Under OECD Pressure: Israel Intends to Abolish the Exemption from Reporting Foreign Income and Assets for First-time and Veteran Returning Residents
On March 6, 2024, a bill to amend the Income Tax Ordinance was published, aiming to abolish the ten-year exemption from reporting foreign source income afforded to first-time residents and veteran returning residents (“benefited individuals”) (*).
(*) a veteran returning resident is someone who becomes a resident of Israel again after being a foreign resident for at least ten consecutive years.
Firstly, it is important to note that:
1. The proposal does not abolish the tax exemption granted to new immigrants and veteran returning residents, but only to cancel the existing exemption from reporting.
2. The amendment regarding the reporting obligation will apply – if the law comes into effect – only to benefited individuals who become Israeli residents from June 1, 2025 onwards.
3. Trusts that existed before the publication of the law will be required to submit a notification detailing the identity of the settlors, beneficiaries, trustees and protectors and their tax residency within 120 days from the date of the law’s publication.
4. The bill has not yet passed the Knesset, therefore all of the above is a discussion of the proposal only.
Explanation
Since January 2007, individuals who immigrated to Israel (first-time residents) or who are considered veteran returning residents according to the Ordinance, are exempt both from paying tax and from reporting to the Israeli Tax Authority on any income produced or accrued outside of Israel or from foreign assets. The exemption applies for ten years from the date on which the taxpayer first became residents of Israel (the “benefit period”).
Following increased international pressure on Israel by the OECD, the bill intends to completely abolish the exemption from reporting foreign assets and income. According to an assessment conducted by the Global Forum (a body operating under the OECD), several deficiencies were identified in Israeli tax legislation, particularly regarding the availability of information concerning new immigrants and veteran returning residents, including information about corporations and trusts they own.
Below are the main changes:
1. Returning Residents and New Immigrants:
• Currently, a benefited individual is exempt from filing a tax return during the benefit years on all income produced or accrued outside of Israel or originating from assets outside of Israel.
According to the proposed law, this exemption from reporting will be abolished, so in effect, the benefited individuals will be required to include in their tax return all of their worldwide income. In practice, abolishing the exemption from reporting will allow the authorities to dispute whether certain income items were in fact completely sourced outside of Israel.
• It should be noted that in recent years, we have witnessed significant efforts by the tax authorities to undermine the applicability of the exemption. There is no doubt that the abolition of the reporting exemption is expected to provoke considerable disputes between new immigrants and returning residents and the authorities. Taxpayers are likely to find out that income they believed was exempt will be viewed as wholly or partially sourced in Israel by the ITA.
• Furthermore, currently, foreign companies controlled and managed from Israel by benefited individuals are not required to file tax returns in Israel, and it is widely accepted that the ITA does not have the authority to demand such reports. The bill proposes that benefited individuals will be obligated to report the existence of such companies, and the tax assessor will have the authority to require the submission of a tax return prepared according to accepted accounting principles.
• Additionally, the exemption that currently allows benefited individuals not to include assets outside of Israel in their wealth declarations will be abolished, so that in effect, the wealth declaration will become a significant tool in the hands of the authorities for examining the scope of the exemption and the assets held by such individuals.
2. Trusts: The proposal to abolish the reporting exemption for benefited individuals will also significantly affect trusts that are currently exempt from tax and reporting because their creators and/or beneficiaries are benefited individuals. The proposed law stipulates that a reporting obligation will apply to such trusts, and in some cases, there will be a retroactive reporting obligation on existing trusts.
Currently, it is unclear whether the retroactive reporting will also apply to trusts where the settlors or beneficiaries arrived in Israel before June 1, 2025, although it is certainly possible that the reporting obligation will apply to individuals who arrived or will arrive before this date.
3. Trusts Without Ties to Israel: The law proposes that an Israeli resident trustee of a trust not required to file a report because all its settlors and beneficiaries are foreign residents and it does not have assets or income in Israel, will submit a notification to the ITA within 90 days including details of the residency of all the individuals involved in the structure.
4. Reporting Controlling Shareholders (applicable to all reporting companies): A company which submits tax returns to the ITA will be required to detail in the annual return its shareholders (up to the level of individuals) along with the residency of such controlling shareholders.
For more information, you can contact Doron Elmekiesse, ADV. (CPA) from our office.
The purpose of this memorandum is to provide you with general information on various topics. The laws themselves are more complex and include additional exceptions. Accordingly, the contents of this memorandum should not be applied without consulting the appropriate professional authority in our office.
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