The Israeli tax system and tax benefits for foreign residents

1
The Israeli tax system and tax benefits for
foreign residents

• Ran Artzi, CPA (Isr).
• Lilach Asherov-Rubin, Adv.

2
The Israeli tax system
3
The Israeli tax system - General

• As of 2003, income Tax in Israel is levied based
  on a personal method. Accordingly, Israeli
  residents are liable to tax in respect of their
  income worldwide.
• Foreign residents are also liable to tax in
  Israel with respect to income generated or
  derived therein (according to source rules) and
  subject to conventions for prevention of double
  taxation between Israel and the relevant
  countries.

4
Israeli resident - Individuals

• An individual is considered an Israeli resident
  if his center of life is located therein in
  this regard, the following considerations are
  observed
• location of his permanent home (individual
  family members).
• Location of his economic and social connections.
• Location of his permanent or usual employment/
  business activity.
• Location of his active and substantive economic
  interests.

5
Israeli resident - Individuals

• The Israeli law sets 2 legal presumptions - an
  individual's center of life is located in
  Israel in the following cases
• During the tax year he was present in Israel
  for 183 days or more, or -
• During the tax year he was present in Israel
  for 30 days or more, and his total presence in
  Israel during that year and 2 previous years
  amounts to 425 days or more.

6
Israeli resident - an Entity

• A person other than an individual is considered
  an Israeli resident if either one of the
  following is met
• It was incorporated in Israel.
• the control and management over its business is
  exercised within Israel.

7
Income tax rates for Individuals
8
General

• Regular income of individuals is taxed, Current
  to 2007, at the following rates (applied to
  annual gross income)
• 0 - 133,680 nis - 30. (31,760)
• 133,681 - 192,000 nis - 35. (31,761 - 45,616)
• 192,001 - 413,400 nis - 36. (45,617 - 98,218)
• above 413,401 nis - 48. (98,219)

9
Gradual decrease of rates

• Tax rates will gradually decline until 2010.
• marginal rate will be set to 44.
• To this end, overall tax rate is inclusive of
  social security and health tax payments.

10
Rental income from Israel

• Tax exemption for rental income from apartments
  in Israel up to 4,200 nis (1,000 ) per month.
• The income tax liability on apartments rental
  fees is calculated on the basis of one of the
  following alternatives
• Rental income is calculated after deduction of
  expenses and taxed as business income
  (progressive) tax rates - over 30 rate.
• Tax is payable at the rate of 10 of gross rental
  income (without deducting expenses).

11
Overseas Rental income

• The tax liability of an Israeli resident
  individual with respect to rental income from
  real property located outside of Israel, is
  determined on the basis of one of the following
• progressive tax rates applied to net rental
  income (deduction of permissible expenses). FTC
  is allowed.
• flat rate of 15 on rental fees after deduction
  of only depreciation expenses. other expenses
  incurred in generating the rental income are not
  deductible. FTC is denied.

12
Passive Investment Income - flat rates

• Dividend income - 20 or 25 for an individual
  who is a substantial shareholder (10 or more).
• 15 - dividend distributed out of the profits of
  an approved enterprise under law of
  encouragement.
• Capital gains - 20 or 25 for an individual who
  is a substantial shareholder.
• However, capital gain from assets acquired prior
  to 1.1.2003 are allocated - on a linear basis -
• part of gain attributed to the period prior to
  31.12.02 - general tax rates.
• part attributed thereafter - 20/25.
• Interest income - 20 (15 - unlinked assets),
  except for a substantial shareholder.

13
Taxation of Employee Stock Options Plans -
(ESOPs)

• Generally, the income derived from ESOPs may be
  taxed as ordinary income.
• Subject to certain conditions, there is a
  possibility to grant ESOPs, the gain from which
  will be taxed as capital gain to the employee.
  The employer is denied the wages expense.
• The tax is levied only when the option or the
  proceeds deriving from it are actually
  transferred to the employee.

14
Personal Credit Points

• Israeli resident individual taxpayers are awarded
  personal tax credit points that are offset
  against the income tax payable. For 2007, each
  credit point equals 2,136 nis (509 ) per year.
• A taxpayers entitlement to credit points
  generally depends on personal and family
  circumstances.
• For example
• A male Israeli resident is awarded 2.25 points.
• A female Israeli resident is awarded 2.75 points

15
Income tax rates for Companies
16
Corporate tax rates

• 2007 - 29.
• 2008 - 27.
• 2009 - 26.
• 2010 (and on) - 25.
• Lower rates may apply under law for encouragement
  of capital investments.
• Capital gains 25. Assets acquired prior to
  1.1.2003 - linear allocation - general tax
  rate/25.

