israel - are-legal.com · Israel has a modern, independent legal system influenced by English common law and the precedent system, with vestiges of Ottoman law and traces of tradi-tional

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27.1 INTRODUCTION 717

27.2 GENERAL OVERVIEW 71827.2.1 Location 71827.2.2 Time zone 71827.2.3 Population 71827.2.4 Capital 71827.2.5 Airports 71927.2.6 Languages 71927.2.7 Political system 71927.2.8 International dialling code 71927.2.9 Introduction 71927.2.10 Government 71927.2.11 Political and economic stability 71927.2.12 Legal system 72027.2.13 Taxation 721

27.2.13.1 Import duties 72127.2.13.2 Tax incentives 722

27.2.14 Corporations 72327.2.14.1 The Israeli underlying company 72327.2.14.2 Companies 72427.2.14.3 Private companies 72427.2.14.4 Public companies 72427.2.14.5 Partnerships 72527.2.14.6 Joint venture 72527.2.14.7 Checklist for non resident companies 72527.2.14.8 Other forms of business organisations 72627.2.14.9 Foreign companies 726

27.2.15 Banks and trust companies 72827.2.16 Insurance 729

27.3 TRUST LAW 72927.3.1 Development of trust law 72927.3.2 Legislation 72927.3.3 Types of trusts, their uses and tax status 730

27.3.3.1 Foreign resident trust 73027.3.3.2 Israeli resident trust 73027.3.3.3 Foreign beneficiary trust 73027.3.3.4 Testamentary trust 73027.3.3.5 Israeli resident beneficiary trust 730

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World’s Leading Financial and Trust Centres

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27.3.4 Creation of trust 73127.3.4.1 Who may settle a trust 73127.3.4.2 Trust property 73227.3.4.3 Duration of trusts 73227.3.4.4 Beneficiaries 73227.3.4.5 Trustees 73227.3.4.6 Protector 73227.3.4.7 Trust deed 73227.3.4.8 Formalities 732

27.3.5 Administration of trusts 73327.3.6 Taxation of trusts and fiscal Regulations 733

27.4 LAW OF INHERITANCE 73327.4.1 Probate or inheritance proceedings 73427.4.2 Probate or inheritance procedures 73527.4.3 Appointment of an executor 736

27.5 REGULATORY AND LEGISLATIVE UPDATES 73627.5.1 Double Tax Agreements (DTA) 73627.5.2 Exchange of Information (EOI) 73727.5.3 Criminalisation of money laundering 737

27.6 CONCLUSION 737

27.7 SUMMARY FACT SHEET 738


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27.1 inTroDuCTion

For many years and for many individuals residing worldwide, Israel has been a preferred jurisdiction to immigrate to or to invest and hold assets. Many foreign residents invest in Israeli real estate and in public and private companies, and hold funds in Israeli banks.

Corporate structures formed under Israeli law may be utilised in many countries worldwide. Recent legislative changes have created a more advantageous environment for the management of investments from Israel via the use of trusts established in Israel or in foreign jurisdictions.

Israel has a fully developed system of banks and investment companies, pro-fessional communities (more than 60,000 licensed attorneys and more than

Map of Israel


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20,000 accountants), a respected corpus of indigenous law and a judicial sys-tem that recognises the common law trust.

With a population of eight million, Israel is culturally European with a demo-cratically elected government. The country is a republic with a prime minister, a cabinet and a unicameral parliament (Knesset) whose members are elected proportionately by all citizens. The Knesset enacts laws; cabinet ministers issue regulations. Israel’s appointed president holds a largely ceremonial posi-tion. The seat of government is Jerusalem, while Tel Aviv is the financial, economic and cultural capital.

Israel has a modern, independent legal system influenced by English common law and the precedent system, with vestiges of Ottoman law and traces of tradi-tional Jewish law. An independent judiciary rules in all civil and criminal matters save personal status, such as marriage and divorce, which is left to religious courts although the financial matters are resolved in secular family courts.

Israel’s tax system has undergone a major reform in recent years, commenc-ing with the taxation reform of 2003 pursuant to which an Israeli resident is taxed on worldwide income, and continuing with the Taxation of Trusts Law 2005 that became effective on 1 January 2006. In July 2013, additional legis-lation, the Law for the Change of National Priorities, was passed effectively overhauling the Taxation of Trusts Law 2005, specifically with respect to the advantages that law afforded non-residents of Israel.

27.2 GEnErAL oVErViEW

27.2.1 Location

Middle East, along the eastern coastline of the Mediterranean Sea, bordered by Lebanon, Syria, Jordan and Egypt.

27.2.2 Time zone

Israel Standard Time (UTC/GMT +2).

27.2.3 Population

The current population is approximately 8,051,200. The great majority of Israelis are either immigrants or the children of immigrants who established a new country and a flourishing business community. Legislation encourages immigrants and expatriates to come to Israel. The law provides for a ten-year tax holiday from the day of arrival with special incentives for the import of capital and business activities to Israel.

27.2.4 Capital

Jerusalem.


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27.2.5 Airports

⦁ Ben Gurion Airport (main international airport).

⦁ Sde Dov Airport (domestic flights).

⦁ Eilat Airport (domestic flights).

Israel boasts modern transportation facilities, with Mediterranean ports at Haifa and Ashdod offering fast container services to Europe, the Americas and beyond. The port at Eilat, on the Red Sea, provides a convenient route to Asia. High value products can be shipped via Ben-Gurion International Airport, with most major cities in Europe served by multiple daily flights. Direct flights to North America and Asia contribute to the 12.5 million passengers flown annu-ally by some 60 carriers. A modern highway system is complemented by a rapidly expanding rail network, interurban buses and internal flights. Advanced telecommunications, a lively press, abundant historical sites and breathtaking scenery make visits easy and memorable.

