The State of Israel taxes individual residents on a personal basis as per the taxpayer’s venue of his or her centre of life. 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.
Following are the applicable Israel tax rates applying to individual taxpayers.
Israel levies personal income tax at a progressive rate, starting at 10% for a gross annual income of approximately USD21,700, and increasing up to a maximum of 47% for a gross annual income of approximately USD144,000 and above. In addition, a surtax of 3% is levied on certain types of income exceeding an annual income of approximately USD186,000. Certain types of passive income are subject to reduced tax rates; for example, rental income from residential properties 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.
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%.
Israeli residents aged over 18 years old 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:
Unemployed individuals with no income pay approximately USD50 a month.
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. However, certain tax reductions and exemptions are available to Israeli tax residents who are single homeowners.
Currently, the corporate income tax rate is 23%. In certain cases, a reduced tax rate is available mainly to certain industrial companies defined as "approved enterprises".
New Immigrants Relief
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. After the expiry of the said ten-year period, such persons continue to enjoy a reduced rate for capital gains tax, computed on a linear basis according to the period of 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.
This "new immigrant" regime exempting from taxation and reporting makes Israel a worthy jurisdiction to consider by wealthy foreign tax residents wishing to relocate as part of their foreign income tax planning. Further, the attraction is enhanced by the fact that Israel is a party to numerous double taxation treaties, with as many as 57 countries and additional tax protocols; the combination of the ten-year exemption plus a tax treaty with the person’s original home country creates a unique planning opportunity.
Inheritance and Generation-Skipping Taxes
As of this date, there are no estate, inheritance and generation-skipping taxes in Israel. In fact, a transfer of any asset by way of inheritance, including by will, is not a tax event in Israel. Moreover, except for real estate transfers, currently 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 of the ordinary purchase tax.
As for trusts (including foundations), a trust is subject to Israeli taxation and reporting obligations if it has at least one Israeli tax resident settlor or beneficiary or if the trust has an Israeli asset.
Similar to the taxation of individuals, an Israeli tax resident trust is liable to tax on its worldwide income, whereas a non-Israeli tax resident trust (ie, 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 applicable tax regimes applying to trusts:
Israeli Resident Trust
a trust qualifies as an Israeli Resident Trust if 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 all the trust’s settlors have passed away and in the assessed tax year at least one beneficiary is an Israeli tax resident. An Israeli Resident Trust is subject to tax in Israel on its worldwide income.
Israeli Beneficiary Trust
a trust qualifies as an Israeli Beneficiary Trust if it 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 has at least one Israeli beneficiary. An Israeli Beneficiary Trust is subject to tax in Israel on its worldwide income.
a trust qualifies as an Israeli Relatives Trust if:
Nonetheless, income generated or produced in Israel is subject to full taxation in Israel.
Foreign Resident Beneficiary Trust
A trust qualifies as a Foreign Resident Beneficiary Trust if:
A Foreign Resident Beneficiary Trust is tax exempt in Israel, except for income generated or produced in Israel.
a trust qualifies as a Testamentary Trust if:
A Testamentary Trust is subject to Israeli taxation depending on the beneficiaries’ tax residency. Hence, if at least one beneficiary is an Israeli tax resident, the trust is subject to tax in Israel on its worldwide income; otherwise it is tax exempt in Israel, except for income generated or produced in Israel.
Foreign Residents Trust
a trust qualifies as a Foreign Residents Trust if:
A Foreign Settlor Trust is tax exempt in Israel, except for income generated or produced in Israel.
the tax rates applicable to all the above types of trusts are those applicable to individual taxpayers.
Taxation of distributions
distributions from an Israeli Resident Trust, Israeli Beneficiary Trust and a Foreign Residents Trust are subject to Israeli taxation in the same manner as if the assets or funds were gifted 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). However, distributions from a Foreign Resident Beneficiary Trust, as well as from Testamentary Trust, are tax exempt in Israel.
Israel had an estate tax regime until 1 April 1981, when it was abolished altogether, and currently, there are no official proposals to re-enact an estate tax regime. However, levying an inheritance tax has sometimes been a campaign promise in Israeli national elections, but no legislative changes have actually taken place.
Nonetheless, due to the COVID-19 crisis, the Israeli government faces the inevitable task of financing its increasing expenditure to support the health sector as well as the local industry and businesses. Consequently, according to recent media publications, the Israeli Tax Authorities are discussing – once again – the possibility of levying either inheritance tax or estate tax, as well as limiting the New Immigrants Relief, broadening the definition of the Israeli tax resident (thus to include any person living in Israel 100 days in a certain tax year, and 183 days in the two preceding years) and enforcing exit tax.
