The State of Israel taxes individual residents on a personal basis as per the taxpayer’s 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.
The 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 USD22,800, and increasing up to a maximum of 47% for a gross annual income of approximately USD151,000 and above. In addition, a surtax of 3% is levied on certain types of income exceeding an annual income of approximately USD194,000. 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's 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 (which includes the employee’s salary and benefits, as well as in-kind benefits the employee receives from their employer, such as a car, meals and cell-phones) up to a ceiling of approximately USD13,000 a month, at the following rates:
Unemployed individuals with no income pay approximately USD50 a month.
It should be noted that, in addition to the national insurance contributions paid by the employees as detailed above, employers also pay national insurance contributions on behalf of each employee, as follows:
Real estate taxes
In principle, the purchase of Israeli real estate is subject to a progressive purchase tax that can be as high as 10% for expensive residential properties and 6% for commercial real estate purchased by an individual. However, certain tax reductions and exemptions are available to Israeli tax residents who purchase a home which will be their single home.
The following are the applicable purchase tax rates applying to non-Israeli tax resident individuals purchasing residential real estate in Israel:
However, an individual who within two years from the date of purchase of the real estate returned to live in Israel after having lived continuously outside Israel for at least ten years, or immigrated to Israel for the first time, retrospectively enjoys the following reduced real estate purchase tax rates, provided, however, it is their only residential real estate in Israel:
Furthermore, as per Article 12 of the Real Estate Taxation (Appreciation and Purchase) (Purchase Tax) Regulations, 1974, a new immigrant who purchases residential real estate for their permanent use, as well as a business place for themselves (or their relatives), during the period starting one year before their immigration and ending seven years thereafter, enjoys special real estate purchasing tax rates:
In certain cases, the above special rates for new immigrants can also be applied to the purchase of land.
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 that has 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 as detailed above.
This "new immigrant" regime, with its exemptions 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. Furthermore, 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 (August 2021), 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.
The 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:
A relatives trust is subject to tax in Israel, at the trustee’s irrevocable election, of either:
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 a 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. While 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 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 for 100 days in a certain tax year, and 183 days in the two preceding years) and enforcing an exit tax.
Israel implemented the OECD's Common Reporting Standard (CRS) and the 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, just recently the Swiss Federal Tax Administration informed 120 Israelis and 150 entities connected to said Israelis, that as per the Israeli Tax Authorities’ request, it shall exchange information about Swiss bank accounts beneficially owned by said Israelis.
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 on 1 January 2020.
Israel is a relatively young country, existing for 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 of the financial and legal systems which is the result of years of nomadism and exclusion of the Jewish people.
However, as Israel sees a rapid growth in major 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 challenges of international planning. It contains important rules on international private laws issues that balance between the rule of Israeli law over succession and 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 their 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 their 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 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 ensure 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 postnuptially; 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 obligations of 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 of their own 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 currently no gift, estate or generation-skipping taxes in Israel.
Israel has not legally addressed the issue of digital assets inheritance. Thus, it is 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 a case were brought before the courts’ . 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 any 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 (Israel's 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 asset 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 the 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 that 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 legislature has not taken any steps to amend Israel's 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 a 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 within 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 the aim of passing on control and responsibility at a later point, after having gone through the necessary 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 the taxation 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 legislature 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 for abundant disputes aiming to disqualify wills.
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 their 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 they 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 them from liability, provided that the trustee acted in good faith and, in performing their act or omission, the trustee had meant to fulfil their 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 their 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 them. Therefore, more sophisticated trusts use other legal systems as the governing law of the trust.
Israel's 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 not only brings with it an intrinsic risk, but also does not necessarily allow for a quick realisation when funds are required by the trust. Thus, although technically permitted, holding an active business is not a common practice for a trustee in Israel.
The trustee would, however, not be at risk of being blamed for acting in a breach of their 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 they wish) 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.
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 they do not wish to become a citizen.
There are no expeditious means for a non-Jewish individual to obtain citizenship.
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 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 the 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 far 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 employees and 12.5% by employers; 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 (although expected to raise to 65) 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 relation to 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 at least a minimum level of financial support during their later years, the National Insurance Agency provides, under certain conditions, an old age pension annuity, welfare annuity and income annuity.
Furthermore, 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 to a large extent controls 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 ILS9.35 million 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:
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 they are alive, and to set up a testamentary charitable trust (ie, a public hekdesh) in their will.
