General Principles

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 Israeli tax rates applying to individual taxpayers are set out below.

Income tax

Israel levies personal income tax at a progressive rate, starting at 10% for a gross annual income (derived from personal effort) of approximately USD20,300, and increasing up to a maximum of 47% for a gross annual income of approximately USD135,000 and above. In addition, a surtax of 3% is levied on certain types of income exceeding an annual income of approximately USD174,000. 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 25% capital gains tax on gains not derived from inflationary increase in value. However, 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%.

Corporate tax

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”.

National insurance

Israeli residents over 18 years 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:

• employees: 3.5–12%;
• self-employed: 5.97–17.83% (can be reduced to 15.62% for women above the age of 62 and men above the age of 67);
• household employees: 2%;
• non-working individual with income: 9.61–12%; and
• early pension (women below the age of 62 and men below the age of 67): 3.49–11.79%.

Unemployed individuals with no income pay approximately USD50 a month.

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:

• employees generally: 3.55%-7.6%; and
• household employees: 5.25%.

Trust Tax Regime

Trusts (including foundations) are subject to Israeli taxation and reporting obligations if they have at least one Israeli tax resident settlor or beneficiary, or if they have an Israeli asset.

Similar to the taxation of individuals described above, 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 applicable tax regimes applying to trusts in Israel are set out below.

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.

Relatives Trust

A trust qualifies as an Israeli Relatives Trust if:

• the settlor is each of the beneficiaries’ parent, grandparent, spouse, child or grandchild (if the settlor and the beneficiaries are relatives of second degree – including siblings, siblings’ issues, or parents’ siblings – the assessing officer is to check and confirm that the trust and any contributions thereto were made in good faith and that no beneficiary has paid any consideration in order to be entitled to the trust’s assets); and
• the settlor of the trust is still alive in the relevant tax year.

A Relatives Trust is subject to tax in Israel, at the trustee’s irrevocable election, of either:

• 30% of all distributions sourced from income generated and produced outside Israel and distributed to Israeli beneficiaries, unless the distribution originates from the principal funds of the trust – which distribution is tax exempt; or
• 25% of all the trust’s income generated or produced outside Israel; in such a case, any distributions made therefrom are tax exempt.

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:

• it is not an Israeli Resident Trust or a Testamentary Trust;
• it is deemed an irrevocable trust under the Israeli Income Tax Ordinance;
• all its beneficiaries are identified as non-Israeli tax residents (in this respect, a yet-to-be-born beneficiary is deemed to be identified);
• at least one of its settlors is an Israeli tax resident (including a settlor who was an Israeli tax resident upon passing away); and
• the trust’s terms specifically state that an Israeli beneficiary cannot be added to the class of beneficiaries.

A Foreign Resident Beneficiary Trust is tax exempt in Israel, except for income generated or produced in Israel.

Testamentary Trust

A trust qualifies as a Testamentary Trust if:

• it was settled under a deceased’s valid will; and
• all of the deceased settlors were Israeli tax residents when passing away.

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:

• all its settlors and beneficiaries are non-Israeli tax residents, and there were no Israeli tax resident beneficiaries since the settlement of the trust; or
• all its settlors passed away and there were no (and currently there are no) Israeli tax resident beneficiaries since the settlement of the trust.

A Foreign Settlor Trust is tax exempt in Israel, except for income generated or produced in Israel.

Tax rates

The tax rates applicable to all the above types of trusts are those applicable to individual taxpayers, as detailed above.

Taxation of distributions

Distributions from an Israeli Resident Trust, Israeli Beneficiary Trust and 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.

As of August 2023, 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 provided they meet the criteria and conditions set by law.

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 below.

This “new immigrant” regime, with its exemptions from taxation and reporting, makes Israel a jurisdiction worthy of consideration 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 an OECD member, as well as 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.

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 (regardless of their citizenship status) who purchase a home which will be their single home.

The following are the applicable purchase tax rates for non-Israeli tax resident individuals purchasing residential real estate in Israel:

• 8% on the value of the real estate to approximately USD1.6 million; and
• 10% on the value of the real estate above approximately USD1.6 million.

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 it is their only residential real estate in Israel:

• no tax is paid on the value of the real estate up to approximately USD520,000;
• 3.5% on the value of the real estate between approximately USD520,000 and USD617,000 (approximately);
• 5% on the value of the real estate between USD617,000 and USD1.6 million (approximately);
• 8% on the value of the real estate between USD1.6 million and USD5.3 million (approximately); and
• 10% on the value of the real estate above approximately USD5.3 million.

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:

• 0.5% on the value of the real estate up to approximately USD522,500; and
• 5% on the value of the real estate above approximately USD522,500.

In certain cases, the above special rates for new immigrants can also be applied to the purchase of land.

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, no legislative changes have taken place.