Israel has implemented the Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) regimes in February 2019 and August 2016, respectively. As a result, Israel automatically exchanges information on an annual basis with the USA, Australia, the UK, Switzerland, Canada and over 90 additional countries. In fact, the recently enacted CRS regulations imposed a retroactive reporting obligation, resulting in 2017 bank accounts having to be reported by June 2019, and 2018 accounts having to be reported by September 2019.
Hence, Israeli tax residents who have held or still hold bank accounts or other financial accounts and assets in foreign countries, as well as foreign tax residents who have held or still hold bank accounts or other financial accounts and assets in Israel, are exposed to exchange of information between Israel and their home countries, and are strongly advised to settle any potential tax issues with both the Israeli and the foreign tax authorities; albeit the anonymous voluntary discovery procedure offered by the Israel Tax Authority (ITA) expired 1 January 2020.
Israel is a relatively young country, existing just over 70 years. Hence, wealthy families in general, and multi-generational wealth transfers in particular, do not play a major role in the country’s economic reality.
In general, older first generations of means prefer to transfer their wealth to their children by way of a straightforward inheritance, due to their mistrust in the financial and legal systems that have resulted from years of nomadism and exclusion of the Jewish people.
However, 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 child has reached maturity and is able to cope with large amounts of funds.
The Israeli Inheritance Law, 5725 – 1965 attempts to meet the increasing global world challenges, as it contains important rules on international private laws aspects, that balance between the rule of Israeli law over succession vis-à-vis the rule of foreign laws, by providing that Israeli courts have jurisdiction to deal with the inheritance of any person who was a resident of Israel at the time of their death, or whose estate includes assets situated in Israel..
The succession rules that are applied by the courts are those in force in the country of residence of the deceased at the time of his death but, when a will is to be examined, the person's capacity to testate is governed by the laws of their country of residence at the time the will was made and, as to the requirements for certain form and formal features of a valid will, Israeli law is flexible and it recognises the validity of the will if the formal requirements of any of the following countries are met: Israel, the country where the will was made, or the country of residence or usual abode or citizenship of the deceased either upon his death or when the will was made, and, when real estate is involved, the country where the real estate is situated.
In practice, 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.
Also, as in most European jurisdictions, families with US persons, companies with US shareholders and trusts with US beneficiaries encounter various difficulties in opening bank and financial accounts in Israel, and sometimes even in conducting ordinary bank transactions such as sending or receiving transfers of funds.
There are no forced heirship laws in Israel.
In the absence of a valid will, the following default heirship rules apply:
Under Israeli legislation, each spouse is free to transfer, during their life and upon death, without restrictions, all their property, which includes any and all prenuptial property, any and all of their postnuptial property inherited or received as a gift, as well as their part of the marital property acquired together with the spouse during the marriage.
Nevertheless, 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, 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 prenuptial 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.
Thus, in order to insure the protection of assets in wealthy Israeli families, it is quite common for couples getting married to enter into prenuptial agreements, although sometimes these agreements are entered into postnuptial; the Israeli Property Relations Between Spouses Law, 5733 – 1973 recognises the validity and enforceability of such agreements, as long as certain procedural requirements are adhered to.
The Property Relations Between Spouses Law
This law regulates the two different cases of property status of spouses: those having a property agreement (either prenuptial or postnuptial) and those who do not.
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 50% 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:
As long as the marriage has not terminated, due to death of one of the spouses or separation, a spouse’s right to property equalisation cannot be transferred, mortgaged or foreclosed.
For spouses who do enter into a property agreement, the law allows 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.
Property transferred as a tax-free gift among individuals, or upon inheritance, will retain its original cost basis for purposes of future sale as well as for purposes of depreciation. It is possible to request a pre-ruling from the Israeli tax authorities for a step-up of the original cost, when an Israeli tax resident receives (whether as a gift or inheritance) a property from abroad.
The major vehicles for transferring assets within an Israeli family are gifts, inheritances and trusts. Sometimes, a combination of these tools is used. For example, a will can provide for the creation of a trust under its terms, certain shares in a family holding company can be gifted during the lifetime of the donor, while others can be transferred into a trust for the benefit of future generations, and children can be included as co-owners of family bank accounts. Unless the younger generation are not Israeli tax residents, taxes are not a factor in choosing the most suitable mechanism, as there are no gift, estate or generation-skipping taxes in Israel.
