The Great International Tax Reform Proposed in Israel – Will It Affect You?


The Israeli Tax Authority has published a report proposing to reform international taxation rules (

Unfortunately, many of the proposals will involve bureaucratic form-filling, looking for tax planning.

Moreover, the proposals miss the big money by ignoring the OECD’s recent (2020/21) twin pillar tax package aimed at larger multinationals.

The Israeli Tax Authority claim the Israeli CPA Institute and the Law Society endorsed the proposals. In fact, the report represents a shotgun wedding after worse proposals were dropped.

It remains to be seen what will be legislated and when.


Below we briefly review proposed some personal proposed measures.


Currently, an individual is considered fiscally resident in Israel if their “center of living” is in Israel. A rebuttable assumption of residency exists after 183 days presence in Israel in one tax year (ending December 31), or 425 days over 3 tax years including at least 30 days in the last year.

It is proposed to introduce “decisive” presumptions of Israeli residency, subject to the center of living test” (i.e. not so decisive) as follows:

  • Present in Israel at least 183 days in one or two tax years.
  • Present at least 450 days over 3 tax years including at least 100 days in the last year, unless they spent at least 183 days any year in a country that has a tax treaty with Israel.
  • Present in Israel at least 100 days in a tax year if their spouse shares a common household and is Israeli resident.

It is also proposed to have decisive tests of foreign residency as follows:

  • Present in Israel under 30 days per year for 4 tax years – from the first tax year.
  • Present in Israel under 30 days per year for 3 tax years – from the second tax year.
  • Both the above are provided the individual is present in Israel no more than 15 days in January or December.
  • The individual and their spouse are present in Israel under 60 days per year for 4 tax years – from the first tax year.
  • The individual and their spouse are present in Israel under 60 days per year for 3 tax years – from the second tax year.
  • Both the above are provided the individual is present in Israel no more than 60 days in January-February or November-December.
  • The individual and their spouse are present in Israel under 100 days per year and in a treaty country at least 183 days for 4 tax years – from the first tax year.
  • The individual and their spouse are present in Israel under 100 days per year and in a treaty country at least 183 days for 3 tax years – from the second tax year.
  • Both the above are provided the individual is present in Israel no more than 50 days in the first or last 100 days of the year (Comment: why the longer period in a treaty country?).


It is proposed that Olim should start disclosing exempt foreign income derived during their ten year “tax holiday”. Another committee may re-review whether the tax exemption should continue. The ITA claims to have statistics showing the ten year tax holiday didn’t increase Aliya. (Page 60. Comment: we are not so sure, presumably any Aliya decrease followed the end of the Soviet influx in the 1990s…)


Another committee will consider trusts, see below.

Exit tax:

The ITA is frustrated that Israelis who stop residing in Israel rarely pay “exit tax” (really capital gains tax of 25%-33%) due upon departure or upon realizing the assets concerned.

So, the report proposes extra requirements if the tax is not paid upon departure including: filing lists of assets at cost and at fair market value upon departure and annually, taxing dividends annually from foreign companies, leaving a guarantee for the tax or an asset lien and/or paying tax on account within 90 days after departure, forfeiting the pre-Aliya Israeli securities exemption.

Since it may take 3 – 4 years to actually know if you established foreign residency (see above), these requirements would also apply if you are gone from Israel 183 days in a tax year.

To reduce double taxation when selling an asset after leaving Israel, the Israeli tax law currently restricts the Israeli tax to the pro rata portion of time they owned the asset as Israeli residents. It is proposed to change that for employee shares and share options to the pro rata portion of the vesting period in Israel (which may cause double taxation after all).

Foreign Journalists and Sportspersons:

Foreign journalists enjoy a 25% tax rate and per diem expense deductions for 36 months. It is proposed to make this 36 consecutive months, once only, for someone who did not reside in Israel in the prior 10 years (spouse likewise), and only engages in journalism.