Splitting the Tax Residency of the Family – New Court Rulings
In recent years, the question of whether an individual can have a separate tax residency from their spouse and family has been a matter in dispute in a number of Israeli court rulings. Although it is possible for an individual to have a separate tax residency from their spouse and family, such split of the tax residency has rarely been recognised by the Israeli Tax Authority (ITA) or by the Israeli courts. Two recent court rulings shed additional light on the factors that should be examined in such cases.
Residency of individuals for Israeli tax purposes – general principles
Since 2003, the taxation system in Israel has been a residence-based one. Thus, 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.
Under Israeli domestic law, the Income Tax Ordinance (the Ordinance) defines an Israeli resident as whoever has the centre of their life in Israel (the centre of life test).
The centre of life test is an essential test that examines the residency of the individual according to the various factors included under the definition and the individual's ties to Israel, as well as a technical test that determines two technical contradictory presumptions for the location of the individual's centre of life on the basis of the number of days that the individual spent in Israel.
The centre of life test
The examination of the centre of life is somewhat vague as it refers to a wide range of facts and circumstances, with no clear method of determination among them.
Under the definition of the centre of life, the Ordinance lists a number of indicators which are used to determine the individual's centre of life, such as the place of the individual's permanent house; the place in which they and his family live; their regular or permanent place of business or employment; their place of vital and active economic interests; and the place of the individual's social interests (organisations, unions or institutes).
The list of factors, as enumerated in the Ordinance is not exhaustive, and case law adds other considerations. When determining the location of the centre of life of an individual, Israeli court decisions have emphasised and considered mainly the following factors.
As will be elaborated below, separated residency of an individual and their spouse was only rarely recognised by the ITA and by the Israeli courts, in very specific cases with special circumstances.
Days in Israel
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. In this regard, the court emphasised that the number of days spent in Israel can function as an independent parameter, which does not depend on the days presumption test but rather serves as an indication of the individual's centre of life.
The place where the individual maintains their permanent home and whether they have a place available to them in Israel to manage their life routine.
Existence of a turning point
Whether the individual became an Israeli resident following a certain turning point after which the majority of the individual's ties are transferred to Israel.
Place of economic interests
Place of work, profession, assets, office, where the individual receives mail, main bank account, etc.
Alternative centre of life/residency
Whether the individual is a tax resident in another country became 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.
It should be noted that the centre of life test is a circumstantial and factual test – ie, the determination of an individual's centre of life is based on their specific circumstances and factual background and there is no "bright line" test. In addition, the list of criteria is not a definitive list for determining an individual’s status as being an Israeli resident for tax purposes. Consequently, the Israeli courts examine the entire set of facts and circumstances in their entirety.
The residency presumptions
Along with the centre of life test, it is presumed that the centre of an individual's life during a tax year is in Israel if the residency presumptions apply. These are that:
For this purpose, under the Ordinance, a "day" includes a part of a day. Meaning, the entrance days to and exit days from Israel, are included in the day count.
According to court decisions, to the extent the presumptions are not satisfied, there is no reverse presumption regarding non-Israeli residency. That is, if the individual has stayed in Israel for less than 183 days there is no presumption that they are not an Israeli resident.
It should be noted that, theoretically, the residency presumptions can be rebutted both by the ITA and by the individual based on other indicators of the centre of life test, with the burden of proof being imposed on the party wishing to contradict the presumption. However, based on Israeli court decisions, practically it is very difficult for taxpayers to rebut the residency presumptions, although it is possible.
In this regard, commencing from 2016, an individual who takes the position that they are not an Israeli tax resident, notwithstanding the fact that they satisfy the one of the residency presumptions, is required to file a special notice with the ITA, which sets out the facts on which they based their claims, and adds supporting documentation.
Splitting the tax residency of the family
In the recent years, the question of whether an individual can have a separate tax residency from their spouse and family has been a matter in dispute in a number of Israeli court rulings. Although it is possible for an individual to have a separate tax residency from their spouse and family, the split of the tax residency such that the individual will have a separate tax residency from their spouse and children, was rarely recognised by the ITA and by the Israeli courts.