Israel has not legally addressed the issue of digital assets inheritance. Thus, it is being claimed that the Israeli Inheritance Law, 5725 – 1965 does not apply to digital assets lacking real monetary value such as email accounts, unless specifically addressed in a valid will. Hence, if a deceased has not left a will, or has left a will without mentioning their digital assets, it is questionable if they will be subject to or affected by an order of probate.
In 2012, in the case of Schwartzman v Psagot Pension Funds, the Tel Aviv District Court recognised that the ownership right of the deceased’s heirs override the deceased’s right to privacy. It is therefore considered that the courts would most likely uphold the heirs’ rights to receive control over digital assets, if such case would be brought to the courts’ decision. Thus, in practice, most Israeli communication companies allow the heirs access to the deceased’s email accounts, subject to their internal procedures.
As for cryptocurrency assets, the Lod District Court in the case of Kopel v Rehovot Income Tax Assessor recognised Bitcoin as a financial asset, subject to capital gains tax on profits derived from its sale. Hence, the Israeli Inheritance Law should apply in regard to cryptocurrency, as to any other valuable asset.
In any case, it is recommended to detail the digital and cryptocurrency assets, including usernames and passwords, in the will.
Israel, being a common law country based upon the English law system, recognises the validity of trusts and foundations.
Israel’s Trust Law, 5739 – 1979 ("Israeli Trust Law"), which is the main law regulating trusts, recognises four main types of trusts: a private trust, a private trust dedicated by a deed or a will in favour of one or more third-party beneficiaries (also known as a "hekdesh"), a testamentary trust and a charitable trust called a "public hekdesh".
For estate planning purposes, Israelis tend to use either a private trust for the benefit of third parties – a hekdesh – or a testamentary trust regulated by Israel’s Trust Law. Nonetheless, due to the fact that the legal structures available under Israel’s Trust Law are insufficient, under-developed and under-protected from creditors' and beneficiaries’ claims, wealthy Israeli families prefer to use foreign common law trust structures to ensure assets protection.
Israel’s Trust Law legally recognises and regulates the establishment and administration of trusts, whereas the Israeli Income Tax Ordinance (New Version), 5721 – 1961 (Israeli Income Tax Ordinance) regulates the taxation of trusts, including foundations and establishments under foreign laws.
While a trustee’s tax residency is irrelevant to the question of a trust’s taxation under the Israeli Income Tax Ordinance, the location of tax residency of each of the trust’s beneficiaries and settlors is crucial. Even one Israeli tax resident beneficiary is sufficient for levying Israeli taxes on the trust’s worldwide income, unrelated to other foreign laws that may govern the establishment and taxation of same trust. Furthermore, in the event that a trust’s settlor, who is an Israeli tax resident, serves also as the trustee and/or the protector of same trust, the trust shall be deemed a revocable trust for purpose of the Israeli Income Tax Ordinance and shall thus be subject to full Israeli taxation, even if all its beneficiaries are foreign tax residents. In fact, a trust shall also be deemed a revocable trust for purposes of the Israeli Income Tax Ordinance if the settlor is also a beneficiary.
The Israeli legislator has not taken any steps to amend the Israeli Trust Law and/or the Israeli Income Tax Ordinance to allow settlors to retain extensive powers. In fact, in a trust dedicated in favour of a beneficiary (ie, a private hekdesh), unless the trust deed specifically permits changes to be made (regardless if by settlor, trustee or beneficiary), a change can be made only if all beneficiaries have consented, or a court order has been issued; thus, resulting in the trust being deemed revocable for tax purposes.
Israeli businesses' main asset protection method is the use of corporate shield; namely, limited companies and limited partnerships, which protect the shareholders/limited partners from the risks involved with the underlying business.
Protecting the ownership of businesses from creditors risks is usually achieved through the use of irrevocable and discretionary trusts. In the event that the owner of the business 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 in today’s transparent legal environment) for creditors to track and locate the assets and link them to the ultimate owner.
As Israel has no estate taxes, inheritance taxes, or even a gift tax (other than a partial purchase tax in regard to gifts of real estate), straightforward gifts are the most common means of transfer of wealth and control to younger generations. Second in popularity would be to transfer only upon death, by way of a well-planned and structured will. Many wealthy families use a combination of both methods, thus allowing training as shareholders to the younger generation, while maintaining the control of the family business with the older and more experienced generation.
