Webinar Transcript (12/12/2024): "ParkBridge FALL Webinar # 6: “International Taxation Law in Israel: Are Your Client’s Prepared for the New and Evolving Rules?”
Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact: jonathan@parkbridgewealth.com)
Presenter: Boaz Feinberg, Partner, Arnon, Tadmor-Levy (Contact: boaz.f@arnontl.com)
Jonathan Shenkman: Okay, good morning. And welcome to the Park Bridge Wealth Management fall Webinar Series. This program is entitled International Taxation Law in Israel: Are your clients prepared for the new and evolving rules? As always, my name is Jonathan Shenkman. I'm the president and chief investment officer of Park Bridge Wealth Management. In that role, I serve in a fiduciary capacity to help my clients achieve their financial objectives. The goal of my programs is to bring professionals together to help them better serve their clients.
This is done by educating attendees on the latest topics in wealth planning, and by encouraging collaboration between a client's attorney, CPA and financial advisor where appropriate. My practice focuses on working with high net worth families, businesses, and not-for-profits. I manage individual investment portfolios, trust accounts, corporate retirement plans and endowments to help my clients achieve their financial goals. In addition to the 20 or so events I run every year, I also do a fair amount of writing on the topics of investing and financial planning. You'll see my work in a variety of periodicals, including Barron's, CNBC, Forbes, Kiplinger, the Wall Street Journal and Trust and Estates magazine to name just a few. You can see all my work on my website at parkbridgewealth.com/articles, or by following me on social media at @JonathanOnMoney. Additionally, you could check out my weekly Podcast which is also called Jonathan on money, and you can listen to that on Apple, Spotify or wherever you get your podcasts.
Today, we're privileged to hear from Boaz Feinberg, who's a partner and the head of the tax practice at Arnon Tadmor-Levy, based in Tel Aviv, Israel. Boaz has nearly 2 decades of experience in taxation and financial regulation on both administrative and regulative levels as well as in litigation. In the areas of domestic and international tax law, Boaz specializes in advising and acting on behalf of corporations and high net worth individuals. He also provides advice and tax planning on mergers and acquisitions and other complex international transactions in the field of civil law. Boaz advises various trusts throughout their establishment and ongoing activities, advises and represents clients before the Israeli tax authorities in various judicial instances, including the Israeli Voluntary disclosure program. Today, Boaz will be speaking about international taxation law in Israel, are clients prepared for the new and evolving rules, and with that introduction I will now turn the program over to Boaz.
Boaz Feinberg: Thank you very much, Jonathan. It's always a privilege of mine to be in one of your podcasts and I'm always honored to speak to your colleagues and your clients. I think it's the 3rd time now, or even 4th that we're doing this once a year fall podcast about things that happen in Israel relating to taxation, international taxation, how they affect those clients who have a nexus to Israel, whether they are planning on immigrating to Israel, whether they have children in Israel, or if they have any investments in Israel.
As you know, I always say, first of all 30 minutes is never enough to speak about the things that are interesting in that respect. And the second thing you ought to know is that every year Israel has a mini reform in its tax rules, and there's always, never a dull moment in Israel, not only geopolitical, but also on the tax spectrum. So the agenda for this very short talk would focus on 3 issues. The first one would be new reporting obligations applicable to new immigrants, which is something that is now applicable for immigrants who would become Israeli residents for the first time on January of 2026. So there's 1 year to be prepared for this, and we'll discuss it in a minute.
Real estate taxation, a new reform specifically for new immigrants on purchasing their residential property, which is very interesting to any person who is thinking of moving to Israel and purchasing a house, a home, and finally, as always, taxation of trust. It feels like every time we speak, there are new issues to be discussing, because it's never ending. The rules are very, very complicated, and there are always questions that I'm receiving from US practitioners and from others relating to the taxation of trusts, depending on whether these are trusts that have settlors who immigrated to Israel or beneficiaries who immigrated to Israel, who live in Israel.
