Special Arrangements
As is well-known, there is an obligation to pay taxes, report, and disclose on assets and wealth, both in Israel and abroad, owned by Israeli residents. This obligation became absolute in 2003 following the reform in international taxation, which transformed the tax system in Israel into a worldwide system.
Since 2006, and especially from 2014 onwards, this obligation also applies to trustees where the settlor or beneficiary are Israeli residents, regardless of whether the trustee is a foreign or Israeli resident, or whether the trust agreement is governed by foreign or Israeli law.
Failure to report constitutes a criminal offense that could result in an indictment and financial penalties, including imprisonment.
At times, citizens are hesitant to provide details about their assets and income, fearing that disclosing this information may lead to punitive measures from the Israeli Tax Authorities. This delay in reporting can extend for many years, while on the other hand, the pressure increases, as Israel now receives quality information about Israeli residents holding foreign bank accounts and even accounts on cryptocurrency trading platforms. This is done either through automatic information exchange agreements that Israel has signed (such as FATCA with the US or the implementation of the CRS standard) or specific requests from the Israeli Tax Authority or financial institutions in Israel, among other reasons.
In recent years, the Israeli Tax Authority has periodically published regulated voluntary disclosure programs (VDP) of assets and wealth, whether these are held in foreign bank accounts, through foreign trusts, or, more recently, in the form of various cryptocurrencies. Some of these procedures are anonymous while others require the disclosure of relevant names and details. The purpose of these procedures is to lift the criminal liability from the taxpayer while addressing the civil liability (tax payment). Often, the amount of tax owed is disputed and subject to various claims, positions, interpretations, and explanations from both the taxpayer’s representatives and the Israeli Tax Authority.
Our team has handled hundreds of VDP’s, whether formally (under the routes and temporary measures published by the Israeli Tax Authority) or informally through coordination with relevant parties in the Israeli Tax Authority. In addition to addressing tax issues, clients typically wish to transfer the settled funds or assets to their accounts in Israel, a complex and well-known procedure, and in these cases, our team is ready to assist with the relevant parties.
Beyond the well-known VDP, special arrangements can also be made with the Israeli Tax Authority in other matters or issues, for example:
- Trust Settlements: See below a summary on Trusts and Intergenerational Transfers of Capital and Private Wealth as follows.
- New Immigrants and Returning Residents: As is known, a new immigrant or an old term returning resident is entitled to an exemption from tax (and from reporting) on their income and assets outside of Israel for a period of 10 years from their immigration or return to Israel. When transitioning from a tax-exempt regime during the benefit period to a taxable regime after its end, it is necessary to settle a thoughtful tax plan that considers the client’s unique circumstances to maintain the tax advantage to which the individual is entitled. This may involve choosing among possible transactions regarding the taxpayer’s asset portfolio, including securities, cryptocurrencies, real assets, or private investments owned by the individual, advancing payments, or distributing profits as relevant, altering transaction terms in certain cases, examining scenarios regarding the payment of foreign taxes and their creditability, and other related issues.
- Arrangements Regarding Step Up of Assets’ Cost Basis: Typically when transitioning from a tax-exempt regime to a taxable regime, whether for new immigrants and returning residents as mentioned above, gifts and inheritances from foreign residents, or legislative changes that bring entities and arrangements that were outside the Israeli tax network into it (for example, changes to trust taxation legislation in 2006 and 2014, or introducing of traded securities’ taxation since 2003, etc.). In all these cases and similar ones, it is advisable to seek prior consultation to avoid unfortunate tax complications and benefit from the advantages that the law provides to the relevant taxpayer.
Cryptocurrency Taxation
Investment in cryptocurrencies and the establishment of crypto ventures have become hot topics in recent years, serving as a liquid investment alternative to the capital market, in the tech sector, and even in the art world.
Terms such as Bitcoin, Ethereum, blockchain, mining, tokens, smart contracts, hot and cold wallets, airdrops, ICOs, DeFi, staking, liquidity pools, NFTs, minting, decentralized exchanges, ERC20, and many others are frequently heard, indicating that the field of cryptocurrency changes almost daily. This rapid evolution necessitates current familiarity from industry professionals, regulators (such as the Bank of Israel and financial institutions operating under its guidelines, the capital market, the stock exchange, the anti-money laundering authority, and also the tax authority), as well as from professional advisors, particularly in the area of taxation.
The cryptocurrency market is characterized by significant volatility, sometimes extreme, which can lead to problematic tax complications for investors. For instance, realizing gains from cryptocurrency trades in one year when the market collapses in the following year can leave the investor with taxable profits without the means to pay the tax owed.
The Israeli Tax Authority has not published many professional guidelines concerning this field and its various aspects, and given the frequent changes in the industry, the existing guidelines and circulars are often insufficient or outdated. This situation places a challenge on professional advisors to be innovative, updated, and creative, and to understand the expected tax implications of various actions, both for investors and crypto ventures, providing appropriate advice accordingly.