27.2.6 Languages

Hebrew, Arabic, English.

27.2.7 Political system

Parliamentary Democracy.

27.2.8 international dialling code

+972.

27.2.9 introduction

The last decade has seen a marked rise in the use of trusts and Israeli com-panies as aspects of international estate planning. Despite recent legislative amendments affecting trusts, the government remains supportive of this devel-opment, and continues to grant certain tax benefits to foreign investors and new immigrants.

27.2.10 Government

The government of Israel is elected by the people under a democratic voting system.

27.2.11 Political and economic stability

The Israeli economy is resilient, globally oriented and based heavily on foreign trade, especially in such high added-value areas as information technology,


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biotechnology, aerospace and defense. The country’s GDP is about $200 bil-lion, per capita GDP (Purchasing Power Parity) is just under $30,000 and exports are close to $60 billion. The economy was almost unaffected by the financial crisis over the past three to five years. Though exports declined some-what during that period, they have substantially recovered.

The economy, also fuelled by much direct foreign investment, is larger than those of all its immediate neighbors combined. The number of Israeli com-panies traded on NASDAQ ranks only behind the United States, Canada and China. Israeli companies may be dual-listed on NASDAQ and the Tel Aviv Stock Exchange.

Recent large discoveries of offshore oil and gas will diminish reliance on fuel imports and lead to sizeable exports. Many multinational technology firms as well as professional service firms maintain R&D or manufacturing facilities in Israel, including Intel, Google, Microsoft, Motorola and Apple. It is note-worthy that Israel spends 20% more per capita than the United States and 50% more than OECD countries on civilian R&D.

Israel is an OECD member, and maintains free trade agreements with the EU, EFTA, NAFTA, Mercosur and regional partners. Free trade negotiations are underway with India, China, South Korea, Chile and Ukraine. Israel has also signed double-taxation treaties with more than 50 countries, including all EU countries, Singapore, Russia, United States and Canada.

Most banks provide private banking services and maintain special centres for tourists and foreign investors. The five large Israeli banks have branches in Europe and the United States and representative offices in other countries. Global accounting firms, advertising agencies and retail chains are active locally. In 2012 regulations were issued permitting foreign law firms to estab-lish branch offices and provide legal services in Israel. As the global world evolved, Israeli clients very often require legal advice relating to the laws of other jurisdictions. The regulations permitting lawyers from foreign jurisdic-tions to establish branch offices in Israel allow for efficient and prompt services to locally-based clients.

27.2.12 Legal system

The history of Israeli law reflects the history of the country in modern times. Under Ottoman rule from 1516–1917, the law applied was a mixture of Muslim and Continental law. The legal system was rather primitive and reflected the simple way of life existing in the country at the time. The Turks did, how-ever, later became aware of this system’s limitations and introduced legislation with a more commercial character reflecting developments in society. The Continental law implemented was mainly French, although other countries, such as Germany, provided another source of law.

During the years 1917–1948, the country was ruled by the British under a League of Nations Mandate. The British were reluctant to make sweeping changes to the legal system of a territory that was not a true British colony.


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The solution was to accept the existing situation, while creating the means for importing the norms of English common law. The King’s Order in Council of 1922 was the most important legislative act of the Mandate period and, through this, the English legal system was made available to the country. In addition, the British Governor, as local sovereign, enacted numerous ordinances, such as the Banking Ordinance and Income Tax Ordinance which, even though sub-stantially amended over the years, still regulate their respective fields.

Since 1948, Israel has enacted its own laws, although the influence of English law can still be felt. Until 1980, for example, whenever there was a lacuna in Israeli law, English law was looked to. Thus, fields of administrative law and unjust enrichment were developed entirely using principles of English law. Furthermore, basic principles and doctrines of the Anglo-American legal sys-tem, such as cross-examination and the rules of civil procedure, continue to guide the thinking of Israeli jurists. Modern Israeli law has abandoned almost all vestiges of Ottoman law, although assimilated English law has remained in effect and continues its independent development through judgments of the courts. While they continue to follow legal developments in England and the United States, regarding them with deference, the Israeli courts are no longer bound by them and have begun creating their own precedents and doctrines, constituting an independent Israeli “common law”. Today, the bulk of Israeli law is legislation passed by the Knesset (Parliament), independent of Ottoman and English Law, as well as Jewish law. As mentioned above, personal status is governed by religious law. Thus, all Jews are subject to the personal law of the Jewish religion, while Muslims and Christians are subject to the laws of their religions respectively. There are special courts for each religion as well as family courts following Knesset legilslation and not religious laws.

The highest judicial body is the Supreme Court, with nine permanent and two temporary members, and it is responsible for interpreting the law. While Israel does not have a formal written constitution, eleven “Basic Laws” serve this purpose.

The Israeli legal system is based on common law, civil law and Jewish Law.

Israel is a parliamentary democracy which consists of three branches: the leg-islature (the Knesset); the executive (the government); and the judiciary (the court system).

27.2.13 Taxation

The maximum income tax rate in Israel is 50% of gross income, roughly the OECD average. The current corporate tax rate of 26.5% puts Israel in the bot-tom third of the developed world.

27.2.13.1 Import duties

VAT applies to most goods and services, including imported goods and ser-vices. The current VAT rate is 18%.


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27.2.13.1.1 Real property tax

A purchaser of real property is subject to a purchase tax at the marginal indi-vidual tax rates of up to 10% from 01/01/2014.

27.2.13.1.2 Income tax

The maximum personal marginal tax rate for earned income for 2014 is 50%. The basic rate of company tax for 2014 is 26.6%. The tax rate on dividends distributed by an Israeli resident company to a non-controlling (holding less than 10% of the Israeli company) Israeli shareholders is 25%, otherwise, the rate is 30%. Dividends paid to a non-controlling foreign resident are subject to a 25% withholding tax; otherwise, the rate is 30%.