So we will start with the new amendment to the income tax ordinance relating to reporting obligations for new immigrants prior to this amendment that came into effect became law 6 months ago in Israel, following OECD's global task force, who were looking into Israeli regulations concerning reporting obligations, and whether or not Israel is able to catch in its net for obligate for reporting purposes those who are in Israel, or that have trust in Israel and based on the recommendations of the global task, the Global Forum, Israel has changed its rules, beginning relating to new immigrants, beginning from January of 2026.
Now, before or until January 2026, the rules since 2008 are that new immigrants, those who become Israeli residents for tax purposes for the first time in their life or senior returning residents, meaning an individual who became an Israeli resident after living 10 years consecutive tax years 10 years before he returned to Israel relating to those 2 types of individuals, a person would be exempt from paying taxes on its foreign sourced income and also would be exempt from filing any tax return, or any other type of reporting relating to his foreign sourced assets.
And now this is all going to change. Beginning of January of 2026, which is approximately one year from now. Anyone who became an Israeli resident for the first time or is a senior attorney Resident, they would now be obligated to file tax returns on an annual basis relating to their foreign sourced income and to their foreign sourced assets. This would mean that it would be once a year annual returns, and anyone who opens up a business in Israel open up the tax file in Israel would usually also be required to file a statement of capital relating to the assets that he owns.
Whether it's now in Israel or outside Israel before the amendment, and until January of 2026, any person who came to Israel did not need to file any tax returns on their foreign sourced income, and if they had a business, and they did open up a tax file in Israel for their Israeli sourced income, they were not obligated to include in their tax returns, or in their capital, in their statement of capital any mentioning of assets or income that were sourced outside of Israel.
Another issue that is also applicable from January 2026, relates to trust until January 2026. Any person who made Aliyah immigrated to Israel, and, for example, was a settlor of a trust, he was not obligated to file any type of notification relating to that trust, that again, for the period of 10 years, provided, of course, that the trust consisted of assets that are all foreign, sourced to Israel.
That also is going to change. And this is specifically an issue that the people who need to be aware of this are the trustees, because usually when a trust is formed before the person makes Aliyah immigrates to Israel, and then becomes an Israeli resident, or if it's a beneficiary of a trust, who made Aliyah and became a resident of Israel. In those situations it would be usually the obligation of the trustee to notify the tax authorities upon the existence of the trust within 90 days of becoming an Israeli resident.
So that would be the rule. Starting of January 2026. Any person who wants to avoid for at least 10 years to file any return, any kind of reporting relating to his foreign income or his assets in Israel, should absolutely recommend his clients to move to Israel before January 2026, and I would also recommend not to wait for the last minute, because it's always a really good question. When do you actually become a resident of Israel? And if, for example, you come here on December, but you made your aliyah process, and it was ended only on beginning of January 2026, Israel may absolutely claim that you've became a resident of Israel, only starting January 2026, and therefore obligated to file tax returns and other reporting obligations on your foreign assets.
One issue, that is seemingly technical is what happens, for example, with US residents and citizens, and they remain US citizens, and they continue on to file US tax returns. How would they now report following the amendment as of January 2026? How would they report to Israel their income in the United States? Israel has said, the tax authorities have clearly said that they realize it's not going to be easy, technically, to adapt the calculations made on the income and other issues relating to the calculation of the tax, and they are willing to accept US tax returns that were filed to the IRS and to use that as an indicator and a sole indicator to the assets and income that were generated in Israel again.
Very important to remember. For the first 10 years those assets and income. If there is any income source to the US and not to Israel, those would be tax-free in Israel, especially regarding passive income, dividend, interest, rental income and capital gain tax and capital gain if it's business. And it was generated outside Israel, which is always a question and needs consultation on if it's sourced to the US. That as well would be tax free. So filing a tax return, including your US tax return, including it in your Israeli tax return, that should be enough, of course, following the 10 years, that individual would become like any other Israeli resident for tax, and would start paying taxes on its worldwide income like anybody else.
The other thing that happened this year is a new reform in transfer tax and real estate taxation transfer taxes. You pay in Israel for the purchase of real property, whether it is commercial or residential. Before the amendment, new immigrants, and only only new immigrants, not senior returning residents as opposed to tax exemption. The 10 Year tax exemption is also applicable to senior returning residents. The transfer tax exemption or reduction actually is only applicable to new immigrants, those who were never Israeli citizens or residents, and became Israeli residents for the first time.