Notably, in one of its initial guidelines, the tax authority expressed its position that cryptocurrency exchanges constitute an asset exchange event subject to tax (as capital gains or business income, depending on the circumstances) and rejected the argument that an increase in the value of cryptocurrency represents a currency exchange fluctuation that could be exempt income for individuals (this Israeli Tax Authority’s position was supported by court rulings).
Beyond the complex tax issues, the cryptocurrency market also presents liquidity challenges when converting cryptocurrencies into legal tender (known as FIAT money) and into investors’ bank accounts. Banks often raise concerns and red flags (due to justified concerns of money laundering, for example), and the Israeli Tax Authority attempts to facilitate the receipt of funds derived from crypto for tax payments (though often with limited success), leaving investors frustrated.
Despite the existing difficulties, we are aware of the increasing legitimacy from regulators worldwide, including in Israel, towards the cryptocurrency realm, such as the adoption of cryptocurrencies as legal tender, allowing tax payments to the state in cryptocurrency, and approving cryptocurrency investments for ETFs and institutional entities. This, along with growing interest from the high-tech industry in various blockchain aspects, indicates an industry that is likely to produce solutions to existing challenges (such as fraud and money laundering).
Our office, in our previous capacity, received the first tax ruling in the cryptocurrency field (number 209/18) concerning the receipt of fees in cryptocurrency by professional advisors. Moreover, our firm is at the forefront of cryptocurrency taxation, with our members serving as chairpersons and members of the Israel Tax Consultants Chamber’s Cryptocurrency Committee, delivering lectures and workshops on the subject, and successfully assisting our many clients in the field in dealings with the Israeli Tax Authority.
Trusts and Intergenerational Transfers of Capital and Private Wealth
This complex issue of transferring family wealth to future generations poses a significant professional challenge for both the professionals involved and the family members themselves. Intergenerational transfer aims, among other things, to protect against creditors, prevent family disputes, navigate inheritance laws both domestically and abroad (e.g., “forced inheritance”), and of course, to pass the economic baton to the next generation.
It is important to note that every action has tax implications that can be quite significant, depending on the manner of asset transfer (e.g., as a gift), the timing, and the parties involved in the transaction (including the transferor and the transferee). These tax implications not only concern Israeli taxes arising from such asset transfers but also taxes in other countries, including the jurisdictions where the assets are located and where the parties are resident, such as estate and inheritance taxes and indirect taxes. Thoughtful and comprehensive tax planning (considering the tax systems in Israel and abroad) will optimize available tax benefits, if any, and prevent distortions and tax complications (such as double taxation).
One of the common tools for intergenerational asset transfer is the Trust settlement. A prominent feature of the trust is the legal flexibility granted to the family’s wishes, as expressed in the trustee’s decisions, such as adding or excluding beneficiaries, setting conditions for entitlement, separating different activities and their corresponding beneficiaries, flexible asset distribution to the next generation, and so forth.
Consequently, the legislation of the Trusts’ Chapter which came into effect in 2006 following Amendment 147 to the Ordinance (and significant changes added since 2014), represented a complex task that is reflected in the wording of the chapter, the different types of trusts, the tax events arising from the transfer of assets to a trustee and from a trustee upon changes in the type of trust and its termination.
Beyond the required familiarity with the intricacies of existing legislation and professional guidelines, due to the multitude of situations related to trusts that remain legally unaddressed, including numerous tax distortions, professionals need flexibility, open-mindedness, and creativity, as trusts still allow for legitimate tax planning opportunities that can be beneficial.
In addition to providing ongoing tax advice regarding the establishment of trusts and regular events occurring during their lifetime, there are many trusts that have yet to report their existence to the Israeli Tax Authority. This may occur if the information is managed by a trustee who is not an Israeli resident and is unfamiliar with Israeli legal requirements, whether the Israeli beneficiary is aware of the trust’s existence (including receiving distributions from it) or not. In 2008 and 2014, the Israeli Tax Authority published settlements for reporting on trusts and paying taxes on their income and assets. Currently, there is no formal and “active” framework; however, like any taxpayer in default of reporting, trustees or beneficiaries in trusts are expected to take proactive steps to rectify the default rather than waiting for actions from the Israeli Tax Authority.
Our team has unique and extensive expertise in trust taxation, including related tax arrangements and settlements, stemming from our work at the Israeli Tax Authority (where we were responsible for legislation and publishing professional guidelines). We have conducted numerous tax arrangements and provided advice to many trustees, settlors and beneficiaries regarding tax implications related to their trusts. Additionally, we have participated in responses from professional associations (such as the Israeli Certified Public Accountants Chamber and the Israeli Tax Consultants Chamber) to legislative proposals and professional guidelines published by the Israeli Tax Authority, and we have written numerous articles on the subject, many of which are published on our website.