27.2.13.1.3 Capital gains

Capital gains taxes may arise on the sale of assets. A 25% tax rate applies to gains by non-controlling shareholders from disposal of company securities; otherwise the rate is 30%.

27.2.13.1.4 Withholding tax

A 25% withholding tax is levied on royalty payments or any other payments to non-residents. Almost each withholding tax rate may be reduced under a tax treaty or incentives regime.

27.2.13.2 Tax incentives

Various programs are available, eg foreign investment incentives, a holding company regime, benefits for new immigrants, benefits for returning residents and R&D incentives.

27.2.13.2.1 Benefits for new immigrants and returning residents

The Income Tax Ordinance includes exemptions and other significant relief in respect of new immigrants and returning residents. A reform that came into force in 2007 significantly expanded the relief granted to those individuals.

The principal benefits are given to a new immigrant (one who became an Israeli resident for the first time) and a long-term returning resident (someone returning to Israel after having been a foreign resident for at least ten years). Limited benefits are also given to regular returning residents (someone return-ing to Israel after having been a foreign resident for at least six years).

New immigrants and long-term returning residents are exempt from tax on all income generated outside Israel or whose source is from assets outside Israel during the ten years from their date of immigration or return to Israel, includ-ing in relation to activities that commenced and assets acquired following the


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date of immigration or return. A regular returning resident is exempt from tax for five years from the date of return on passive income (interest, dividends, royalties, rentals and pensions) generated outside Israel or whose source is from assets outside Israel in respect of assets acquired by him or her while a foreign resident.

New immigrants and long-term returning residents need not report their exempt incomes nor report on their assets located outside Israel for a period of ten years from their date of immigration or return to Israel.

27.2.13.2.2 Rulings

A taxpayer may request a ruling on the tax consequences of a proposed transaction.

27.2.14 Corporations

There are six types of entities

(1) Partnership

(2) Collective corporation

(3) Non profit organisation

(4) Private company

(5) Public corporation

(6) Mixed corporation

There are various types of companies in Israel for taxation purposes:

⦁ Family company

⦁ Transparent company

⦁ Home company

⦁ Underlying company

27.2.14.1 The Israeli underlying company

The trust taxation legislation provides for the incorporation of an underlying company, whether in Israel or abroad, to hold trust assets on behalf of a trustee. The underlying company is used for the legal separation of the trustee’s per-sonal assets and the trust’s assets. It is a separate legal entity holding the trust’s assets for the trustee. The company’s assets are considered assets of the trustee and its income is considered the trustee’s income. The Israel Tax Authority will “ignore” the financial activity of the company and treat the assets and income derived therefrom as if they were held directly by the trustee.

The Law for the Change of National Priorities 2013 (as described in more detail below) clarifies a number of issues that heretofore were unclear. An


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underlying company must hold the trustee’s assets for the trustee and must meet the criteria below: (i) it must be incorporated for the sole purpose of holding trust assets; (ii) an underlying company of an Israeli resident trust, an Israeli resident beneficiary trust or a testamentary trust in which there is an Israeli resident beneficiary, or a trust holding assets in Israel, must file a report with the Israel Tax Authority within 90 days from the date of incorporation; and (iii) the trustee must hold 100% of the shares of the underlying company directly or indirectly via another company in which the trustee holds 100% of its shares and which satisfies (i) and (ii) above.

The Israeli underlying company confers significant benefits. It is simple to construct, and enables efficient trust administration. The place of residence or business activity of the trustees will not affect the taxation of the trust. It is the tax status of the beneficiary and the settlor that will determine Israeli tax liability.

27.2.14.2 Companies

The corporation is the most common form of business entity in Israel and is based on the 1983 Companies Law, which is in turn based on the 1929 British Mandatory Companies Ordinance. Companies must file Articles of Association with the Registrar of Companies, which establish their corporate identity and principle objectives, as well as their rules of conduct.

Most companies limit the personal liability of their members by shares. (Unlimited Companies exist in Israel, but are rare.) The word “Limited” or “Ltd.” must appear at the end of their name. Companies are not allowed to acquire their own shares, or to assist others in purchasing them, in order to pro-tect its creditors. Major changes cannot be made without a 75% vote among the shareholders. Corporate officers are expected to act in good faith, avoid con-flicts between their personal and corporate interests, and may not be exempt from liability incurred through a breach of duty or care nor may they be insured or indemnified in respect of unlawful acts.

27.2.14.3 Private companies

Private companies must have a minimum of one and a maximum of 50 share-holders, excluding any past or present employees. They must restrict the rights of their shareholders to transfer their shares and they are not allowed to offer any of their shares or bonds to the public. An independent auditor must be appointed at each annual shareholder’s meeting and must submit a yearly report to the Ministry of Finance, in accordance with Israeli GAAP – Generally Accepted Accounting Principles.

27.2.14.4 Public companies

A Public company is any company, which is not a private company. Public companies must have a minimum of seven shareholders. There is no maximum. Their annual financial report must be made available to the public.


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27.2.14.5 Partnerships

Partnerships are distinct from companies and are governed by the 1975 Partnerships Ordinance. They must be profit-motivated businesses, based on the principle of mutual loyalty, with a minimum of two and a maximum of 20 partners. They must be registered with the Registrar of Partnerships before they can commence operations. A corporation can be a partner in a partnership. A partnership may also be a partner in another partnership, in a tiered system.

There are two kinds of partnerships: general and limited. With a general part-nership, each partner is equally responsible for all liabilities. This is not limited by the partner’s contribution, share in the partnership, or right to assets. In a limited partnership, one or more partners are only liable for the amount they have invested in the partnership. However, each partnership must have at least one general partner who bears unlimited liability.