17
Accumulated Profits

• At the sale of shares (including liquidation of a
  company), a tax benefit is granted on gains
  liable to tax on the corporate level.
• The part of the gain in the amount of the said
  profits accrued up to 31.12.2002 is liable to tax
  at 10 rate.
• Profits accrued after 31.12.2002 is liable to
  tax at 20 or 25 rate for individuals, and 0
  for companies.

18
Losses

• Losses arising from a trade or business may be
  set off, in the year in which they arise, against
  income from any source.
• the balance of such losses, if any, will be
  carried forward, without time limitation, to
  offset income from a trade or business, as well
  as business capital gains and land appreciation,
  but not income from other sources.
• Tax losses cannot be carried backwards.

19
Setting-off foreign losses

• Foreign losses are generally set off against
  foreign income.
• Passive losses from may set off passive income,
  and business or vocation losses may set off
  likewise income
• Exception excess loss from foreign business of
  which control and management are exercised from
  Israel, may be set off against income accrued or
  derived in Israel that year.
• Capital loss from sale of an asset abroad shall
  be set off first against foreign capital gain.
• Precondition for off setting losses - had it been
  income it was subject to tax in Israel.

20
Controlled Foreign Corporation (CFC)
21
CFC - General

• The CFC legislation Article 75B of ITO - is
  designed to prevent the deferment or avoidance of
  taxes through the use of foreign corporations,
  with respect to passive income.
• According to the legislation, an Israeli resident
  who has control over a controlled-foreign-corporat
  ion, is subject to tax on his pro-rata portion of
  that corporations undistributed profits as
  though they were actually distributed to him as
  dividends at the end of tax year - Deemed
  dividend.

22
CFC - A Controlling Member

• The rules set in article 75b apply to an Israeli
  resident who is a controlling member.
• A controlling member is a person that holds,
  directly or indirectly, by himself or jointly, at
  least 10 of any means of control of the
  corporation at either one of the relevant dates.

23
CFC - definitions

• A controlled foreign corporation is a Foreign
  resident body-of-persons that meets the
  following
• Its shares or other interests are not traded on
  a stock exchange.
• Most of its income or profits during the tax year
  are passive. In this regard, a specific rule is
  set for a corporation held by a business company.
• The tax applied to its passive income overseas
  does not exceed 20.
• More than 50 of any of the corporates means of
  control are held, directly or indirectly, by
  Israeli residents. In this regard, other
  alternatives are set by the law.

24
CFC - Definitions

• Passive Income - an income being one of the
  following, except if it is of a business nature
• Interest or linkage differences.
• Dividends.
• Royalties.
• Rental income.
• Consideration for the sale of an asset which was
  not used as part as the corporations business.

25
CFC - Definitions

• Undistributed Profits
• Profits originating in passive income of the
  company, except for profits originating from
  dividends received from another foreign
  corporation whose income was taxed at a rate that
  exceeds 20, that were not paid to shareholders
  during the tax year
• The profits are calculated according to domestic
  tax laws of the foreign companys state of
  residence, except if it is not a treaty
  country, in which case the profits will be
  calculated according to accounting principles
  accepted in Israel.

26
CFC - prevention of double taxation

• Upon actual distribution of the cfcs profits to
  its shareholders, or upon the sale of its shares,
  tax previously paid by a shareholder for such
  undistributed profits will be credited against
  tax due in connection with the distribution or
  sale, as the case may be.

27
Foreign Vocation Company (FVC)
28
Foreign Vocation Company

• A foreign body-of-persons that meets all the
  following
• If it is a company, not more than 5 individuals
  control the company.
• 75 or more of any means of control are held,
  directly or indirectly, by Israeli resident
  individuals.
• Most of the controlling members or their
  relatives, carry on a special vocation on
  behalf of the corporation.

29
Foreign Vocation Company

• Most of its income or profits derive from a
  special vocation.
• Income generated by FVC from activities preformed
  by a controlling members (through his relative or
  a company under his control) shall be taxed in
  Israel as income generated in Israel.
• The FVC is considered an Israeli resident for
  domestic tax purposes.