International Taxation
The field of international taxation encompasses many issues relevant to almost every client, whether in Israel or abroad, who has transactions, assets, or income in Israel or abroad. Taxpayers and/or the accountants and tax advisors responsible for preparing and submitting their reports to the Israeli Tax Authority are required to address many aspects of international taxation, and at times they need minor assistance from specialists in the field to prevent tax complications on the one hand and to find efficient and cost-effective tax solutions on the other.
Some of the issues that comprise the world of international taxation include:
- Residency, Relocation, or Immigration and Return to Israel: The residency of individuals (and to some extent, corporate residency) is a broad area of disputes and discussions that frequently occur between the Israeli Tax Authority and the public of taxpayers for whom the issue is relevant. Despite countless professional guidelines, circulars, positions, and rulings from district or supreme courts, the determination of an individual’s residency is not straightforward, and the phrase “each case is judged on its own merits” is indeed applicable here. Determining the residency of individuals has cardinal tax implications, including their presence within the Israeli tax network, Exit Tax if a person chooses to terminate residency, various ways to tax options and shares granted within employment relations upon severance of residency or acquiring Israeli residency, substantial benefits for non-residents and those who immigrate to Israel or return after a long period abroad, and many other related aspects.
- Creating Appropriate Tax Structures for Activities or Investments Outside of Israel by Companies or Israeli Individuals: This involves addressing various tax and reporting aspects, including examining the existence of a permanent establishment and attributing income to it, recognizing relevant anti-avoidance provisions such as those relating to controlled foreign corporations (CFCs) or foreign vocation companies (FVCs), reporting and withholding obligations, and many other aspects related to this area. Of course, any structure that includes intercompany transactions requires consultation and guidance regarding transfer pricing, including preparing the necessary studies currently required from Israeli taxpayers even for relatively simple transactions.
- Recognition of Foreign Tax Laws and the Implications of Double Taxation Agreements: This includes examining multilateral agreements (such as the MLI), determining the taxable income of the client in Israel and abroad, reviewing tax credits available in Israel or abroad for taxes paid in different countries, understanding the withholding obligations of the various group “players” when making payments, and more.
- Wise Use of Entities with Special Characteristics, Particularly Concerning Transparency for Tax Purposes: This applies both domestically and internationally, including hybrid entities such as LLCs or their equivalents, partnerships, Family companies or Real Estate companies, trust holding companies, and other structures. Addressing these characteristics can save clients significant money and prevent unnecessary tax payments.
Our team has decades of combined experience in various issues related to international taxation. Hagi Elmekiesse and Eyal Sando were among the founders of the International Tax Division in the Israeli Tax Authority and shaped its direction. We have written hundreds of articles, participated in legislative initiatives, and contributed to the formulation of professional guidelines and instructions, both in our previous roles at the Israeli Tax Authority and as consultants in the private sector. We have lectured in numerous educational programs, seminars and conferences, both in Israel and abroad, providing international tax consulting to thousands of clients who required it. Additionally, some of our team members have been involved in the committee for reform in international taxation (the committee report was published in November 2021), and we serve as permanent consultants in international taxation to the Israel Tax Consultants Chamber and part of the Experts Team of “Hashavim” ” providing professional answers to questions raised by professionals such as accountants, advocators and CFO’s. As part of the AITC network and based on the relationships developed over the years with colleagues worldwide, we are equipped to provide clients with comprehensive tax solutions that consider tax implications across all relevant jurisdictions.
Israeli Taxation
A smart tax structure and actions taken or conducted by the taxpayer can save significant funds essential for the growth of the business and, of course, for personal welfare. Proper management begins with effective tax planning for a transaction or activity structure, conducted in a fully legitimate manner, and continues with ongoing consultation throughout the business’s lifecycle while assessing changes in operations alongside legal amendments in taxation. As is well known, late awareness will not necessarily correct past mistakes, and the basic instinct to push forward and remember tax obligations only when submitting reports contradicts financial reasoning. Proper planning and advice are built on presenting various tax alternatives for the desired transaction and conducting tax simulations relevant to each alternative, including potential tax exposures, ensuring that the client has all the necessary information to choose the right alternative for them.
The field of Israeli taxation encompasses many aspects, including examining transactions between the company and its controlling shareholders, reviewing anti-avoidance provisions (such as mandatory dividend distributions, “Wallet” companies, owners’ withdrawals, and disregarding artificial transactions, among others), the manner of conducting sale transactions (for example, self-purchases of shares, pre-transaction dividend distributions, utilizing losses, liquidation, contingent sales, etc.), the timing of tax indebtedness or tax events, loss offsets, and expense deductions, as well as income classification (such as distinguishing between business income and passive or capital income), and more.
Our firm is prepared to provide comprehensive advice in the areas of direct and indirect taxation, both Israeli and international, among others through close collaboration with tax experts who are an integral part of our team in client management, in unique fields such as complex mergers and acquisitions, incentive laws, real estate taxation, customs and VAT, and employees stock options and shares.