Nonetheless, due to the current local and global economic recession, the Israeli government faces the inevitable task of financing its increasing expenditure. Consequently, the Israeli Tax Authority wishes to levy either inheritance tax or estate tax, as well as limit the New Immigrants Relief, by broadening the definition of the Israeli tax resident to include any person living in Israel for 100 days in a certain tax year, and 183 days in the two preceding years, and further enforce the current applicable 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, in 2021, the Swiss Federal Tax Administration informed 120 Israelis and 150 entities connected to said Israelis that, as per the Israeli Tax Authority’s 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 the 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, although the anonymous voluntary discovery procedure offered by the Israel Tax Authority (ITA) expired on 1 January 2020.

It should be noted that currently there is no public beneficial ownership register. However, the Israeli Companies Registrar manages the Companies Register and the Partnerships Register, in which the direct shareholders, or partners, as applicable, are noted. 

Israel is a relatively young country, existing for only 75 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. However, as the country’s founding generation is becoming elderly, the transfer of businesses and wealth to the third and fourth generations is progressively increasing. As a result, multi-generational wealth transfers are expected to play a major role in Israel’s economy in the near future.

In general, older first and second generations of means prefer to transfer their wealth to their children by way of a straightforward inheritance. However, in recent years there has been sturdy growth in the older generations’ interest in legal mechanisms such as trusts and the establishment of family constitutions to assist in succession planning. However, their mistrust of financial and legal systems, which is the result of years of nomadism and the exclusion of the Jewish people, is still evident.

Additionally, 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 self-made wealthy individuals, with young children or in their second marriage, tend to prefer setting up trusts and similar arrangements, such as guardianship, 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 law issues that balance the competing claims of Israeli and foreign laws over succession, 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 (one or more) 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. 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;
• the country of residence, usual abode or citizenship of the deceased, either upon their death or when the will was made; or
• the country where the real estate is situated, when real estate is involved.

Even when an estate is in place, the rules that are applied are those in force in the country of residence of the deceased at the time of their death, even if the will was drawn up elsewhere.

It is important to note that, as of 2015, residents of the European Union who hold Israeli citizenship can decide, as part of their will, which law should govern their estate, and for that matter pick the Israeli law.

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 if there is even one Israeli tax resident beneficiary. Such taxation exists even where the trust’s settlor has not been an Israeli tax resident 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, settlor and/or protector 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.

• If the deceased is survived by children and a spouse, the deceased’s spouse receives all joint household belongings (the family’s car, furniture, housewares, electrical appliances, etc) and half of the estate, while the remaining half is divided among the children, equally.
• If there are children, but no spouse, the deceased’s children share, equally, the entire estate.
• If there are no children, but the deceased is survived by a spouse and parents, the spouse receives all joint household belongings (the family’s car, furniture, housewares, electrical appliances, etc) and half of the estate, while the remaining half is inherited by the deceased’s parents.
• If there are no children and grandchildren, or the deceased’s parents are not alive, but there is a spouse, the spouse receives all joint household belongings (the family’s car, furniture, housewares, electrical appliances, etc) and two thirds of the estate, while the remaining third is inherited by the deceased’s siblings (or if there are no siblings, then the deceased’s grandparents and their offspring); in addition, if the spouse was married to the deceased for at least three years, and has lived with the deceased in the deceased’s property, the spouse also receives the entirety of the deceased’s share in that property.
• If there are no children nor a spouse, the deceased’s parents and siblings share the entire estate.
• If there are no children, parents, siblings or grandparents but there is a spouse, the spouse inherits 100% of the estate.
• If there are no children, parents or siblings and no spouse, the estate is divided equally between the deceased’s grandparents and their offspring.
• If a deceased’s child is not alive, said child’s share of the estate is divided equally between the deceased’s grandchildren from said child.
• If an heir stated above is not alive, their share of the estate passes on to their legal heirs.

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 by said spouse, 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, 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:

• properties owned by a spouse prior to the marriage;
• properties gifted to or inherited by a spouse during the marriage; and
• payments paid to a spouse by the Israeli National Insurance Agency or in accordance with any law relating to compensation for corporal damage or death.

As long as the marriage has not terminated, due to the 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, meaning such agreement can be drawn before or during the marriage. 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 Authority 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 the 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 rights of the deceased’s heirs override the deceased’s right to privacy. It is therefore thought 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 to cryptocurrency, as it does 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 legal system, recognises the validity of trusts and foundations.

Israel’s Trust Law, 5739-1979, 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 private hekdesh);
• a testamentary trust; and
• a charitable trust called a public hekdesh.

For estate planning purposes, Israelis tend to use either a very detailed private trust for the benefit of third parties – a private hekdesh – or a comprehensive testamentary trust, each 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 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, if 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. 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 of whether 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 that protect the shareholders/limited partners from the risks involved with the underlying business.

Protecting the ownership of businesses from creditors’ risks can be achieved through the use of irrevocable and discretionary trusts. If 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, and unless the donee is a non-Israeli tax resident), 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 accompanied by a family constitution, which is a valid contract that governs the family’s younger generations’ decision-making process when they gain control over the family business. The family constitution can be drawn during the lifetime of the founding generation, or alternatively be added as an appendix to the will, thus conditioning the receipt of the inheritance, with the execution of the family constitution.