30
Rules for Foreign Tax Credit (FTC)

• FTC is granted to Israeli residents only with
  respect to their income generated outside Israel
  (according to Israeli source rules).
• Foreign taxes may offset Israeli tax levied on
  the same income, while separating different types
  of income - the basket method. In this regard,
  all income of the same type generated in all
  countries except Israel are grouped into one
  basket (e.g. dividend basket business income
  basket etc.).
• Cross-credit within a basket is permitted.

31
Rules for Foreign Tax Credit (FTC)

• No credit is granted for income exempt from tax
  in Israel.
• excess foreign tax may be carried forward up to 5
  years (within a basket) and will be
  index-adjusted.

32
Exit tax

• An Israeli resident that ceases to be an Israeli
  resident is treated as if he sold all of his
  assets on the day before he ceased to be an
  Israeli resident.
• Payment of tax may be postponed until the day on
  which the asset is disposed of.
• In case the disposition price is lower than the
  value of the asset on the day in which the
  taxpayer ceases to be an Israeli resident, the
  lower value applies.
• The exit tax is not imposed in to assets which
  remain subject to Israeli tax.

33
Real estate taxation
34
Land betterment tax

• The Land betterment tax is levied on gain derived
  from
• Sale and any kind of transfer of real estate
  located in Israel
• Disposition of shares or other interests in a
  Real Estate Company (a body-of-persons whose
  entire assets comprise of interests in real
  estate located in Israel, except for accessory
  assets).
• Tax rate for land betterment accrued after
  7.11.2001 is 20 for individuals and 25 for
  companies. For land betterment accrued before
  that day - marginal rates for individuals and
  companies rate for companies.

35
Land betterment tax

• The sale of a residential apartment by
  individuals is exempt from land betterment tax if
  certain conditions are fulfilled.
• Exemption from land betterment tax is granted for
  certain types of transactions (e.g. a gift
  between individual family members).

36
Acquisition tax

• Real estate purchased in Israel is subject to
  acquisition tax payable by the buyer. Generally,
  5 tax rate is imposed on the value of real
  estate.
• For a residential apartment, the acquisition tax
  is calculated based on purchase price as follows
  (if certain conditions have been fulfilled)
• Up to 476,215 nis (113,385 ) - 0.5.
• From 476,215 nis (113,385 ) until 739,120 nis
  (175,980 ) - 3.5.
• Above 739,120 nis (175,980 ) - 5.

37
Value added tax (vat)
38
Value added tax

• Value added tax (Vat) is levied on the
  consumption of goods and services in Israel. Vat
  is indirect tax, levied goods delivered and
  services rendered in Israel.
• The current vat rate in Israel is 15.5 for all
  taxable transaction.
• Transactions subject to 0 Vat rate (examples)
• Exported goods.
• Sale of intangible assets to non residents.
• Services rendered outside Israel to non resident.

39
Social security
40
Social security

• Employers, employees and self-employed are liable
  for social security payments. The employees
  share includes compulsory health insurance.
• The social security rates are based on gross
  monthly income, as follows (current to 2007)
• Employees share 3.5 for 3,580-4,522 nis
  (852-1,076 ) gross income, and 12 for
  4,522-35,760 nis (1,076-8,514 ) gross income.
• Employers share 4.14 for 3,580-4,522 nis
  (852-1,076 ) gross income, and 5.68 for
  4,522-35,760 nis (1,076-8,514 ) gross income.

41
Tax benefits for foreign residents
42
general overview

• Israel encourages investments from both Israeli
  and foreign residents, by offering a wide range
  of incentives and benefits through a number of
  laws and regulations.
• In order to promote weak economic regions within
  Israel, certain benefits are granted in a
  differential manner - greater benefits in
  priority regions (A, B) than in the center of
  the country. However, enterprises throughout the
  country may be eligible for benefits if they
  comply with the relevant criteria.

43
general overview

• Special emphasis is given to high-tech industries
  and RD activities.
• Specific tax benefits are designated for foreign
  residents designed mainly to promote investment
  in Israeli capital market (including banks).
• Increased tax benefits for companies with greater
  foreign participation under the Law for
  Encouragement of Capital Investment.
• special anti abuse section to prevent Israelis
  from abusing such benefits - art. 68A.

44
Categories of exemptions benefits

• Exemption from tax on capital gains
• Exemption from tax on investment income
• Law for Encouragement of Capital Investment from
  1959
• Participation Exemption
• Taxation of Trusts
• Sec 16A of Income Tax Ordinance.