As an intermediate step, 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, after having going through well needed business training and mentoring.
More sophisticated families use trusts as a means for executing a measured and regulated transfer of wealth and control to younger generations. Sometimes a trust is combined with strategies originating in the Israeli Companies Law, 5759 – 1999: mainly, the transferring owners would create a holding entity (company or partnership) 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.
Property transferred as a tax-free gift among individuals, or upon inheritance, retains its original tax cost basis for purposes of future sale as well as for purposes of depreciation. However, in the event that an Israeli tax resident receives (whether as a gift or inheritance) a property from abroad, regardless if partial or whole, a pre-ruling can be requested from the Israeli tax authorities allowing for a step-up of the original cost to the fair market value of the property transferred. The Israeli tax authorities would most likely impose certain conditions on the set-up, including by limiting the set-off of depreciation, losses, and foreign gifts and inheritance taxes.
Being a relatively young country, the Israeli judicial system does not see a great number of substantial wealth disputes (other than in the case of divorce proceedings). There are hardly any known disputes regarding trusts, foundations, or similar entities, conducted under Israeli law in Israeli courts.
More common are disputes relating to the validity of wills: wills made at old age or by an unhealthy testator are sometimes attacked as being staged by interested parties while not representing the testator's true will due to their unsound mind at such time, or as being affected by undue influence.
In order to reduce interested party claims, the Israeli legislator strictly stated in the Inheritance Law, 5725 – 1965 that any provision of a will that benefits a party who has been a witness to, or has participated in any way in the making of (including by mere co-ordination of travel arrangement), such will is null; hence, this provision of law is used as grounds to abundant disputes aiming to disqualify a will.
Under Israeli Trust Law, if damage is caused to assets or beneficiaries of a trust as a result of an act, omission, or negligence of a trustee, the trustee is personally liable to monetarily compensate for the decrease in value of an asset, as well as for any lost profit (in the amount equalling the difference between the value of the asset at the day of compensation and the value of the asset had the trustee not breached his or her duty).
While Israeli law does recognise the concept of a trust, trusts are not recognised in Israel as a separate legal entity, and all rights and liabilities of the trust rest with its trustee or trustees.
As a trust is not recognised as a separate legal entity, it is common practice to use either a corporate trustee or a "trust holding company", a designated legal entity fully owned by the trust and acting on behalf of the trustee to hold all or some of the trust’s assets. This structure operates to facilitate the administration of the trust and its assets and activities, and to protect the trustee’s personal assets from blending into the trust.
In Israel, a trustee is personally liable for any damage caused to the trust’s assets and/or beneficiaries as a result of a breach of their duty as trustee. Hence, a trustee that acted as per the trust’s terms shall normally not be personally liable if he or she acted in good faith and diligence as a reasonable person would have acted under the same circumstances.
The trust’s terms cannot discharge a trustee from liability, including from the obligation to act in good faith and diligence as a reasonable person, nor provide for an exemption from liability due to negligence. However, a trustee may request the court to exempt him or her from liability, provided that the trustee acted in good faith and, in performing their act or omission, the trustee had meant to fulfil his or her rule as trustee.
As the trustee’s liability for damages means that the trustee is personally liable to compensate for the damages caused to the trust’s assets and/or to the beneficiaries as a result of a breach of his or her duty as trustee, it is highly recommended to insure the risks associated with the activity of trustees, or at the very least to receive an indemnification obligation from the settlor and/or beneficiary.
The aforesaid provisions of the Israeli Trust Law are obviously very conservative and under-developed, and pose significant exposures and risks to trustees acting under it. Therefore, more sophisticated trusts use other legal systems as the governing law of the trust.
The Trust Law requires a trustee to efficiently invest funds that are not required for the daily needs of the trust, thus to preserve the capital and to produce income to the trust. "Efficiently invest" is interpreted as investing in a manner that does not entail unnecessary risk, allows quick realisation if and when funds are required by the trust, and ensures at least either monetary income or an increase in the investment’s value; all while using the reasonable person test as a scale. Nonetheless, if the trust’s terms specifically state how funds should be invested, the trustee is required to act accordingly.
The Israeli investment standard relies upon the "reasonable person" test. As a result, and unless the terms of the trust state otherwise, diversification is customary in the industry as it is the diligent act to be done by a reasonable person.