Many wealthy families use a combination of both methods, thus allowing training as shareholders or as directors 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 Israeli tax residents 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, if an Israeli tax resident receives (whether as a gift or inheritance) a property from abroad, regardless of whether partial or whole, a pre-ruling can be requested from the Israeli Tax Authority allowing for a step-up of the original cost to the fair market value of the property transferred. The Israeli Tax Authority would most likely impose certain conditions on the step-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 public disputes regarding trusts, foundations or similar entities conducted under Israeli law in Israeli courts. However, in recent years, as the country matures, the Israeli judicial system is seeing an increase in the number of disputes that come before it; disputes that can be categorised into three kinds.

The first kind of disputes relate 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.

The second kind of disputes deal with the issue of the estate’s scope of assets. Recent years have seen an increase in spouses and children of deceased claiming that property that is allegedly part of the estate does not in fact belong to the deceased’s estate. For that matter, spouses who are not the sole heirs would tend to claim they are entitled to half of the property under the “property equalisation” regime, while children and other interested third parties would argue that parts of the deceased’s property were given to them as a gift prior to the deceased’s death.

The third kind of disputes focuses on international and cross-border inheritance disagreements, mainly due to the demise of wealthy Jews who held property in Israel and abroad.

Under Israel’s 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(s).

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 pass-through 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 fiduciary 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 with diligence as a reasonable person would have acted under similar 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 Israel’s 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, to preserve the capital of and to produce income for 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. As a result, wealthy Israeli families tend to regulate the desired investment policy within the framework of the trust deed.

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 of an Israeli-law governed trust.

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 the purpose of holding an active business and ensuring 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.

Citizenship

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, as well as the 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 not any person who:

• had been a Jew and has voluntarily converted their religion;
• had been engaged in an activity against the Jewish people;
• may endanger public health in Israel or the security of the State of Israel; or
• has a criminal record and is likely to endanger public welfare in Israel.

It should be noted that the Israeli government is currently considering the abolishment of the right of citizenship of grandchildren of a Jew and their spouses, if they are not Jews themselves. 

A non-Jew adult may acquire Israeli citizenship by naturalisation subject to several requirements, all being at the discretion of the Israeli Minister of the Interior, including:

• they have resided in Israel for at least three out of the five preceding years; and
• they have legally settled in Israel.

It may also be required that the person’s prior nationality be renounced.

Residency

A Jew eligible for citizenship is also eligible for permanent residency. A non-Jew may apply for residency (temporary or permanent) under certain circumstances, which is a fairly long process, imposing different requirements.

Domicile

Israeli law does not recognise the concept of domicile.

Israeli citizenship of a Jew becomes effective on the day of arrival into Israel, or receipt of a new immigrant’s certificate, whichever is later. 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 Israel’s 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, which can also include directions as to the desired way of management of said person’s business and property. 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 sale, transfer or charge of a real estate property;
• the rental of a real property subject to the Tenant Protection Laws;
• any act, the validity of which is conditioned upon registration in a register kept by law;
• making non-customary gifts;
• provision of a guarantee;
• any act that imposes a liability on the ward, such as a loan, a pledge or a guarantee;
• mode of investment of ward’s funds exceeding ILS500,000; and
• collection of the guardian’s remuneration.

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 retirement age (currently, 62 and 8 months for women (gradually rising to 65) and 67 for men; with the exception of bereaved parents for whom the retirement age is 71) senior citizen status and a 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, including 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, 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, and as of January 2022 also for same-sex couples, provided, inter alia, that:

• all parties are Israeli residents;
• the surrogate is an unmarried woman, meaning single, widowed or divorced (although certain exemptions apply) who has already had at least one child of her own, underwent no more than four childbirths, and is above the age of 22 but younger than 39; and
• the surrogate is not related to either of the designated parents.

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 for 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.

Posthumously Conceived Children

Although there is no law specifically permitting the use of a deceased’s sperm to posthumously conceive a child, Israeli courts tend to permit implanting sperm, either collected during the deceased’s lifetime or after his death, especially in circumstances where the deceased left behind a spouse.

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 register.

As the registration in the Israeli population register is not legally valid, and does not automatically grant same-sex couples all the rights of married couples, many same-sex couples choose not to marry abroad, but rather select to enter into common law relationships (through contractual marriage), providing them with equal access to many of the rights of married couples (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 ILS9.35 million or 30% of the donor’s chargeable income for the same year, whichever is lower.

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 audit regime. In addition, all four structures cannot distribute any profits, directly or indirectly, to their members, shareholders or trustees, including their founders or settlors.

Thus, the actual structure of incorporation depends upon the selected source of law governing the creation of the structure, namely:

• an amutah has a separate legal personality and is governed by the Amutot Law, 5740-1980;
• a charitable company has a separate legal personality similar to a corporation and is governed by the Companies Law, 5759-1999;
• a public hekdesh, which is a form of charitable trust, does not have a separate legal personality and is governed by the Israeli Trust Law; and
• a charitable fund has a separate legal personality as a corporation and is governed by the Companies Law, 5759-1999.

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. Alternatively, a donor may wish to consider setting up a Donor-Advised Fund with an authorised and regulated organisation.