It is not clear under Israeli law under which circumstances an individual can have a different residency status to that of his family and there are no clear criteria to determine when the centre of life of an individual can be separate from their family. Generally, the tax residency of an individual who claims for a separate tax residency from his family should be examined based on the centre of life test and on the residency presumptions, and based on the specific facts and circumstances of the individual, including all the factors that were discussed above.
According to the ITA's position, as provided in a circular published in 2012, the individual's place of residency cannot be separated from the place of residence of their family, unless the couple are separated or under very extreme circumstances. The circular provides two private tax rulings as an example to the ITA's approach.
The first was the case of an individual who intended to leave Israel and emigrate to a foreign country with his spouse and children; however, due to a severe illness of their son, which required medical treatment that could not be obtained in the foreign country, the spouse continued to live in Israel with the children while the individual left Israel, lived and worked in the foreign country.
The individual visited Israel for short periods only and his number of days in Israel per year was between 40 and 70. It was determined by the ITA that the individual should be considered as a foreign tax resident even though his family lived in Israel.
The second case involved an individual who left Israel for a foreign country; however, his wife and children never left Israel. His number of days in Israel each year was between 90 and 150.
In these circumstances, the ITA determined that the individual remained an Israeli tax resident, as he had a permanent home in Israel in the relevant years, where he lived with his family for substantial periods of time (three to five months a year).
From the above examples, it can be concluded that the ITA's position is that in extraordinary cases there can be a split of the tax residency of a family and that the number of days the individual spends in Israel is a critical factor in its decision whether to recognise a separate tax residency for the individual and their family.
In a court ruling from 2014 in the case of the CA 4862/12 Kfar-Sabba Assessing Officer v Michael Sapir (the Sapir Case), the Supreme Court determined that under certain circumstances, the centre of life of an individual may be different to that of their spouse and children, even if the couple are not separated. However, the court emphasised that the circumstances of the taxpayer in this case were extraordinary and that the individual is required to demonstrate that they indeed have a separate life; that the centre of their life is based in a different country than their family; and that their sole tie to Israel is the family. The family is considered as a very significant tie to Israel and, therefore, the individual has to show other very significant ties to the other country.
In addition, case law over the years has indicated and emphasised certain additional factors which should be considered.
The age of the children (minor or adult)
In the Sapir case, a separate tax residency of spouses who had adult children was recognised. The Supreme Court mentioned that in case of adult children, it is not rare that one of the parents lives in a different country from the children. A similar consideration was mentioned in the CA 477/02 Gonen v Assessing Officer Haifa (the Gonen case), although in that case the separate residency was not recognised by the Supreme Court. Having said that, separate residency can be recognised in the event of minor children as well, based on the specific circumstances.
Where the individual spends the holidays and personal events, weekends, etc
In the case of CA 3328/15 Plonni v Assessing Officer Ashkelon (the Plonni case), although the individual claimed that his marriage to his wife was only formal and that he had another spouse in the foreign country, the Supreme Court emphasised that the fact that the individual spent weekends and holidays in Israel with his formal wife and with his children supported his Israeli residency.
Number of days in Israel and whether the individual has spent most of the year outside Israel
In this regard the court also examines the nature of the individual's stay in Israel (consecutive or inconsecutive stay, number of entries, long stay or short stay, etc) and the reasons for their stay.
Homes in Israel and abroad
Whether the family's house in Israel is the individual's permanent home or if they have a separate permanent home available to them, physically and legally, in the foreign country where all their belongings are located.
Other connections to the foreign country
The significance of the individual's economic and social ties in the foreign country.
Those that depend on the individual, as opposed to,. ties that do not. The place where the spouse and the children live is a tie that is not dependant on the individual, while place of work, business, social life, economic interests etc, are ties that depend on the individual. In a separate tax residency situation, the ties that depend on the individual should support their separate residency.
It should be noted that proving that the centre of life of an individual is outside of Israel while their family live in Israel might be easier if that other country has a tax treaty with Israel. Otherwise, the test is more rigid.
Developments regarding separate tax residency of an individual and their spouse and family
Two recent court rulings from the last year shed more light on additional factors that should be examined when an individual claims for a separate tax residency from their family and spouse.