Acquiring or holding an active business does not only contain an intrinsic risk, but also does not necessarily allow for a quick realisation when funds are required by the trust. Thus, holding an active business is not a common practice for a trustee in Israel, although technically being permitted. In fact, the trustee would not be at risk of being blamed for acting in a breach of his duties, where a trust has originally been created with a purpose to hold an active business and ensure its smooth succession. In such cases it is strongly recommended to specifically state this purpose of the trust in the trust deed, and if not possible - at the settlor’s letter of wishes.
The Law of Return, 5710 – 1950 grants every Jewish person the right to immigrate to Israel and to become (if he or she wishes to) an Israeli citizen. In this respect, a "Jew" means a person who was born to a Jewish mother, or has converted to Judaism and is not a member of another religion, including a child and the grandchild of a Jew, the spouse of a child of a Jew and the spouse of the grandchild of a Jew, but excluding any person who:
A non-Jew adult may acquire Israeli citizenship by naturalisation subject to a number of requirements, all being at the discretion of the Israeli Minister of the Interior, including:
It may be also required that the person's prior nationality be renounced.
A Jew eligible to citizenship is also eligible to permanent residency. A non-Jew may apply for residency (temporary or permanent) under certain circumstances, which is a fairly long process, imposing different requirements.
Israeli law does not recognise the concept of domicile.
Due to COVID-19, only Israeli citizens and residents are allowed entry into Israel. In fact, a non-Israeli citizen or resident is prevented from entry into Israel unless he or she has obtained a special permission from the Israeli immigration authorities prior to boarding the plane to Israel. Currently (ie, July 2020), said special permission is generally granted to foreign spouses of Israeli citizens or residents, minor children of Israeli citizens or residents, foreign students enrolled into Israeli universities, married foreign Yeshiva students attending local Yeshivas, nationally required infrastructure experts, artists and sportsmen approved by the Ministry of Culture and Sports, medical tourism approved by the Ministry of Health, parents, siblings and grandparents of an Israeli citizen or resident getting married in Israel, or - a thousand times different - whose funeral is taking place in Israel.
Upon entering Israel, at the border, every person (regardless of being a citizen, resident or not) has to demonstrate the capability of going into a 14-days obligatory self-quarantine. If, however, said person does not fulfil the obligatory self-quarantine, he or she may be deported.
Israeli citizenship of a Jew becomes effective on the later of the day of arrival into Israel, or receipt of a new immigrant’s certificate. However, a Jewish person may declare, within three months, that he or she does not wish to become a citizen.
There are no expeditious means for a non-Jew individual to obtain citizenship.
Due to COVID-19, only Israeli citizens and residents are allowed entry into Israel.
Although the Israeli Trust Law does not specifically provide for a special needs trust, such a trust can indeed be set up. It is customary to define in such a trust the standard of care to be granted to the disabled person as well as the means for the treatment of the disabled person, including their right to use family assets such as family homes.
Any adult person can prepare oneself for the unfortunate event they may become disabled, by signing a Durable Power of Attorney appointing one or more agents to act on their behalf in financial, medical and personal affairs when said person shall no longer be able to make decisions and act in such matters. The Durable Power of Attorney may include explicit instructions as to the extent of authority of each agent and the standard of care the person wishes to receive, as well as other preliminary instructions. Unless instructed otherwise in the Durable Power of Attorney, in implementing the Durable Power of Attorney the mandatory supervision of the Government Administrator General is not required.
A request for guardianship is submitted to a competent court by a spouse, parent, or any other family member of the ward, or by the Israeli Attorney General.
Upon receiving a guardianship request, the court will examine 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 been granted then consent is needed from the appointed person for this 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.
As of the date of appointment, the guardian is subject to the Administrator General’s supervision. However, each of the following requires prior approval of the competent court:
The ageing of the Israeli population was defined as a national, social and financial challenge by the Israeli government, as back as 2015.
As part of addressing the challenge, the Israeli government has enforced a gradual mandatory pension provision (which includes a severance pay component), to be paid by all employers and employees from their monthly salaries. Currently, the mandatory contribution is 6% by the employee and 12.5% by the employer; however, it is also customary for employers to offer study fund savings to their employees.
In addition, the Israeli government issues each Israeli resident who has reached the retiring age (currently, 62 for women and 67 for men; with the exception of bereaved parents for whom the age is 71 ) a Senior Citizen status and certificate granting discounts in public transportation, museums and cultural centres, public parks, bank fees, municipal property taxes (up to a 25% discount, and subject to certain conditions) and other benefits.