45
Exemption for capital gains

• Gain derived from the sale of securities traded
  in Israeli stock exchange, provided the gain was
  not derived within a permanent establishment of
  the seller located in Israel.
• Gain derived from the sale of Israeli resident
  companys securities traded in a foreign stock
  exchange, provided the gain was not derived
  within a permanent establishment of the seller
  located in Israel, the security was purchased
  after registration for trade and other
  conditions.

46
Exemption for capital gains

• Gain derived from the sale of shares in an
  Israeli resident company who - at the time of
  issuance of such shares - was approved as an R
  D Company.

47
Special exemption to boost investments - Art.
97(B3)

• Special exemption from CG in relation to
  investments in Israeli resident companies (or
  foreign companies whose main assets are interests
  in Israeli assets) between 1.7.05 and 31.12.08.
• The exemption is excluded for
• Gain derived within a PE of the seller in
  Israel.
• Gain derived from the sale of any security of a
  company which - at the acquisition date of that
  security and two years preceding its sale - the
  major value of its assets comprised of interests
  in real estate located in Israel or in an Israeli
  real estate company.

48
Special exemption to boost investments

• Conditions at the acquisition date
• Acquisition between 1.7.05 - 31.12.08.
• Acquisition for Fair Value consideration.
• The purchaser was a resident of a country with
  which Israel had a convention for the avoidance
  of double taxation (treaty country), as follows
• An individual purchaser - was a resident of a
  treaty country for at least 10 years prior to
  acquisition
• A foreign entity purchaser - at least 75 of
  controlling interests over such entity were
  held, directly or indirectly, by individuals who
  were residents of a treaty country for at least
  10 years prior to acquisition.

49
Special exemption to boost investments

• An acquisition statement was filed with Israeli
  tax authority within 30 days of acquisition.
• Conditions at the selling date
• The seller is a resident of a treaty country
• The seller reported the sale to the tax
  authorities of country of which he is a resident.
• The seller filed a request to be exempt from
  tax to Israeli tax authorities.
• The exemption is not conditioned upon the date of
  selling.

50
Exemption for interest on a Foreign-Currency-Depo
sit

• Interest paid to a foreign resident for a non-NIS
  deposit in an Israeli bank is exempt, provided
  all the following conditions are met
• The deposit is not within a PE located in Israel
  and the income does not derive from business
  activity.
• No Israeli residents share interests in the
  deposit.
• a foreign resident statement was filed.
• The deposit has not secured a loan granted by the
  bank to an Israeli resident, who is a relative of
  the owner (a family member or controlled
  corporate).

51
Exemption for income / gain from government bonds
or loans

• Interest (including discount) or index-linkage
  differentials paid on a government bond or loan
  traded in Israeli stock exchange
• Capital gain derived from the sale of such
  government bond or loan not traded on stock
  exchange (in Israel or overseas)
• Exempted provided that
• The tax payer was a foreign resident at the date
  of the bond/loans acquisition and/or at the date
  of its sale.
• The income/gain from the bond/loan are not within
  his PE located in Israel.

52
Investment income in Israeli capital market -
foreign residents mutual fund

• Exemption from tax for a foreign resident mutual
  fund
• CG from sale of securities listed for trade in
  Israeli stock exchange, if acquired following
  listing or from the sale of foreign securities.
• Interest currency differentials for
  foreign-currency deposit in Israel.
• Dividend, interest currency differentials
  derived from foreign securities.

53
Exemption for investment income

• Currency differentials on a loan granted by a
  foreign resident, provided that it was not
  granted through his PE in Israel.
• currency differentials on a companys foreign
  currency bank deposit originating from a foreign
  resident's payment for such companys shares,
  provided the company is mainly controlled by
  foreign residents.

54
Exemption for interest income

• Interest paid by an Israeli body-of-persons to a
  foreign resident in relation to a foreign
  currency loan granted by him provided it is used
  for a purpose included in the Law for
  Encouragement of Capital Investment.
• The exemption from tax (wholly or partly)
  requires the approval of the Minister of Finance.

55
Article 16A of ITO

• The Minister of Finance is authorized to return
  income tax, fully or partly, to a foreign
  resident if the tax payable in Israel is not
  granted to his as a credit against the tax due in
  his state of residence.

56
Investment incentives and trade advantages
57
Law for Encouragement of capital investments,
1959 (the law)

• A special status of an approved enterprise or
  program may be awarded to investments (domestic
  and foreign) and activities (mainly industrial)
  in Israel.
• This status awards income tax benefits (current
  business income dividend distributed) and/or
  government grants.
• The law applies to industrial enterprises
  (including high-tech and bio-tech), hotels and
  other tourist ventures, industrial and
  residential buildings. It may also apply to
  industrial development centers located in Israel.