Foreign sportspersons enjoy a 25% tax rate and per diem expense deductions for 48 months. It is proposed to make this 48 consecutive months, once only, for someone who is not an Israeli citizen.

Stock Options of Olim:

In Tax Ruling 989/18 the ITA claimed that stock (share) options granted to Olim before moving to Israel are fully taxable if realized after moving to Israel. The law society and CPA Institute objected strongly. The ITA now proposes a climb-down.

Step Up/Step Out

Currently, the ITA allows Israeli residents that receive an inheritance or gift from abroad to claim a step up (revaluation) of the cost to market value on the date of the inheritance/gift – on tax form 905. This is intended to avoid double taxation – gift or inheritance or estate tax abroad plus capital gains tax in Israel.

Now the report proposes imposing a corresponding capital gains tax on inheritances from Israeli residents to recipients resident abroad. Comment: This would be a back door estate tax in Israel, but only if the recipient is resident abroad. Some tax treaties may apparently forbid such discrimination e.g. the Israel-US treaty.

Foreign tax credits:

Please see below, some of the proposals would affect individuals as well as companies.


Foreign Tax Credits:

An Israeli resident company or individual can only credit foreign tax against Israeli tax on the same type or “basket” of income or gain. Currently, there are around 11-12 baskets. It is proposed to reduce this to 5 baskets: passive income, active income, capital gains, controlled foreign companies (CFCs) and foreign professional companies.

If a US citizen residing in Israel derives income from a third country, say the UK, it is proposed to deny a credit for the third country (UK) tax in Israel if a credit is also claimed in the US. Comment: this ignores the fact that third country income may be taxed in the US, Israel. And the third country.  This proposal would also affect Israeli groups with tiers of subsidiaries.

Before claiming a foreign tax credit for tax paid to a country that lacks a tax treaty with Israel, it is proposed that advance permission would be needed from the Israeli Tax Authority (ITA).

Currently, excess foreign tax credits can be carried forward up to 5 years. It is proposed to stop carrying forward excess foreign tax credits unless they result from losses in Israel or timing differences.

Currently, Israeli resident companies can credit not only foreign dividend withholding tax but also corporate income tax paid by 25%-or-more affiliates (“daughters”) or their 50%-or-more subsidiaries (“granddaughters”). It is proposed to also allow a credit for 50%-or-more subsidiaries of the latter (“great granddaughters”). But any credit would only be allowed if the dividend payor is owned at least 12 months and the dividend is derived from third party income.

Controlled Foreign Companies (CFCs):

Currently, Israel generally taxes undistributed income of 10%-or-more Israeli resident shareholders of companies that derive mainly passive revenues or profits, pay 15% or less tax thereon and are over 50% owned by Israeli residents.

The report proposes to make passive revenue include: (a) insurance income from related parties; (2) royalties from related parties if the company can bear “essential risks” or relating to purchased intangible assets; (c)  interest from related parties, if the payor would otherwise escape CFC taxation or is an Israeli resident including permanent establishment abroad or the Israeli company gave a loan note not bearing interest under transfer pricing rules or bearing untaxed interest, (d) “benefits” from financial assets, (e)  “profit shifting” to a company unable to bear related risks, (f) capital gains from intangible assets owned over one year, but this would be rebuttable under rules the ITA Director would set.

It is proposed that tougher CFC criteria would apply to countries on grey or black lists, including the Netherlands, Finland and Sweden, including: a 30% Israeli shareholder threshold; a 33.3% share of revenues or profits.

It is proposed that Olim in their 10 year “tax holiday” would count as Israeli residents but they would not themselves pay CFC taxation.

It is proposed to empower the ITA Director to over-rule CFC taxation in a reorganization.

Foreign Investors in Israeli Real Estate Companies:

Foreign investors enjoy an Israeli capital gains tax exemption when selling securities in Israeli companies that do not mainly hold Israeli real estate. The report proposes making the no-Israeli-real-estate rule apply throughout the three years prior to sale.

