Israel’s legislators and its tax authority currently have enough on their plates handling the war economy to justify some light-headedness when it comes to answering the demands of an ill-timed audit by the tax-wallahs of the OECD.  That august organization is now threatening Israel (who isn’t?) with the naughty step. The misdemeanour – our system leaves something to be desired regarding tax transparency and exchange of information, thanks to the laissez-faire treatment of first time tax residents and some returning residents. Last week’s proposed legislation to rocket ourselves back into the OECD’s good books shows all the evidence of preparation under fire. Before it, or anything like it, can become law it will be up for public comment, a Knesset vote, and – if it survives that – ricocheting around the combat-ready Knesset Finance Committee.

Everybody who has Israel in their sights, by now knows that first time Israeli residents and some returning residents have a tax furlough in respect of foreign sourced income for 10 years . Apart from an inherent OECD problem with the tax exemption – not currently being shot down – the new resident is not even required to report their foreign income as exempt in Israel. That reporting exemption stretches to most trusts involving new residents and some returning residents. What is more, Israel is evidently not very good about reporting ultimate beneficial ownership of companies and trusts, not to mention other tax planning ordnance.

Bottom line – while the Government is very happy with the status quo that would be expected to continue to encourage immigration despite the current war, it has to appease the other side.

Enter the proposed law:

• For individuals taking up first-time residence before June 1, 2025 (June 1, 2026 according to the incorporated explanatory notes – but what’s a year among friends?), the law will continue as at present. Why the delayed action? Because the kind authorities don’t want to disappoint those who have already arrived, as well as those starting to pack their bags. I have been wondering for the last week what June 1 could possibly signify (whether in 2025 or 2026), with no plausible explanation – perhaps it is simply to confuse the enemy. Anyone arriving after that date will be entitled to the current tax beneficial status but will be required to report their tax exempt income to the ITA.
• Understanding the situation with trusts involving first time residents and some returning residents is a struggle. On the one hand, the logic applied to first time residents in the previous paragraph should also apply to their trusts; on the other hand the proposal demands immediate information reporting (but not tax liability) for 2024. Closer scrutiny suggests that, thanks to the fog of the war of words, reporting of relevant trusts could vary from nothing, through details including residence of settlors and beneficiaries, to full disclosure of income. The factors in determining the level of reporting will include: whether the sole settlor elects in the future to take the income to their person tax return, whether the trustees are Israeli or foreign resident, and the classification of the trust.
• Collateral damage involves foreign trusts with no Israeli resident settlors, beneficiaries or assets in Israel, that have Israeli resident trustees. As of 2024, the trustees will be required to report to the ITA at minimum the tax residence of settlors, beneficiaries and protector. Such information will presumably be shared by the ITA with foreign authorities. This is the perfidious abandonment of our allies. I am old enough to remember (but not yet old enough to forget) the negotiations that took place when the trust law was implemented in 2006. One of the points stressed was that the ITA would not make any demands of Israeli trustees of foreign trusts – a nod to Israeli lawyers and others who wanted to enter that business. It would be a casus belli if Israeli trustees had to inform foreign settlors and beneficiaries that, as of 2024 (too late to reorganize), they can expect their details to be shared with the tax authorities of their resident countries.
• It should be noted that there are also other requirements concerning beneficial ownership of bodies, and the ability of the tax authority to demand information concerning certain foreign corporate holdings of new residents.

This conflict looks like it has a way to go before the dust settles. Advisers and their clients need to keep a close watch on developments.