The Israeli government published a draft bill on February 22, 2024 proposing to repeal the ten year reporting exemption for Olim. This will relate to foreign income and assets of theirs and of trusts they are a party to. But this only relates to disclosure – the existing ten-year exemption from paying Israeli tax on foreign source income and gains should NOT change. But Olim are being used as scapegoats – read on.

Background:

Israel is a member of the OECD and subject to Peer Review by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum). In 2022 the Global Reform issued a draft report (“Second Round, Phase 1) and should publish recommendations at the end of March 2024. If the Global Reform rates Israel as only “Partially Compliant”, adverse economic consequences may follow. For example, the EU may blacklist Israel, and withhold high levels of tax at source, according to the draft bill commentary.

What did the OECD Global Forum say in 2022?

“Israeli law does not ensure the availability of accounting records in respect of foreign resident trusts having a trustee resident in Israel and for trusts created by new immigrants and veteran returning residents which are vested with assets abroad for a period of 10 years, as well as in respect of companies that are controlled in Israel by new immigrants or veteran returning residents for a period of 10 years.” The OECD recommended: “Israel should ensure that accounting records consistent with the standard are maintained for all relevant legal entities and arrangements without exceptions”. (“Global Forum report on Israel, Second Round, Phase 1, page 17).

What about the FATF?

The draft bill commentary also quotes recommendations of the Financial Action Task Force (FATF). The FATF is an intergovernmental organization combatting money laundering. FATF Recommendation 24 requires countries to ensure that competent authorities have access to adequate, accurate and up-to-date information on the true owners of companies. This… will help prevent the organized criminal gangs, the corrupt and sanctions evaders from using anonymous shell companies and other businesses to hide their dirty money and illicit activities.”

FATF Recommendation 25 says: “countries should ensure that there is adequate, accurate, and up-to-date information on express trusts and other similar legal arrangements, including information on the settlor(s), trustee(s), protector(s) and beneficiary(ies), or class(es) of beneficiaries, and any other person exercising ultimate effective control…”

What is proposed in Israel?

Briefly, the bill proposes to repeal the exemption from disclosing foreign source income and gains of new residents, senior returning residents (who resided abroad over 10 years) – i.e. Olim and others – and various types of trusts in which they are parties. Trustees will need to file forms with the Israeli Tax Authority (ITA) spelling out exempt income. Where parties to a trust include entities and arrangements (as opposed to individuals), their ultimate beneficial owners (UBOs) will need to be disclosed. The definition of UBO will be taken from anti money laundering rules. This includes individuals who steer activities in practice i.e. “call the shots”.

Companies abroad controlled and managed by Olim should start keeping accounts according to Israeli generally accepted accounting principles.

If enacted the disclosure rules would apply to individuals who move to Israel on or after June 1, 2025, but to trustees only 90 days after publication of enactment of the law and to income tax returns for 2024 onwards.

Comments:

• The above timeframe is muddled, but that is not all.
• The Knesset enacted the 10 year tax holiday in 2008 for foreign income of Olim to encourage Aliya. Now Olim are the only ones being blamed for apparent money laundering loopholes. No evidence of Olim exploiting any loopholes is presented. And there is zero consideration of how much income is derived by Olim from offshore sources or disreputable sources. Instead, Olim are criticized for having “mixed income” derived partly in Israel, partly abroad. In our view this is not a problem.
• In short, Olim are scapegoats being tarred by a broad brush. Money laundering, tax evasion and corruption by others are totally ignored.
• The Global Forum actually wants Israel to copy other countries by instituting a trust registry, like the companies and partnership registries. The present bill ignores this.
• What is the expected effect of the proposed bill on the State budget? Nothing according to the commentary.
• Will the ten-year exemption for Olim be in danger next? Apparently not according to the commentary. It remains to be seen what will be enacted and when.

Additional possible implications to consider include:

• How will Olim report exempt foreign income on annual income tax returns? Will their tax returns double in length – exempt foreign and taxable Israeli lines for each type of income?
• Olim will need to establish exactly when they became Israeli residents for tax purposes.
• Olim may apparently squeeze into the old more lenient rules if they make Aliya in 2024 rather than 2025, but their trusts may not?
• Trustees may need to fill in forms within 90 days after enactment of the proposed law.
• Olim may soon be requested to file offshore company accounts, once they disclose their existence.
• Will loopholes open up for visiting students, visiting soldiers , people who elect a settling in year among others and people splitting their time between Israel and at least two other countries each year?
• What about people with multiple permanent homes – disclosure and/or tax in each country?
• Will foreign charities be caught?
• Will foreign life insurance policies and investment bonds be caught?

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

[email protected]

(c) Leon Harris 26.2.2024