In parallel, in order to ensure that every elderly person shall receive a minimal financial support during their later years, the National Insurance Agency provides, under certain conditions, old age pension annuity, welfare annuity and income annuity.
Further, Israeli tax laws provide to elderly or retired people reduced income tax rates for certain amounts of income from designated sources such as financial income, pension income and more.
Children born out of wedlock, legally adopted children and legally recognised surrogate children are all considered as legal issue of the deceased parent and grandparent, and are thus eligible to inherit, subject to the terms and conditions of the Inheritance Law, 5725 – 1965. In fact, a child born up to 300 days after the deceased has died is eligible to inherit from them as well as if born out of wedlock, adopted, surrogate, or otherwise.
It must be noted, however, that under Jewish law, which is to a large extent controlling legal marriages of Jewish people in Israel as it is adopted by the country’s civil law, a child born out of a married Jewish woman's adultery, although legally considered the child of its biological father (and thus entitled to inherit from him), will be defined as a "mamzer", meaning the child and their issue (up to ten generations onward) would not be able to legally marry in Israel. Because of these severe impediments, Israeli courts have taken the position that the paternity of a child born out of marriage cannot be easily legally challenged, in order to avoid creating a body of evidence that might be used to declare the child a mamzer.
Surrogate Pregnancy Arrangements
Israel permits surrogate pregnancy arrangements only for infertile heterosexual couples and single women, provided, inter alia, that:
It is also required that the designated parents and the surrogate be of the same religion, to ensure that the child’s religious status would be clear (although certain exemptions apply in the case of non-Jewish couples). As a condition to the surrogate pregnancy procedure to take place, the designated parents and the surrogate must sign a surrogate pregnancy agreement, which ought to be pre-approved by an Israeli government committee.
It should be noted that surrogacy is not legal in Israel for convenience or career considerations, but only due to infertility or health reasons.
Same-sex marriage is not legal in Israel, although the Israeli Ministry of the Interior registers same-sex marriages performed abroad in the Israeli population registration.
As the registration in the Israeli population register is not legally valid, and does not automatically grant same-sex couples with all rights of married couples, many same-sex couples choose not to marry abroad, but rather choose to enter into common law relationships (through contractual marriage), providing them with equal access to many of the rights of married couples (such as tax credits, the right to litigate in front of the Family Courts, etc).
As is customary worldwide, the Israeli Income Tax Ordinance provides for a tax deduction for charitable donations to an Israeli not-for-profit organisation recognised under Section 46 of the Israeli Income Tax Ordinance (up to 35% of the donation if donor is an individual, otherwise 23%), provided the donation, which must be higher than ILS190, does not exceed the lower of ILS9,350,000 or 30% of the donor’s chargeable income for the same 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 and value-added tax (VAT), provided that its income does not constitute business income.
There are four legally recognised structures for charitable planning in Israel: an "amutah" (a traditional not-for-profit organisation), a charitable company (a non-profit organisation registered as an Israeli corporation), a public "hekdesh" (similar to a charitable trust) and a charitable fund (a not-for-profit Israeli corporation aimed at providing grants). All are regulated by the Israeli Registrar of Associations – Non-Profit Organisations, and are subject to the same taxation regulations and to an extensive filing and audits regime. In addition, all four structures cannot distribute any profits, directly or indirectly, to their members/shareholders/trustees, including their founders/settlors.
Thus, the actual structure of incorporation depends upon the selected source of law governing the creation of the structure, namely:
In fact, sophisticated donors usually prefer to incorporate a charitable company or charitable fund, as both of these structures provide more flexibility in terms of ability to retain control and allow for the use of up-to-date solutions. 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 with a large number of members and benefits from a better public image (although for no good reason).
Nonetheless, as all said structures require extensive reporting and are subject to extensive scrutiny by the Registrar and the public, 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 is alive, and to set up a testamentary charitable trust (ie, a public hekdesh) in his or her will.
Strict Approach of the Israeli Courts regarding Israeli Tax Residency of Individuals that are Not Residents of Other Countries
In the recent years, Israeli court rulings have been more aggressive regarding the Israeli tax residency of individuals who claimed that they are not residents of any country. In recent Israeli court rulings, such as the Bar Refaeli case, as provided in more details below, the courts adopted a strict approach regarding the definition of an "Israeli Resident".