They may enjoy before the change in law, they would have enjoyed a reduction in the transfer tax paid on the purchase of real property in Israel, under certain conditions among them that the property is either residential or commercial, that is intended for the use of the new immigrant. It was not possible to enjoy the reduction in the transfer tax if you purchased a residential property and not use it for your own dwelling purposes. So if it's used for your own purpose, and it was purchased one year before Aliyah, and not more than 7 years from Aliyah.
Then you would be eligible to pay a reduced transfer tax of 0.5% on up to 1.98 million shekels on the 1st 1.98 shekels. That would be the 1st bracket approximately $535,000 and a flat 5% on the excess purchase amount. If you're not a new immigrant and you purchase residential, it would depend on certain issues. First, whether or not you're an Israeli resident or not, and secondly, whether or not this would be your 1st residential property in Israel or not. Later stage, I will show you exactly a table of what is the difference between the reduction in the transfer tax that is reduced as opposed to regular, either foreign or Israeli residents who are purchasing residential.
One of the problems with the conditions before the change in law relates to the fact that the property was supposed to be purchased one year before Aliyah and in many cases that caused an issue, especially if someone purchased a house from a contractor, and in that situation, of course, it was very possible that the house would not be ready for living in it before the end of one year, and that meant that you had to sign an agreement with a contractor, and you had one year to become an Israeli resident. If you failed to do that, you would not enjoy the reduction in the transfer tax.
So one of the things that were changed right now other than the rates that we will touch in a minute was that from now on, foreign residents who sign an agreement to purchase residential property from a contractor may receive the tax benefit if they move to Israel no later than 3 years from the date of signing the agreement. And that is very, very important. People are not in any problem of debating whether or not they need to come, live in Israel before the house is ready, rent out an apartment or lose on the reduction in the transfer tax, but rather now they would have 3 years from the date of signing to become Israeli residents usually in Israel. And that's again, I'm emphasizing the term. Usually 3 years are enough from the date that a person signs a contract with the contractor and having the house ready for living in it.
The other thing that is very important and that was changed is that right now under the new reform, there is no requirement to enjoy the reduction in transfer tax that the apartment would be used specifically for the immigrants personal residential usage. And you can decide that you are using this specific reduction in transfer tax as a new immigrant, even on a second apartment, which may be an investment apartment. It doesn't necessarily have to be your dwelling house.
And here, I understand that you will be able to receive the slides after the talk, and you can look into this a little bit more clearly. But you can see here the differences between transfer tax with relief as a single property owner on a person who is a non-immigrant. Anyone, a transfer tax on new immigrants before the amendment, when it was 0.5% and 5. And the new transfer tax. You could see the property value running from $500,000 for a residential property to 5.5 million dollars, and the differences between the transfer tax rates. You could see, for example, that on 5.5 million it would be better to use the 1st house reduction.
And that is only provided that you're an Israeli resident. If you're an Israeli resident, and you are purchasing your 1st house. You would probably better enjoy not the new immigrant reduction. But rather than you, the 1st apartment reduction.
So that's with regard to real estate immigrating with a trust that will be the final issue we will discuss. And it's always a lot of questions that I received from my clients, a lot of issues that always emerge, whether it is a person who is a settlor of a trust, and is immigrating to Israel, or whether it's a beneficiary who immigrated to Israel, and is a beneficiary of a trust that was formed either before he became an Israeli resident or after.
So really, in a nutshell, a few consequences of being a settlor of a trust immigrating to Israel that you must look into, and I always always recommend and urge people to try to do this, try to plan ahead before you actually make Aliyah.
The first one is a real case that just happened to a client of mine, and if you had not consulted me, you would be in real trouble. The first question is, when you make Aliyah as a settlor, are there any other beneficiaries in the trust who are already living in Israel? And the reason is that this client of mine, very wealthy individual from the Midwest, planned to make Aliyah and he called his lawyer, who doesn't deal with taxes and certainly not with taxation of trusts, and he asked them a simple question.