58
Encouragement of capital investments

• In recent years, the law has undergone
  comprehensive amendments. Presently, 3 routes
  of tax benefits are available to enterprises
  located in preferred region A
• A scheme allowing tax exemptions during the
  concession period.
• The company tax is, wholly or partially,
  deferred until distribution of untaxed profits,
  at which time it will be paid by the company.
• Lower withholding tax rate in respect of
  dividends distributed - 15, or lower according
  to a tax treaty.

59
Encouragement of capital investments

• The scheme known as the Ireland Scheme -
• The profits are taxed at the rate of 11.5.
• No additional company tax is required when
  profits are distributed.
• Withholding tax rate in respect of the dividends
  distributed from such profits - 15 for Israeli
  residents shareholders and 4 for foreign
  residents.

60
Encouragement of capital investments

• A strategic investments scheme -
• The enterprise is granted a full tax exemption
  during the concession period and is not required
  to pay additional tax upon distribution of
  profits as dividends.
• No tax withholding from dividends.
• A minimum threshold of investment amount -
  between 147 - 220US million (depending on
  location).

61
The approval requirement

• An enterprise seeking grants is required to
  submit a plan to the Investments Center.
• An enterprise wishing to benefit from tax
  concessions is no longer required to file a
  formal request. Provided it complies with the
  conditions stipulated by the law, it is eligible
  for such tax benefits and may claim them under
  the income tax returns it files.

62
General requirements

• Under the grants scheme, the enterprise is
  required to fund 30 of the scope of approved
  investments in equity.
• No such requirement exists for the tax benefits
  schemes.
• For investors defined as foreign residents, the
  state provides increased tax benefits which they
  are able to enjoy for longer periods.

63
Tax benefits period for grants scheme

• Tax benefits for an approved enterprise are
  granted for a period of 7 consecutive years and
  may be extended, under certain conditions, up to
  10 years for foreign invested companies.

64
Approved enterprise controlled by foreign
residents

• The reduced tax rates are in accordance with the
  percentage of foreign participation, as follows

Not an approved enterprise An approved enterprise - of foreign participation An approved enterprise - of foreign participation An approved enterprise - of foreign participation An approved enterprise - of foreign participation
Not an approved enterprise 0-49 49-74 74-89 90-100
Taxable income 100 100 100 100 100
Corporate tax 29 25 20 15 10
Balance 71 75 80 85 90
Tax on distributed dividends 17.75 11.25 12 12.75 13.5
Total tax burden 46.75 36.25 32 27.75 23.5
65
A foreign-invested company

• In order to be consider as an approved
  enterprise controlled by foreign residents,
  certain conditions have to be fulfilled
• the foreign residents must invest at least 5
  million NIS (1.2 million ) in the companys
  capital stock, including shareholder loans, such
  investment providing a right to its capital
  stock, profits, voting power and managers
  nomination.
• Foreign resident who purchased a company whose
  paid-up capital stock exceeds 5 million NIS.

66
A foreign-invested company

• A company controlled by an Israeli resident,
  directly or indirectly, or a company that Israeli
  residents are eligible to 25 of its profits,
  will not be considered as an enterprise
  controlled by foreign residents.

67
Tax benefits for exempt enterprise (non-grants
scheme)

• The enterprise must be an industrial plant or
  hotel.
• The Enterprise is competitive and contributes
  to the gross domestic product. (An enterprise
  will be considered to have fulfilled this
  condition, for example, if it is engaged in bio
  technology or nanotechnology and has obtained the
  approval of the head of industrial RD
  administration, or if it exports at least 25 of
  his yearly income).
• Minimum investment in capital assets/equipment,
  as described below.

68
The minimal amount of investment

• New investment - at least 300,000 nis (71,430
  ).
• Expansion of an existing enterprise - a
  percentage of the value of productive assets, as
  follows
• Up to 140 million nis (3.33 million ) - 12.
• Above 140 million nis (3.33 million ) and up to
  500 million nis (119 million ) - 7.
• Above 500 million nis (119 million ) - 5.
• Provided that the total amount of investment will
  not be less than 300,000 nis.

69
Tax exemption (deferral) until profit distribution

• A company may choose an alternative benefit
  scheme allowing it tax exemptions instead of
  grants. Only limited liability companies are
  entitled to choose this scheme. This periods for
  tax benefits are as follows (years)
• (1) On the undistributed portion only.
• (2) The reduced tax rates are identical to the
  rates details above.