Israeli tax residency - legal background
According to the Israeli law, Israeli residents are subject to tax in Israel on their worldwide income, while foreign residents are subject to tax in Israel only on their Israeli sourced income.
The definition of the term "Israeli resident" for Israeli tax law purposes includes two tests. The first, a substantive test that examines the tax residency of the individual according to the various factors. The second is a technical test that determines an individual's centre of life according to two technical presumptions based on the number of days the individual spent in Israel.
The substantive test determines the tax residency of an individual based on the examination of the individual's "centre of life". This test takes into account all of the individual's ties to Israel. The individual will be considered an Israeli resident if the majority of his ties are connected to Israel. The centre of life test includes the following factors, which are not exhaustive:
The technical test (known as the "days test") presumes the centre of life of an individual based on the number of days the individual stayed in Israel. Under the technical test, an individual is presumed to be an Israel tax resident if he or she spent a minimal number of days in Israel. It should be noted, that the technical test creates only a presumption regarding the individual's centre of life is in Israel.
The days test presumes that the centre of life of an individual is in Israel if:
For this purpose, under Israeli law, a "day" includes a part of a day. This means that the entry and exit days, are included in the days count.
The days test creates a presumption that can be rebutted both by the taxpayer and by the tax assessor, with the burden of proof being imposed generally on the party wishing to contradict the presumption.
According to recent court decisions, when the days test parameters are not satisfied, there is no negative presumption regarding non-Israeli residency. Simply stated, if an individual does not spend 183 days in Israel during a tax year nor spend more than 30 days in a given tax year and more than 425 in the two proceeding tax years it does not create a presumption that the individual is not an Israeli tax resident. It should be noted that, theoretically, the days test can be rebutted by the individual based on the centre of life test. However, according to Israeli court decisions, from a practical perspective, it is very difficult to rebut the days test.
An individual that claims they are not an Israeli tax resident, despite the fact that they satisfy one of the parameters of the days test, is required to file a notice with the Israel Tax Authority. The notice sets out the facts on which the individual bases their claims, and the individual is required to add supporting documentation to the notice.
The centre of life test (the substantive test)
According to the Israeli law, an individual is considered as an Israeli tax resident, if the centre of their life is located in Israel.
The examination of the "centre of life" is a somewhat vague test, as it refers to a wide range of facts and circumstances, with no clear method of determination applicable to them. As mentioned above, the definition of an "Israeli Resident" lists a number of parameters which are used to determine the individual's centre of life. The list of parameters is not exhaustive and Israeli case law has added other considerations over the years. Additionally, the order of the indictors listed in the Israeli law, does not imply any priority or preference of one indicator over another.
The residency questionnaire required by the Israel Tax Authority in the tax audits of individuals who claim foreign residency also provides a good indication of the parameters used by the Israel Tax Authority and its approach regarding the centre of life test. As a general rule, the connections of an individual may include, inter alia, the following:
The court has also viewed an individual's application for permanent residence status as an indication of residence.
When determining the location of the centre of life of an individual, Israeli court decisions have emphasised and considered also the following factors: the number of days the individual spent in Israel and whether they spent more days in Israel than in any other country in a given year; the place of permanent home; and an alternative centre of life.
It should be noted that the centre of life test is a circumstantial and factual test, that is, the determination of an individual's centre of life is based on his specific circumstances and factual background.
The Supreme Court has previously stated that the "centre of life" test has two components - the objective nexus of the individual to Israel as well as the subjective intention of the individual to locate their centre of life in Israel.
The subjective aspect of the centre of life test examines the perception of the individual towards their residency, beyond the mere objective criteria. To change one's tax residency the individual himself has to be interested in changing their centre of life. A temporary move abroad for a specific and limited purpose with no intention of changing one's residency, would not constitute a change in one's centre of life.
That being said, Israeli courts give more weight to the objective rather than subjective characteristics (the place in which the individual sees themselves as resident). Subjective characteristics, however, will not be altogether ignored.
Developments regarding the criterion of an alternative centre of life
Whether the individual is a tax resident in another country has become a very crucial factor in recent court decisions. In this regard, Israeli court decisions have been very strict with respect to individuals who claim non-Israeli residency, without having an established tax residency in another country.
The Bar Refaeli Case – The Tax Residency of an International Super Model
On 10 April 2019, in the case of Bar Refaeli v Kfar Saba Assessing Officer, Tax Appeal 6418-02-16, the Israeli district court rejected the tax appeal of Bar Refaeli, an international super model and the host of the 2019 Eurovision Song Contest in Israel, regarding her tax residency during the years of her relationship with the Hollywood actor, Leonardo DiCaprio.