Foreign partnerships are simply general or limited partnerships established outside of Israel. Before commencing business, they must register in Israel, with the Ministry of Justice if a limited partnership, but this is usually a for-mality. If a foreign partnership is legally registered outside of Israel with more than 20 members, it can still operate as a partnership in Israel. All other rules for Israeli partnerships apply.

27.2.14.6 Joint venture

A joint venture is similar to a partnership, but more limited in scope, unit-ing two or more groups in a single moneymaking venture. It is not a separate business entity, but can be defined and organised in several ways: including a partnership agreement, a subcontract arrangement, or a company where the members of the joint venture are all shareholders. Typically, it links entities in different countries or continents. A foreign company that contracts with an Israeli distributor to promote its products within Israel is a common scenario for a joint venture. There is a new law applicable to agents and distributors.

27.2.14.7 Checklist for non resident companies

According to the Companies Law, any company incorporated overseas may establish a branch or place of business in Israel, as long as it is registered as a foreign company. A foreign company is a company registered outside Israel and any body of persons, other than a partnership, registered or incorporated outside Israel.

27.2.14.7.1 Duty to register foreign company

A foreign company shall not keep a place of business in Israel, and in particu-lar shall not maintain an office for the transfer of shares or for the registration of shares, unless registered as a foreign company under the provisions of the Companies Law and unless it pays the registration and publication fees.


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27.2.14.8 Other forms of business organisations

Non-profit organisations are established for educational, cultural, recreational, medical, or other charitable purposes without the desire to derive a profit. In Israel, they are called “Amutot” and are covered under a11980 law.

27.2.14.9 Foreign companies

Three options are generally available to foreign entities interested in doing business in Israel: opening a branch in Israel; incorporating a subsidiary com-pany in Israel; and establishing a partnership in Israel within the framework of a company.

27.2.14.9.1 Opening a branch in Israel

If the foreign business operates in its country of origin as a corporation, it may open a branch in Israel that will operate under the same name as the foreign company. There may be tax reasons to choose this option.

Generally, any action of this nature requires formal company registration with the Registrar of Companies. Israeli law recognises the term “foreign company” and in accordance with British tradition, which forms the basis of Israeli com-pany law, the foreign company can be registered in Israel and is then deemed an Israeli company.

27.2.14.9.2 Incorporating a subsidiary in Israel

The following are some important aspects relating to the incorporation of a company in Israel:

⦁ Company name:

Company registration is with the Registrar of Companies, a unit of the Ministry of Justice.

The foreign company may incorporate an Israeli company bearing an identical or similar name to that of the company abroad. The Registrar usually authorises this if there is no risk that the public will confuse the name with that of a company already operating in Israel. The name of the company is in Hebrew with the optional addition of an English name.

Registration grants the company protection of its name under Israeli company law and, if necessary, one may petition the court for an injunction against use of the name in a way that may mislead the public.

⦁ Registering a new company:

Unlike Continental Europe, companies are not registered with a notary as Israel’s Company Law is based on the English Companies Act 1929.

The company’s articles of association describe the company’s objects, and its internal management and administrative procedures, principally those regarding its shareholders and board of directors.


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No minimum capital is required in order to register companies. There is no tax due for the issuance or allotment of share capital.

The company is usually registered within a few days if no special problems arise regarding the company’s name or its registration documents.

A company may be established by a single shareholder. The registered share capital is determined in the articles of association and is composed of issued shares. The board of directors may issue shares only up to the limit of registered share capital.

⦁ The Registrar of Companies:

The Registrar of Companies is a public agency. An extract from the Registry, obtained upon the payment of a small fee, evidences general information on the company, including, without limitation, names of shareholders and of directors, the company’s address and its share capital.

⦁ Appointments

– Appointing directors or officers

Under Israeli company law, the company is managed by a board of directors consisting of one or more directors, as decided by the incorporating entity. In most cases, the articles of association provide for the number of directors of the company. A legal entity, such as a company, may serve as a member of the board of directors.

There is no mandatory provision in the law for the board of directors to have an Israeli member. A foreign person may serve as a director, even if not resident in Israel.

The board may appoint officers who manage the day-to-day business of the company. Private companies in Israel need not have a company secretary, though some companies do appoint such an officer.

– Appointing an auditor (CPA)

By law, a company must appoint an auditor to review the company’s books. The auditor (a “certified public accountant”) is appointed at a shareholders’ meeting and is responsible for the preparation of the company’s annual audited financial statements, required to be filed with the Israel Tax Authority. Private companies need not file their financial statements with the Registrar of Companies.

27.2.14.9.3 Commencing business

Whether the foreign company chooses to operate as a foreign company with a branch in Israel, or to incorporate a subsidiary in Israel, there are a number of legal and commercial requirements to be undertaken prior to commencing business activities. There are generally five main requirements:


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(1) Registering the company with the Israel Tax Authority.

(2) Registering the company with the VAT Authority.

(3) Opening an employer file with the National Insurance Institute.

(4) Opening a bank account.

(5) Attending to various technical matters.

Registering with the Israel Tax Authority: Registration as a company should be made at the Israel Tax Authority within 30 days of commencement of opera-tions by providing details of the company’s activities.

Registering with the VAT Authority: Companies must register as dealers for VAT purposes no later than the commencement of operations. Upon registration, the company receives a certificate of registration for VAT purposes in which the registration number is usually the same as that issued by the Registrar of Companies. A foreign resident individual or entity that starts to conduct any part of its business in Israel must also appoint a local VAT representative with responsibility for handling all Israeli VAT matters.

Opening an employer file, Tax Authority file: The company is considered an employer if it employs people. Salaries paid to employees and related taxes deducted are reportable and payable to the Tax Authority monthly. Non-compliance may lead to criminal sanctions imposed on the company’s directors.