He said, I understand from my friends and colleagues that if I make Aliyah I'm exempt for 10 years on anything that is generated in the United States. Is that correct? And my partner, a lawyer who helped him with real estate in Israel, with investments said, "Sure, that's what I understand also. But you know what, how about I speak to Boaz before you actually make aliyah. Let's just be 100% certain that that is, in fact, the situation that you will enjoy the 10 Year tax holiday."
And the partner called me and asked me that question. I said, well, that would depend. It would depend on whether or not he has any children living in Israel. Does he have any children living in Israel? He said, absolutely he does, and they live here for 20 years now. So really they live here for 20 years. That means they live here for over the 10 year tax exemption they personally had.
So that's interesting. So let me ask you another question. Does this guy have any trusts? And are any of his Israeli children beneficiaries in those trusts? And naturally he did not know the answer to that. So he called the client, and the client called me, and he said, yes, I do. I have certain irrevocable trusts that have my children in Israel beneficiaries, but not only my Israeli children are beneficiaries in that trust. I also have children living in the United States who are beneficiaries in that trust.
And I told him, it's very simple. The minute your footsteps in Israel, the entire trust income would be taxed in Israel from day one. No 10 year tax exemption for that particular trust, for the reason being that there are beneficiaries in this trust who are over their 10 year tax exemption.
So we needed to figure out what to do with that specific trust before he made Aliyah. One of the things that we decided to do eventually, because it was an irrevocable trust was to wind up the trust, wind up the trust, so that it won't be a situation where the entire trust income - and again, many of his children living outside Israel are beneficiaries in that trust. If we wouldn't wind it up, the entire trust income would have been taxed in Israel from day one.
So that's one thing you need to look into. Are there any beneficiaries in that trust who are already living in Israel when that settlor is planning on moving to Israel? The other question, are there any beneficiaries planning on immigrating to Israel? That would be another very, very interesting question, because the other situation where the seller will be way over his 10 years and then the beneficiaries would make Aliyah - they also would not be enjoying themselves the 10 year tax holiday on anything they receive from that trust.
So that is another situation that you need to be aware of. The other thing that is very important to understand - many settlors who have trust, who are Israeli residents are always contemplating on what to do with their real property in Israel.
So if it's not an irrevocable trust, and the purpose for the trust is not a skipping generation trust, or trying to reduce estate taxes, but rather to have it as a grantor trust, our recommendation first of all would be: You do not need a grantor trust for a real property in Israel. You do not need it, because usually in Israel, using the probate procedure, using a will in Israel is a pretty simple procedure. It's not like in the United States, where you would usually use a grantor trust in order to avoid the probate procedure.
Israel and Israel - usually the probate procedure would be the best approach to use. And this is applicable not only if you're an Israeli resident. This is also applicable, of course, if you're a US resident, but you have real property in Israel, so that would be usually our recommendation.
The reason by the way being that we would rather prefer not contributing real estate in Israel into trust, and that is, we discussed this, I believe before on previous podcasts. There is an issue with the Galleys precedent in the Supreme Court that says that you have an arbitrage of rules relating to real property in Israel. One is the income tax ordinance, which deals with trusts and the other one is the real property appreciation and transfer tax law which does not deal with trust, but it does deal with taxation of assets which are real property in Israel.
And they do not coexist. Real property would look differently on contributions of real property into trusts, the real property law, the tax law and the income tax ordinance would usually exempt contributions of assets into a trust, and that may cause a lot of issues that we would rather avoid.
Naturally, of course, if the purpose is having an irrevocable trust, and you do want to include in that irrevocable trust, the appreciation of the real property in Israel. That is something that we could do, but needs to be very carefully planned because of this arbitrage of rules.
And, lastly, being a beneficiary moving to Israel, questions that you need to ask yourself, or if you are practitioner questions, you need to ask your clients before they move to Israel. First of all, and most importantly, when you move to Israel as a beneficiary of a trust, are the settlers of the Trust still alive - settlers, or at least the spouse of a seller.
