Israel follows the OECD and intends to cancel reporting exemptions for New Residents

Since 2007, the state of Israel has offered a very attractive tax regime for first-time Israeli residents and veteran returning residents (hereinafter collectively: “New Residents”), which is designed to encourage immigration to Israel. According to the Israel Tax Ordinance, New Residents are granted with a framework of tax benefits, while the key benefit is a ten-year exemption on taxes for income generated outside of Israel, including capital gains, dividends, and rental income from properties abroad. Alongside the exemption, currently, New Residents are exempt from reporting on such foreign-sourced income with the Israel Tax Authority.

In the last weeks, the Ministry of Finance of Israel published a new legislative memorandum (the “Memorandum”), according to which the reporting exemption (unlike the exemption from taxation) will be eliminated.

The Memorandum aims to implement the recommendations of the 2021 Israel Committee on International Taxation Reform and apply the international standard of exchange of information for tax purposes and transparency led by the OECD’s Global Forum on Transparency and Exchange of Information. By that, Israel is expected to prevent from being included in the EU blacklist.

In a nutshell, the Memorandum addresses the following amendments:

• Cancelling the existing exemptions from reporting on foreign-sourced income granted to New Residents, and trusts associated with them. It should be noted that the Memorandum is not intended to cancel the ten-year exemption from taxation on such foreign-sourced income.

• Imposing new reporting obligations regarding corporations controlled by New Residents (“Managed Corporations”). In this regard, the Israel Tax Authority will be authorized to require such Managed Corporations to submit tax returns, and for this purpose such Managed Corporations will be obligated to maintain accounting records in accordance with accepted accounting principles in Israel.
  

In addition, the Memorandum includes a new reporting obligation about “Controlling Persons” of corporations. According to the Memorandum, corporations shall be obligated to provide the details about their “Controlling Person”, as defined in Section 135B of the Israel Tax Ordinance.

According to the Memorandum, the suggested amendments shall come into effect during 2025 and shall apply only to New Residents, who become Israeli tax residents thereafter. However, trusts, that had no reporting obligation before the date of the legislation (the “Effective Date”), will be required to submit a report about their beneficiaries and their tax residency within 90 days of the Effective Date.

Assuming that the Memorandum will become effective as a statute, it is expected to align Israel with international standards and potentially prevent inclusion on the EU blacklist. Potential New Residents and related entities must stay informed about the legislative proceedings and seek professional guidance to ensure compliance with the new reporting requirements.

The information contained in this article does not constitute legal or financial advice of any kind. We invite you to reach out to our tax experts to provide tailored advice and assistance in making informed decisions that align with your circumstances.

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