National Insurance (social security) contributions: The National Insurance Institute provides Israeli residents with a comprehensive system of social security benefits financed by contributions (payments) from employers and employees. Employers are obligated to withhold employees’ contributions from salaries and to remit these, together with the employer’s contributions, to the National Insurance Institute. Separate registration at the National Insurance Institute is not required.

Bank account: a bank account should be opened immediately after register-ing the company in order to allow for the depositing of share capital received for shares issued to the shareholders, as well as to permit regular business activities.

27.2.15 Banks and trust companies

Most banks provide private banking services and maintain special centres for tourists and foreign investors. The five large Israeli banks have branches in Europe and the United States and representative offices in other countries. Global accounting firms, advertising agencies and retail chains are active locally.

A bank account should be opened immediately after registering the company in order to allow for the depositing of share capital received for shares issued to the shareholders, as well as to permit regular business activities.

The following documents are generally required in order to open a commercial account:


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⦁ Articles of Association and Registration Certificate from the Registrar of Companies.

⦁ Board of Directors’ resolution to open a company bank account at the particular bank and a determination of the rights of signature on the account, along with a lawyer’s or a certified public accountant’s confir-mation of the Board of Directors’ resolution.

⦁ A foreign company must provide written confirmation from a lawyer in the country of incorporation authenticating the corporate documents and the validity of the resolutions taken with respect to opening a bank account in Israel.

27.2.16 insurance

The National Insurance Institute provides Israeli residents with a comprehen-sive system of social security benefits financed by contributions (payments) from employers and employees. Employers are obligated to withhold employ-ees’ contributions from salaries and to remit these, together with the employer’s contributions, to the National Insurance Institute. Separate registration at the National Insurance Institute is not required.

27.3 TrusT LAW

27.3.1 Development of trust law

The trust institution has been recognised under the Israeli legal system since the 1920s.

The private trust was not regulated by statute until 1979, when the Trust Law was enacted.

The Supreme Court held that the concept of trust existed in Israel even prior to that date. After the enactment of the Trust Law, the courts no longer needed to rely on foreign laws, which had formed the basis for the recognition of the trust before 1979.

However, there remains a strong connection between the Israeli and Anglo-American systems in this field and a great resemblance between the trust institutions of these legal systems.

One peculiar feature of the Trust Law is that it does not permit skipping gen-erations, ie one cannot create a trust by a trust agreement that will survive the life beneficiary for the benefit of his successor without requiring the trustee to commence probate proceedings and a valid will is required. If the relevant for-malities are followed by establishing the hekdesh (ie signature before a notary) this issue should be resolved.

27.3.2 Legislation

The Trust Law, 5739–1979, enacted by the Israeli legislature has regulated the law regarding trusts in Israel including the powers, duties, rights and conduct of trustees and in turn has repealed the earlier mandate legislation.


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27.3.3 Types of trusts, their uses and tax status

The Taxation of Trusts Law 2005, as amended by the Change of National Priorities Law 2013, defines five types of trusts:

⦁ a foreign resident trust;

⦁ an Israeli resident trust;

⦁ a foreign beneficiary trust;

⦁ a testamentary trust; and

⦁ an Israeli resident beneficiary trust.

27.3.3.1 Foreign resident trust

This is a trust established by a foreign resident for the benefit of foreign resi-dent beneficiaries. Until the enactment of the Change of National Priorities Law, such a trust may have included Israeli resident beneficiaries and was exempt from Israeli reporting and taxation on all foreign source income. That is no longer possible as a foreign settlor trust is defined as one where there are no Israeli resident beneficiaries.

27.3.3.2 Israeli resident trust

This is a trust established by a resident of Israel for the benefit of Israeli resi-dent beneficiaries. Worldwide income of such trust is taxable in Israel at the rate applicable to individuals.

27.3.3.3 Foreign beneficiary trust

This is a trust established by an Israeli resident for the benefit of foreign resident beneficiaries. Strict guidelines must be met in order for such a trust categorisation to be accepted and reporting is required both upon the establish-ment of the trust and annually. This trust is not subject to tax payments in Israel on foreign source income.

27.3.3.4 Testamentary trust

This is a trust established under a will and is categorised as one of the above depending on the facts.

27.3.3.5 Israeli resident beneficiary trust

This is a trust established by a non-resident of Israel in which at least one of the beneficiaries of the trust is a resident of Israel.

Two additional criteria must be met for the trust to be classified as an Israeli resident beneficiary trust. Firstly, the settlor and beneficiaries must be


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immediate family members (ie, the settlor is a spouse, parent, grandparent, child or grandchild of the beneficiary). A broader family relationship (ie, siblings, nieces, nephews, aunts, uncles) will only permit classification as an Israeli resident beneficiary trust upon the submission of evidence to the assessment officer of the Israel Tax Authority that such a trust was settled in good faith and that the beneficiary did not provide consideration for such settlement in his favour. Secondly, the settlor must still be alive.

If any one of these additional criteria is not met, the trust is to be classified as an Israeli resident trust.

The Israeli resident beneficiary trust is subject to tax as set forth below:

Distributions to beneficiaries will be taxed at the rate of 30% of the distribution amount unless the trustee provides evidence of income and principal portions of the distribution. Where the distribution is comprised solely of principal and no income, it is not taxable.

The trustee may opt under certain circumstances to subject trust income allocated to an Israeli resident beneficiary to tax at the rate of 25% in the tax year in which the income is produced. This option requires the preparation of balance sheets, annual reporting and annual tax payments on realized gains. Once all of these require-ments are met, the distributions to the beneficiary are not taxable. This option is irreversible by the trustee.