If the settlers are still alive and the beneficiary moves to Israel, that would classify the trust as a relative's trust. Relatives Trust has its own set of rules. It does tax certain income of the trust that is attributable to the beneficiary, whether it's under a distribution of profit to the beneficiary, or whether it is on an ongoing basis on the portion that is attributable to the beneficiary in Israel. Naturally, of course, first 10 years are exempt, but those 10 years, at the end of the day following those that trust would start paying taxes in Israel.
And if the settler and or his spouse is not alive, that would mean that that trust would be classified from day one as an Israeli resident trust. An Israeli resident trust is a trust that is taxed on its entire income and not attributable to the beneficiaries. And again, if there is a beneficiary in a trust that has siblings in the United States, and the parents are in the United States and passed away - first 10 years there would be an exemption following the 10 years. Though under the guidelines of the Israeli tax authorities, the entire trust income would be taxable in Israel.
So always plan ahead. If that is something that your client is planning on doing, make sure that if the settlers are not alive, things need to be made differently, so that you won't have the entire trust income taxable in Israel at the end of the 10 years of the beneficiary's life in Israel.
Second, that question you should ask yourself is, how would Israel calculate the profit upon the sale of assets by an Israeli beneficiary that was either received under a distribution, or if the trust itself sells the property. So a rule of thumb, if it's a beneficiary of a relative's trust, then you would get a step up in basis from the date that the asset was contributed into the trust. So that is the way that Israel looks at how to calculate the profit.
If it's a beneficiary of a trust with settlers who passed away, it's an Israeli resident trust, and in that situation there is a real possibility that Israel would claim that the beneficiary or the trust should pay the capital gain tax based on the original purchase price by the sellers.
So that is something that you also need to be aware of, and there are things to be done with the tax authorities to make sure that you may get a step up in basis from the date that at least the beneficiary became an Israeli resident. But that is something that you would have to approach the tax authorities before you are allowed to continue speaking of step up in basis and Grantor Trust. What to be aware of - here we're discussing a settler who's a US person who has a Grantor trust, and has a child in Israel without a trust.
If a person is a foreign resident and passes away, and is now the beneficiary in Israel inherits property, there is the possibility to approach the tax authorities and receive a step up in basis ruling that would be applicable for the date of death of the person who was the original owner of the property.
In Israel, just to be clear the way this works - if there is no inheritance or estate tax, and therefore there is no step up in basis, Israel does allow for a situation where the person who passed away is a foreign resident to allow a step up in basis. But if the assets were in a grantor trust, you need to make absolutely sure that the Grantor Trust language of the trust document is acceptable to the Israeli tax authorities that would allow the same step up to occur. If the Grantor Trust is not drafted in a way that allows the step up, you won't get the step up, so that is very important.
And I believe that time is over. I'm so sorry for this so much to go through. But I really want to thank you again, Jonathan, for this opportunity, and I hope everybody enjoyed the talk.
Jonathan Shenkman: Great. Thank you so much, Boaz. If anyone has any specific questions, new business opportunities, or any other issues they'd like to discuss, please feel free to reach out directly to Boaz or myself where appropriate. Now be sure to include his contact information in the follow up email to this program. And, as I mentioned at the onset, the goal of these programs is stay up to date on timely wealth management related topics, and to collaborate where appropriate, I think we can all agree that the clients who are best prepared are the ones who are served by a team of knowledgeable advisors.
Three more quick items before I let you go. First, this concludes my Fall Webinar Series. But have no fear. I'll be sending out my Winter Webinar Series in the coming days and we have an all-star lineup of speakers. In the meantime, if you have a friend, colleague, or client who would like to be notified of my upcoming webinars, they can email me with the word webinar in the subject line, and I'll add them to my Webinar distribution list. My email is Jonathan@parkbridgewealth.com. Second, you can follow all my work on X and Instagram at @JonathanOnMoney. You could also listen to my weekly podcast also called Jonathan on money which is available on Apple, Spotify or wherever you get your podcasts and you can watch my practical planning videos, which I post several times a week by following me on Youtube at Jonathan on money as well. And third, please take 30 seconds to fill out my survey at the end of this program. It helps me improve my webinars and provide timely and interesting content to attendees, and I thank you in advance for that. With that this concludes today's session. Please stay safe and healthy and have a wonderful day. Everybody.