Tax Appeal 41182-01-19 Zeev Lederman v Assessing Officer Tel Aviv 5, (Tel Aviv District Court, April 2021) (the "Lederman case")
In this case, the taxpayer, a former Israeli resident who left Israel in 1990 and became a US tax resident, claimed that he returned to Israel and became an Israeli tax resident in 2009, while the ITA claimed that he should been considered as an Israeli resident from 2002, when the taxpayer's spouse returned to live permanently in Israel with their children. The taxpayer further claimed that he should be entitled to the benefited tax regime for new immigrants and long-absent returning residents under which an exemption from Israeli tax on foreign-sourced income is granted for a period of ten years.
The District Court's decision focused on determining the "turning point" from which the taxpayer should be considered as an Israeli tax resident (whether it was in 2009 as the taxpayer claims, or in 2002 as the ITA claims).
Regarding the separate tax residency of the taxpayer and his spouse, the District Court's ruling sets out the tension and the difficulties between the taxpayer and his spouse during the years, and the fact that although they were not formally separated or divorced, they lived separately; the taxpayer's centre of life was in the USA, where he worked in senior roles, and his wife's centre of life was in Israel together with their children and close to her family. The court mentioned that a formal and absolute separation of the couple could support the taxpayers claims; however, it is not a necessary factor since it is possible that a couple will have a good long-distance relationship.
The District Court ruled that it was only in 2009 when the taxpayer returned to Israel with the intention to move to Israel and create a better relationship with his wife and children, while disconnecting the financial ties he had to the USA, due to the financial crisis at the time and the significant losses he had incurred. The court also pointed out that in 2009 there was a significant increase in the number of days the taxpayer spent in Israel compared to previous years.
In examining the taxpayer's centre of life, the District Court emphasised the fact that the taxpayer arranged his life around his professional life and workplaces, which were mainly outside Israel. It was only in 2009 that he strengthened his financial ties to Israel, which supported his argument that this was the turning point of his centre of life.
An additional important factor that the court emphasised is the fact that the individual submitted US tax returns as a US tax resident, with a US address on the returns.
Tax Appeal 61908-01-19 Babakhnov v Gosh Dan Assessing Officer (Tel Aviv District Court, April 2021) (the Babakhnov case)
In this case, the taxpayer, who was an Israeli tax resident, claimed that during 2004–08 he was a tax resident of Russia, although his spouse and children remained Israeli residents. The taxpayer further claimed that he came back to Israel in 2009 and should have been entitled to the benefited tax regime for new immigrants and long-absent returning residents under which an exemption from Israeli tax on foreign-sourced income is granted for a period of ten years.
First, the District Court examined the residency presumptions and found that during 2005–08 the taxpayer did not meet the threshold to be deemed as an Israeli tax resident. Having said that, the District Court ruled that although the taxpayer spent, on average, 300 days outside of Israel, this factor by itself is not enough and he should still be considered as an Israeli tax resident since all the other objective factors as well as the subjective factors, show that his centre of life remained in Israel with his family.
The District Court found that most of the taxpayer's financial and social ties were to Israel and it emphasised that the taxpayer had not presented any proof that he was a tax resident in any country other than Israel, or submitted tax returns or paid taxes in any country other than Israel. Additionally, it was not only the taxpayer's family who had stayed in Israel, but also his financial interests, such as offices, official address, bank accounts, etc.
Regarding the claim for a separate tax residency of the taxpayer and his family, the District Court established the factor of the "awareness of the family" as one of the factors that should be examined in separate residency cases. The court emphasised that there is a difference when the spouse and family are aware of the separate tax residency of the individual and they actively choose to live separately (such as in the Sapir case) compared to cases of individuals who manage "secret" or "double" lives in other countries (ie, have a relationship with another spouse, etc) and their families are not aware of such double lives (such as in the Babakhnov case).
A separate tax residency of an individual and their spouse and family has been recognised in case law as well as by the Israeli Tax Authority. Although there are no clear rules determining the tax residency of individuals who claim for a separate tax residency from their spouse and family, it seems that the circumstances should be extraordinary and that the taxpayer should actively prove that their centre of life is outside Israel. In proving such a claim, consideration should be given to the taxpayer's number of days in Israel, and to their financial and social ties, as well as to the awareness of the family to the splitting of the tax residency.
It should be mentioned that there is an intention of the Israeli Tax Authority to implement changes in Israeli law regarding the determination of Israeli residency, including the implementation of clear and rigid rules regarding the separation of the centre of life of an individual from their family's place of residence. As of June 2021, such new rules have yet to be introduced to the Israeli parliament.
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