27.3.4 Creation of trust

Trusts are created by contract or deed (Hekdesh). In a contractual trust, the rights of the parties, the trustee and the beneficiaries are determined in an agreement, which may or may not be written. A trust created by deed must be in writing, must express the intent of the settlor to establish a trust and must outline the purposes, assets, and conditions. It can be signed before a notary or constitute a will that is not oral. The trust is established upon the receipt and control by the trustee of the trust assets. Where there are trust assets but no deed is found, the court may declare the existence of a trust and define its purposes and conditions. If it is intended that the trust be executed during the life of the settlor, it must be signed before a notary. A trust created by contract usually needs no formality but is limited as an inter vivos trust and requires a probate process in order to transfer assets held by it. A trust created by deed (Hekdesh) remains valid and governs the transfer of the assets after the death of the settlor without the requirement for a probate process as long as certain conditions are upheld.

27.3.4.1 Who may settle a trust

The creator of a trust may be anybody who is competent to carry out a legal act.

There may be more than one creator of a trust in one transaction.


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27.3.4.2 Trust property

The capital settled into the trust and the income of the trust property, or some-thing for which any trust property has been exchanged, shall also be property of the trust.

27.3.4.3 Duration of trusts

There is no time limit for the duration of trusts under the law.

27.3.4.4 Beneficiaries

The beneficiary of a trust may be the person on whom the trust has conferred the relationship to the property. The creator of the trust and the beneficiary may be the same person.

27.3.4.5 Trustees

An Israeli trust company may act as a trustee or co-trustee of trusts governed by the laws of foreign jurisdictions. The trustee may use an underlying com-pany, which may enjoy tax free status and the possibility of maintaining private bank accounts and holding investments in Israel or abroad. The trust may also establish and manage real estate trusts in accordance with Israeli real property laws. If the real property is located in Israel, Israeli tax will apply. A trust may administer assets held by any trust as well as cooperate with asset management and trust companies locally and abroad.

27.3.4.6 Protector

Israeli law does not recognise the institution of a protector. However, the struc-ture of a trust may be such as to include a de facto protector, possessing such powers as the appointment or removal of trustees. A non profit entity has a supervisory committee, similar to the role of a protector.

27.3.4.7 Trust deed

The deed must express the intent of the settlor to establish a trust and must out-line the purposes, assets and conditions. It can either be signed before a notary or constitute a will that is not oral. The trust is established upon the receipt and control by the trustee of the trust assets. Where there are trust assets but no deed is found, the court may declare the existence of a trust and define its purposes and conditions.

27.3.4.8 Formalities

A trust, effective upon the death of the settlor, must be in writing and executed in accordance with the legal formalities required for the execution of a last will and testament under the Law of Inheritance.


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27.3.5 Administration of trusts

Statutory trustees appointed by the court have reporting requirements to gov-ernmental bodies and the court addressing general management, distributions from the trust, change of administrators, passing of accounts and variations of trust.

27.3.6 Taxation of trusts and fiscal regulations

The Taxation of Trusts Law (discussed above) imposes reporting and tax pay-ment obligations on trustees, based on the categorisation of the trusts, regardless of the trustees’ jurisdiction of residence or business activities. Failure to report will cause a heavy punitive tax burden on distributions made to Israeli resident beneficiaries. Trustees must ensure that they fulfill their duties as they may face claims by beneficiaries for damages caused by their failure to file the relevant reports and pay taxes owing.

27.4 LAW oF inHEriTAnCE

The Law of Inheritance governs succession in general under Israeli law, including estates of descendants who pass away intestate as well as testate suc-cession, will drafting and testamentary estates.

The forms of wills set forth below are valid under the Law of Inheritance:

Handwritten will: This will must be written, signed and dated in the testator’s own handwriting.

A will made in the presence of witnesses: A will made in the presence of wit-nesses must be in writing, whether handwritten or printed. The testator must sign the will in the presence of two witnesses upon a declaration by the testator that the document is his last will, and a certification by the witnesses of the signature of the testator.

A will made in the presence of an “authority”: An “authority” is a judge of a district or a magistrates court or a religious tribunal, a notary or an Israeli consular representative abroad.

A will in the presence of an authority is made by the testator by bringing his testamentary wishes before the authority either orally or in writing. The authority records such testamentary wishes in writing and reads them to the testator who must then declare the writing to constitute his will. The authority then certifies that the will was read to the testator, or that the testator read the same, and declared the same to be his will.

If the will is written in a language that is not understood by the testator, a translation into a language understood by the testator must be read to him and the translator must certify the fact of translation on the will. Non-translation constitutes a fundamental flaw that invalidates the will.

The most suitable form of will for a person who is blind or physically incapa-ble of signing a will is a will made in the presence of an authority.


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An oral will: An oral will may only be made by a person on his deathbed or by a person who, in justifiable circumstances, regards himself as facing imminent death.

An oral will by such a person must be made by the testator stating his testa-mentary wishes in the presence of two legally competent witnesses over the age of 18. As soon as possible thereafter, the witnesses must draw up a memo-randum in writing of the words of the testator. The memorandum must state the date of the will and the circumstances in which it was made, and as soon as possible thereafter the memorandum of the will must be deposited with the Registrar for Inheritance Affairs, although the court has authority to validate a delay in deposit.

The validity of an oral will is limited in period: it ceases to be valid if the testa-tor is still alive one month after the end of the circumstances that justified the making of an oral will.

Proper succession and estate planning is advisable, requiring the execution of a last will and testament, especially for non-residents, as well as for individu-als who own assets in more than one jurisdiction. There are no forced heirship rules for Israeli residents.