National priority region National priority region National priority region National priority region National priority region National priority region
A A B B C C
Tax exemption (1) Reduced taxes (2) Tax exemption (1) Reduced taxes (2) Tax exemption (1) Reduced taxes (2)
Domestic company 10 - 6 1 2 5
Over 25 foreign control 10 - 6 4 2 8
70
Tax exemptions until profit distribution

• Companies in which foreign participation exceeds
  74,(and with approved program not less 20
  million ) are entitled to a longer benefit
  period (15 years), subject to the approval of the
  investment center board.
• The tax exemption is actually a tax deferment.
  The exempted tax becomes due when the enterprise
  distributes tax exempted profits.

71
Accelerated depreciation

• Approved enterprises are eligible for accelerated
  depreciation on the tangible assets, reaching
  400 of standard depreciation rates on buildings
  (not exceeding 20 per annum and exclusive of
  land), and 200 on equipment. The tax authorities
  may allow increased rates of up to 250, if there
  is evidence of a high depreciation rate of
  equipment. This benefit is available for a 5
  tears period from date of operation rather than
  from purchase date of asset.

72
Participation exemption
73
Participation Exemption

• A recent legislation (in force as of 1.1.2006)
  provides for a participation exemption regime for
  Israeli holding companies, under specific
  conditions.
• An Israeli holding company is exempted from tax
  on the following
• (1) dividends received from foreign
  subsidiaries
• (2) capital gains tax upon sale of such
  subsidiaries
• (3) interest on bank deposits in Israel and on
  income (interest, dividends, and capital gains)
  from securities traded in Israeli stock exchange.

74
Participation Exemption - benefits for foreign
investors

• Foreign shareholders benefit from a reduced
  withholding rate on dividends distributed by the
  Israeli holding company - 5.
• Foreign shareholders may apply for tax exemption
  on capital gain upon the sale of the Israeli
  holding companys share under Art. 97(B3) -
  special exemption.

75
Participation Exemption
Israeli resident
Foreign resident
Israeli holding company
76
Participation exemption

• Definitions Israeli holding company
• Registers in Israel, Managed and control from
  Israel.
• The company is privately owned and not tax
  transparent.
• The company is not a financial institution.
• Its total investment in foreign subsidiaries,
  throughout at least 300 days of the tax year,
  amounts to at least 50 million NIS(11.9 million
  ).
• 75 or more of its assets constitute the
  subsidiaries.
• The company formally requests to be recognized as
  a holding company.

77
Participation exemption

• Subsidiary for participation exemption
• Resident of a treaty country.
• Resident in non treaty country - provided that
  the corporate tax rate on business income in that
  country is 15 or more (at time the shares are
  purchased).
• The Israeli holding company holds at least 10
  of profit rights in the subsidiary for 12
  consecutive months.
• At least 75 of the subsidiarys income from
  sources outside Israel business income.
• Israeli assets or Israeli income of the
  subsidiary may not comprise more than 20 of the
  subsidiarys total assets/income, respectively.

78
Taxation of Trusts
79
Foreign Resident - Settlor trust

• The Foreign Resident Settlor Trust classified
  as such under recent legislation (in force as of
  1.1.2006), may be used as an instrument for
  international tax planning.
• A trust is considered a Foreign resident settlor
  trust if -
• at the time of its establishment, and during the
  relevant tax year, all its settlors are foreign
  residents (irrespective of the beneficiaries tax
  residency) Or-
• during the relevant tax year, all its settlors
  and beneficiaries are foreign residents.
• irrevocable or not.

80
Foreign Resident Settlor trust

• The transfer of assets by the settlor to the
  trustee is not taxable
• The trustees income is taxable as if it were the
  foreign resident's income.
• Income generated outside Israel is not taxable
  nor does it need to be reported in Israel.
• Transfer of assets from the trustee to the
  beneficiaries is regarded as being transferred to
  them by the settlor directly.

81
Foreign Resident Beneficiary Trust

• Foreign resident Beneficiary trust -
• At least one of its settlors, at the time it was
  established, was an Israeli residents
• The trust is irrevocable
• All the beneficiary during the relevant tax year
  are identified foreign residents.

82
Tax treaties
83
Treaties for prevention of double taxation

• Israel has entered into tax treaties with 42
  countries, most of them are based on the OECD
  model convention.
• In addition, two treaties have been ratified and
  will enter into force as of January 1, 2008.

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Thank you