ISRAEL: An introduction to Private Wealth Law

Israel: Private Wealth Law

Tax Regime

Israel offers new immigrants a favourable tax regime which has attracted substantial immigration of high-net-worth individuals and families in the last decade, as it allows them to manage their global wealth without incurring additional Israeli tax liabilities during their first years in Israel.

Under the special beneficial tax regime, New Immigrants and Long Absent Returning Residents (individuals who return to Israel after more than 10 consecutive years of being Foreign Residents for Israeli tax purposes) are entitled to exemption from Israeli income tax on foreign sourced income (including interest and dividends) and capital gains from the sale of foreign assets for a 10-year period since their transfer of residence date, unless they have requested otherwise.

Reporting Obligations

In addition, until recently, New Immigrants and Returning Residents were also exempt from reporting obligations on their exempt foreign sourced income and on their exempt capital gains for the same exemption period. A new law enacted in April 2024, cancelled the exemption from reporting obligations for New Immigrants and Returning Residents who will arrive in Israel after January 1st, 2026. Having said that, New Immigrants and Returning Residents will still be entitled to the tax exemption on their foreign sourced income and capital gains. Accordingly, individuals who consider immigrating to Israel in the near future should take into consideration that if they immigrate prior to 31.12.2025, the new law will not apply to them, and they should still be entitled to the reporting exemption on foreign income and capital gains.

The purpose of the substantive exemption and the tax benefits to New Immigrants and Returning Residents was to encourage the immigration and return to Israel of high-net-worth investors and qualified human capital, while promoting administrative simplicity and avoiding potential conflicts with the Israel Tax Authority. 

Management and Control Test

The beneficial tax regime for New Immigrants and Returning Residents includes additional substantive benefits, such as exemption from the management and control test for foreign companies of New Immigrants and Returning Residents and exclusion of New Immigrants and Returning Residents from the Israeli CFC rules.

Trusts Exemption

In addition, in certain circumstances, trusts with settlors or beneficiaries who are New Immigrants and Returning Residents, can also be entitled to an exemption from Israeli income tax on the trust's foreign sourced income and capital gains from the sale of foreign assets during the New Immigrants' 10-year exemption period.  

Although the taxation of trusts in Israel is a complex issue, the substantial immigration of high-net-worth individuals and families from common law jurisdictions has developed the trust taxation practice in Israel, as well as other legal and tax services to foreign trustees, family offices and trust companies of high-net-worth families. The Israeli rules regarding taxation of trusts apply to civil law trust entities as well, such as Foundations (under the laws of Holland, Lichtenstein, Panama, the Bahamas or the Netherland Antilles), Establishments (under the laws of Lichtenstein) and Reg. Trusts (under the laws of Lichtenstein).

Trusts as an Estate Protection Structure

Trusts of high-net-worth individuals and families in Israel are commonly used as an estate tax protection structure, whether in a structure that includes only a trust or with a special Underlying Trust Holding Company which serves as a "blocker" for estate taxes in other jurisdictions. In addition, certain types of trusts may provide asset protection from creditors as well as nuptial protection (from spouses). Also, as the Israeli Inheritance Law is conservative, high-net-worth families also use trusts as a vehicle to implement complex estate and inheritance arrangements.

The Taxation of Trusts

Generally, the taxation of a trust for Israeli tax purposes is determined according to its classification for Israeli tax purposes, which is based on the tax residency of the settlors and beneficiaries. There are 5 classification categories that should be examined separately in the case of each trust based on the specific circumstances. The residency of the trustee does not affect trust taxation in Israel, and a trust will be subject to the Israeli tax net if it has at least one Israeli settlor or beneficiary, even if the trustee is a foreign trustee. In addition, all types of trusts are subject to tax in Israel on Israeli-sourced income and capital gains. Accordingly, the different classifications of trusts pertain to the overall reporting obligations of a trust and to its tax obligations with respect to non-Israeli sourced income.

Tax Benefits to Foreign Investors

Israel is also a hub for qualified hi-tech industry and successful technology companies, and the country offers tax benefits to foreign investors on their investments in Israeli companies.  As such, non-Israeli investors are generally exempt from tax on capital gains derived from investment in the shares of Israeli resident technology companies and hi-tech companies. The combination of these two factors has attracted, and continues to attract, foreign investments in Israeli companies. A new law from July 2023, added additional tax benefits for investors in certain qualified Israeli hi-tech companies. These additional benefits include a tax credit of up to 33% of the investment amount for certain investments, as well as an option for investment rollover to individual investors in certain cases. In recent years, the number of young Israeli entrepreneurs who have made a successful exit and sold their hi-tech companies has increased, consequently increasing the number of high-net-worth Israeli individuals.

Philanthropic Activity

Philanthropic activity in Israel has also become an important aspect of wealth management for many high-net-worth Israeli families as well as Jewish families from all over the world who seek to contribute to or establish Israeli charities. Alongside the achievement of philanthropic purposes and legacies, families aim to streamline their worldwide charitable structures by creating efficient and tax optimized cross border philanthropy networks.  

Conclusion

To sum up, the combination of the substantial immigration of new high-net-worth individuals and families to Israel, and the increasing number of successful Israeli hi-tech entrepreneurs, has substantially developed and continues to develop the private clients practice in Israel and the legal landscape across the board, including taxation, real estate, family law matters, succession and estate planning and trusts matters.