As held in the case below, private international law applies where the testa-tor is a non-resident. A Supreme Court decision, Attorney General – General Guardian v Anonymous (594/04), considered whether a testatrix may choose the law governing her last will in an attempt to avoid forced heirship provi-sions in her country of residence. The deceased, a citizen of Israel and the Netherlands who resided in the Netherlands at the time of her death, signed a valid last will bequeathing her Israeli assets to two of her three daughters. The Supreme Court held that the deceased’s estate was to be distributed in accordance with the laws of the deceased’s jurisdiction of residence at her death. As the laws of the Netherlands include forced heirship provisions, the Supreme Court found that said Netherlands laws were to be considered by the Israeli probate court and should govern the distribution of the deceased’s estate throughout the probate proceedings held in Israel.

27.4.1 Probate or inheritance proceedings

Israel does not recognise foreign court orders and a petition for an inheritance or probate order, as the case may be, must be filed with the competent authority in Israel in order to distribute estate assets located in Israel in all cases regard-less of the place of residence, domicile, nationality of the deceased, or the situs of other assets of the estate.

The rights of heirs by law or beneficiaries under a will are declared by way of an inheritance order for the former or by a probate order for the latter. Generally, neither an inheritance order nor a probate order provides details of the assets of the estate. An inheritance order declares the identity of the legal heirs and their respective share of the estate, whereas a probate order declares the will of the deceased to be valid under Israeli law.


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The proper law which will be resorted to is the law of the place of residence of the deceased at the time of his death. There are, however, three exceptions to this general rule:

(1) with respect to assets located outside Israel: the assets pass after death exclusively in accordance with the lex situs. Therefore, if the lex situs expressly excludes the application of any foreign law, then the lex situs will apply regardless of domicile;

(2) with regard to one’s capacity to make a will: the law of domicile of the testator at the time of the signing of the will applies and not the law of domicile at the time of death;

(3) with respect to validity as to form: a will is valid if it is valid in accord-ance with the law of any one of the following:

– Israeli law;

– the law of the country in which the will was signed;

– the law of the country of domicile or of residence of the testator, whether at the time the will was signed or at the time of death;

– the law of the country of citizenship of the testator, whether at the time the will was signed or at the time of death;

– if the will relates to real property, the lex situs.

Notwithstanding the above, foreign law will not be resorted to:

⦁ if the foreign law refers to yet another foreign law. Such other foreign law will not be resorted to and the internal law of the first foreign country will apply. If, however, the law of the first foreign country refers the mat-ter to Israeli law, then Israeli law will apply;

⦁ to the extent that such law discriminates as to race, religion or nationality or otherwise contradicts Israeli public policy;

⦁ if such law confers intestate inheritance rights on a person who is not a relative of the deceased by blood, marriage or adoption, unless and to the extent that such foreign law recognises such inheritance rights as conferred by Israeli law.

27.4.2 Probate or inheritance procedures

A petition for the appropriate order (inheritance or probate) is filed with the Registrar of Inheritance Affairs in accordance with the regulations pursuant to the Law of Inheritance. This petition, sworn to by way of an affidavit, includes the petitioner’s details, the deceased’s details and details about the deceased’s family members.

The petition is filed together with the original death certificate, the original will (if one exists), documentation evidencing the ownership by the deceased of assets located in Israel, identifying documentation of the heirs by law or beneficiaries and evidence of notices provided to each heir or beneficiary. If


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the deceased was a non-resident of Israel, documents in a foreign language may require translation and documents issued by foreign government agencies may require translation and a certification as to their authenticity. In addition, if the deceased was a non-resident of Israel, an opinion by a local attorney in the deceased’s jurisdiction of residence advising on the succession laws in that jurisdiction, also forms part of the petition.

The Registrar of Inheritance Affairs furnishes a copy of the petition to the Administrator General at the Ministry of Justice who is at liberty to intervene in the proceedings when a matter of public interest is involved.

27.4.3 Appointment of an executor

The appointment of an executor of an estate is not required under Israeli law although it may be advisable for a foreign resident for the efficient distribution of an Israeli estate (this may be especially important where there are no Israeli resident beneficiaries or heirs).

The petition to the Registrar of Inheritance Affairs or to the Family Court is sworn to by way of an affidavit, similar to the petition for a probate or an inheritance order. The consent of the executor as well as the consent of the heirs or beneficiaries must be filed together with the petition. The Registrar of Inheritance Affairs and the Family Court will not usually approve the appointment of a foreign resident as an executor of An Israeli estate nor will co-executors be approved where one is not an Israeli resident.

The Guardian General at the Ministry of Justice is the body to which appointed executors report in accordance with the provisions of regulations pursuant to the Law of Inheritance. It is responsible for ensuring that the relevant rights are granted to the heirs or beneficiaries, to the State of Israel and to minors or missing persons, if any. Executors are required to file annual financial reports with the Guardian General as well as to take every possible action to ensure the most advantageous result to the estate. As a result, for every transaction, the executor must publish a tender in order to receive the best possible offer for that transaction. Further, each and every action taken by executors, such as a transaction for the sale or rental of real property, must receive the approval of the Family Court.

27.5 rEGuLATory AnD LEGisLATion uPDATEs

27.5.1 Double Tax Agreements (DTA)

At present, Israel has signed double tax treaties with over 50 countries. The majority of these treaties, particularly those signed in recent years, are based on the OECD’s model treaty. The Israeli tax authorities tend to interpret Israel’s treaties in accordance with OECD commentaries, or by reports published by the organisation on issues of international taxation.

The treaties function to prevent double taxation by guaranteeing that the inves-tor’s state of residence will provide either a tax credit for income tax paid in


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Israel or, alternatively, that Israeli sourced income will be exempt from tax in Israel or in the country of residence of the foreign investor.

Once a treaty is made part of Israeli law, its provisions take precedence over domestic law.

The treaties with the United Kingdom, the United States and Malta include a trust within the term “person.” Where a trust is considered a resident by both states, the issue of residence will be resolved by the parties through mutual agreements procedures.

