, philanthropy and charity purposes in Israel: (a) an “amutah'” (a traditional not-for-profit organisation), (b) a charitable company (a non-profit organisation registered as an Israeli corporation), (c) a public '“hekdesh”' (similar to a charitable trust) and (d) a charitable fund (a not-for-profit Israeli corporation aimed at providing grants).

    As all these structures are regulated by the Israeli Registrar of Associations - Non-Profit Organisations, and are subject to the same taxation regulations as well as an extensive filing and audits regime, the actual structure of incorporation depends upon whether a separate legal personality is required and the preferred source of law governing the creation of the structure, namely: (a) an “amutah” has a separate legal personality, and is governed by the Amutot Law, 5740 – 1980; (b) a Charitable Company has a separate legal personality similarly to a corporation, and is governed by the Companies Law, 5759 – 1999; (c) a public “hekdesh”, which is a form of charitable trust, does not have a separate legal personality, and is governed by the Israeli Trust Law; and (iv) a charitable fund has a separate legal personality as a corporation, and is governed by the Companies Law, 5759 – 1999.

    Hence, sophisticated donors seeking flexibility in terms of ability to retain their control as well as access to up-to-date solutions, usually prefer to incorporate a charitable company or a charitable fund. However, if the not-for-profit organisation is intended to include many members of the public, it is recommended to use an “amutah”, which is easier to manage where a large number of members are involved.

    Nonetheless, all four structures require extensive reporting and are subject to extensive scrutiny by the Registrar and the public; hence, a donor that only wishes to provide grants to other not-for-profit organisations may wish to refrain from incorporating or forming any charitable structure while he or she is alive, and to set up a testamentary charitable trust (i.e., a public “hekdesh”) in his or her will.

  27. What important legislative changes do you anticipate so far as they affect your advice to private clients?

    As of December 2019, no important legislative changes are anticipated. However, as Israel is going through its third national elections within a period of 12 months, it is advised to regularly verify all tax rates and exemptions, including the 'new immigrant' regime, as well as the possible levying of an inheritance tax, which has tended to be a campaign promise by some political parties.