No Permanent Establishment:

The report contains a (strange) proposal to tax a foreign resident operating in Israel without a permanent establishment (undefined) if interest, royalty or pension costs are deducted.

US Limited Liability Company (LLC):

Currently, Israeli Tax Circular 5/2004 allows an LLC shareholder (member) to credit US tax against Israeli tax. The report proposes allowing the shareholder set off US losses between all LLCs, S-Corporations and partnerships held by the taxpayer.

Hybrid finance:

Based on Action 2 of the OECD measures against BEPS (Base Erosion and Profit Shifting), the report proposes a string of measures aimed at preventing cross border interest payments being deducted as an expense in one country without being taxed in another country. These measures target hybrid entities (transparent in one country not the other), reverse hybrid entities (the reverse) and hybrid instruments (debt in one country, equity in the other).

Branch tax:

The report did not reach a conclusion whether to propose a branch tax on remittances by a branch to its head office, partly in case double taxation may ensue.


Enhanced Reporting:

In the interests of “transparency”, the report proposes a host of additional reporting requirements, including:

  • On foreign offshore companies engaged in “round tripping” i.e. Israeli residents hold over 50%, tax rate up to 15%, in a country lacking a tax treaty with Israel or operating a “territorial basis” of tax, mainly Israeli source income of assets.
  • On “Special major shareholders” holding 25% if Israeli residents together over 50% regarding directors, profits, various payments, on an expanded Form 150. Comment: Strangely, it is proposed that the expanded form would replace the need to file a Country by Country (CBC) form where required by the OECD (in apparent contradiction of Israel’s OECD obligations).
  • On any Israeli resident with foreign assets over NIS 1 million (currently NIS 1,872,000) including “means of decentralized payments” (apparently crypto).
  • On any Israeli resident who receives a gift over NIS 500,000 from abroad.
  • On foreign companies with platforms for activity of Israeli residents, to provide upon request information about Israeli residents using it and their customers and transactions.
  • “In order not to impose more burdensome reporting requirements” the report proposes “reporting of more acts and expanding their scope…on taxpayers involved in cross-border arrangements” (Page 64).
  • Allowing information exchange between the ITA, the Companies Registry and the Anti-Money Laundering Authority regarding ultimate beneficial owners. Currently this can land civil servants a 3 year jail sentence.
  • Trustees, financial institutions and business service providers to have and provide the ITA upon request accurate up to date information about trust settlors, beneficiaries, any protector and assets “without legal impediment” or face “sanctions” (page 67). Another committee will continue reviewing this.


As mentioned, the proposals miss the big money by ignoring the OECD’s recent (2020/21) twin pillar tax package aimed at larger multinationals.

Pillar I aims to shift some of the profit from the country(ies) where it was generated to where the consumers are located for multinationals with annual revenue over EUR 15 billion.

Pillar 2 calls for a minimum global corporate income tax of 15%.

Both of these Pillars would be relevant to Israel, and Israel is an OECD member supposed to adopt OECD recommendations, but the report does not mention them.

The OECD has also introduced a multilateral instrument (MLI or “super treaty”) which amends existing tax treaties (regarding income location and taxability) for countries which sign up to them, including Israel. The MLI effectively by-passes the Knesset so the report should have mentioned it because the ITA claims it believes in “transparency”.

The report was presented by an ITA committee to the ITA Director. The report still has to be drafted as a bill for consideration by the Israeli cabinet and then the Knesset.

So, it remains to be seen what will be legislated and when.


  • You should review the above for relevance to your situation.
  • Contact us for specific advice.
  • Monitor with us the progress of these proposals and any others that may emerge.
  • Plan any changes e.g, regarding residency, before any legislation gets passed.
  • Anyone engaged in e-commerce – supplying products or services over the internet – should contact us for about ABC (Analysis, Business nexus planning, Comprehensive structural planning). Many changes are afoot in many countries.

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

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd

© Leon Harris, December 9, 2021

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