For example, the treatment of income received by a trust or estate will be determined by the residence and taxation of the person subject to tax on such income, which may be the grantor, the beneficiaries, the trust or the estate itself, as the case may be (Israel-US Double Taxation Treaty).

27.5.2 Exchange of information (Eoi)

The Israeli government is looking into the possibility of signing up to multilat-eral information exchange agreements. Until now, this was only possible under an information exchange clause in a bilateral tax treaty between Israel and the other country concerned.

Israel is a member of the OECD but this does not facilitate information exchange about taxpayers, only about tax and economic administrative tech-niques in principle.

Before Israel can exchange information about taxpayers to a multilateral forum, a legislative amendment would need to be proposed and enacted by the Knesset. Israeli tax officials indicated that such an amendment has been drafted and the legislation proposed to section 196 of the Income Tax Ordinance is being drafted. Currently, this section allows the finance minister to implement bilateral tax treaties with another country whenever this appears “useful.”

27.5.3 Criminalisation of money laundering

The primary anti-money laundering legislation in Israel is the Prohibition on Money Laundering Law, 5760-2000. This legislation obliges institutes to carry out due diligence on clients in order to confirm the identity of their clients and to report suspicious transactions. This law also provides for the direct requirement of reporting transactions that are suspected of involving money laundering.

27.6 ConCLusion

Israel offers a modern, western economy buttressed by an institutional and legal framework that protects individuals and companies. If the law is utilised correctly by foreign individuals, a major international business and financial centre may be created in Israel for the benefit of Israelis and non-residents alike.


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27.7 summAry FACT sHEET

GEnErAL oVErViEW

Location Middle Eastalong the eastern coastline of the Mediterranean Sea, bordered by Lebanon, Syria, Jordan and Egypt

Time zone Israel Standard Time (UTC/GMT +2)

Population 8,051,200

Capital Jerusalem

Airport(s) Ben Gurion Airport (main international airport)Sde Dov Airport (domestic flights)Eilat Airport (domestic flights)

Language Hebrew, Arabic, English

Currency New Israeli Shekel (NIS)

Political System Parliamentary Democracy

International dialing code +972

Legal system English common law, Civil law and Jewish law

Centre’s expertise

TAx

Personal income tax 11% to 50%

Corporate income tax 26.5%

Exchange restrictions There are no foreign currency restrictions

Tax treaties Austria, Ukraine, Ireland, UK, Estonia, USA, Ethiopia, Bulgaria, Belgium, Belarus, Brazil, Georgia, Jamaica, Germany, Denmark, South Africa, Korea, India, Netherlands, Hungary, Vietnam, Taiwan, Hellenic Republic (Greece), Japan, Luxembourg, Latvia, Lithuania, Moldova, Mexico, Norway, China, Singapore, Slovenia, Slovak Republic, Spain, Poland, Portugal, Philippines, Finland, Czech Republic, France, Canada, Croatia, Romania, Russia, Sweden, Switzerland, Turkey, Thailand, Malta, Uzbekistan, Uruguay and Argentina

sHArE CAPiTAL

Permitted currencies NIS

Minimum authorised capital

Minimum share issue One


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TyPE oF EnTiTy

Shelf companies

Time taken to register new entity

24 hours

Incorporation fees Approximately US $750

Annual fees Approximately US $430

DirECTors

Minimum number One in private companyTwo in public company

Residency requirements No residency requirement for directors

Corporate directors Yes

Meetings/frequency Annually

sHArEHoLDErs

Disclosure Yes

Bearer shares No

Minimum number One

Public share registry Yes

Meetings/frequency Annually

ACCounTs

Annual return Yes

Audit requirements Yes, where income/ profits exceed 500,000 NIS

rEGuLATory & LEGisLATion

Double Tax Agreements (DTA)

Yes

Exchange of Information (EOI)

Yes

Criminalisation of Money Laundering

Yes

Foreign Account Tax Compliance Act (FATCA)

In the near future

Mutual Administrative Assistance in Tax Matters

Subject to Double Tax Treaties

oTHEr

Registered office Israel

Domicile issues


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Company naming restrictions

A company may be registered with any name, subject to the provisions of the Israeli Companies Law. But, a company shall not be registered with a name that is the same or similar to any other company lawfully registered in Israel or the name which in the registrar’s opinion might be deceptive or misleading or contrary to public policy or to public sensitivity

Alon Kaplan, Managing Partner of Alon Kaplan International Law Firm and Chairman of MMG Trust (Israel) 1978 Ltd., was admitted to the Israel Bar in 1970, the New York Bar in 1990 and the Frankfurt Bar Association in 2010. Alon was among the founders of STEP Israel in 1998, currently serves as its President, and is Academic Coordinator and Lecturer of the STEP Diploma Course at the Institute of Advanced Studies at Tel Aviv University’s Faculty of Law. Alon also lectures on trusts in the LLM program at the Faculty of Law of Tel Aviv University. Alon advised the Israeli Tax Authority on trust Legislation. Alon Kaplan is General Editor of Trusts in Prime Jurisdictions, and is the Israel Country Correspondent for Oxford Journals’ Trusts and Trustees.

Lyat Eyal was admitted to the New York State Bar in 1998 and practiced law in the law firm of Faust Oppenheim, LLP. Ms Eyal was admitted to the Israel Bar in 2005 when she joined Alon Kaplan International Law Firm. Ms Eyal is the Deputy CEO of MMG Trust (Israel) 1978 Ltd. Ms Eyal is a member of STEP, the New York State Bar Association International Section and Trusts and Estates Section. Ms Eyal is also a mem-ber of the International Academy of estate and Trust Law. Ms Eyal practices law in the areas of trusts, estate planning and contract law.

Alon Kaplan LL.m, TEP

Lyat Eyal LL.B., TEP


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