As to the quantitative days test, Refaeli met the presumption during 2009 when she spent 185 days in Israel. In 2010, she spent only 131 days in Israel, however, together with the two preceding years she spent 424 days (ie, one day less from the required 425 days of the days test).
The court mentioned, in this regard, that the number of days spent in Israel can also function as an independent parameter, which does not depend on the days test but rather serves as an indication to the individual's centre of life. For this purpose, the court calculated the average number of days Refaeli spent in Israel during the years 2006 until 2012, which was about 146 days per year. The court mentioned that this is a significant period of time indicating an active nexus to Israel that was not gradually loosed.
As to Refaeli's claim that DiCaprio's home in Los Angeles was her permanent place of residence during the relevant years, the court rejected her claim in light of the absence of supporting evidence and the fact that Refaeli did not bring DiCaprio to testify on her behalf.
ne of the most important criterion explored by the court concerned Refaeli's claim that she has no tax residency at all. Refaeli claimed that being an international model who travels around the world falls into the exceptional cases of "no tax residency" individuals. The court mentioned the theoretic example of an individual who lives on a yacht and sails from place to place without having any permanent port as an example of the rare case that might fall into the "no tax residency" individuals' category. However, the court ruled that Refaeli's case is far from being similar to the case of an individual who lives on a yacht, and that in her case she had a "permanent port" in Israel.
The Refaeli case demonstrates that it is very hard for individuals to claim that they are not Israeli tax residents when they cannot prove tax residency in any other country. This is especially true when the individual is an Israeli citizen and tax resident in the prior to the tax year examined.
The Amit Case – The Tax Residency of an International Poker Player
In the case of Amit Amshikashvili Rafi v Tel Aviv Assessing Officer 4, Tax Appeal 476/17, the individual did not meet the quantitative days test, and in one of the years in dispute, he stayed in Israel for only 30 days. However, the court ruled that the individual was not a tax resident in any other country, his residency in places abroad was only occasional and he did not submit tax return in any other country.
In view of this factual background, the court ruled that the individual is an Israeli tax resident. The court mentioned that an individual indicating that he is a tax resident of another country is relevant for the examination of his centre of life. Accordingly, the default with respect to an Israeli citizen and resident that was born in Israel, not being a resident of any country, is that he remains an Israeli tax resident, even while spending long period of times out of Israel.
The Plonni (John Doe) Case – The Tax Residency of an Ultra-High-Net-worth Individual Lliving Outside of Israel Separately from his Israeli Wife
In the case of Plonni (John Doe) v Ashkelon Assessing Officer, Civil Appeal 3328/15, although the individual met the quantitative days test (the 425 days presumption), he stayed in Israel for less than half a year in all of the disputed years. In addition, the taxpayer claimed that his centre of life is outside of Israel.
The court ruled that the individual is an Israeli resident, although he stayed in Israel for less than half a year. One of the main factors in the court's decision was that the taxpayer was not a resident or a citizen of any other country, a fact which weakened his claim for foreign tax residency.
Expected reform regarding international tax and the connection to COVID-19
The authors of this article are members of a committee formed in order to examine and provide recommendations on the implementation of a comprehensive international tax reform in Israel. In its work, the committee also examines suggested changes in the definition of an "Israeli Resident" under the Israeli tax law.
One of the purposes of the initiated reform is to allow more clarity to individuals with respect to their Israeli tax residency status based on their personal circumstances and way of life, without the need to exhaust the matter through long assessment procedures by the Israel Tax Authority as well as legal proceedings in court. The ability to achieve certainty and clarity in a rather short period of time would be beneficial for all parties involved.
The above can be well demonstrated by referring to the implications of COVID-19 on the tax residency of individuals in Israel. As a result of the virus, the borders around the world were closed for a significant period of time. Such immediate restrictions on the movement between countries, without knowing when they will be removed, resulted in tax issues and exposures for many individuals.
For example, an individual that planned to travel out of Israel so he will not meet the quantitative days test, but due to the COVID-19 restrictions could not leave Israel. Accordingly, the individual will be presumed an Israeli tax resident during the relevant tax year. It should be mentioned that currently, the Israel Tax Authority has not been willing to publish any reliefs during the COVID-19 pandemic. Therefore, effectively, the same parameters detailed above would be applicable during the COVID-19 pandemic.