Alon Kaplan, a senior legal advocate in Israel, senior STEP member and chairman of MMG Kaplex Trust Company (1978), and who is also a partner at Morgan & Morgan Group, is upbeat about the country's prospects as a hub for high net worth individuals. As always, this publication stresses that the views of the author are not necessarily endorsed by this publication's editors.

For many years and for many individuals residing worldwide, Israel has been a preferred jurisdiction in which to invest and hold assets. Many foreign residents invest in Israeli real estate and in public and private companies, and hold funds in Israeli banks.

Israel is a country of immigration with a special tax environment that has developed since the establishment of the state in 1948. The tax system caters to foreign investors who enjoy generous tax benefits, while new immigrants and returning expatriates enjoy a 10-year tax holiday on foreign-source income. This explains why many high net worth individuals take advantage of these favorable conditions and choose to invest in Israel or settle in the country with their families.

Corporate structures formed under Israeli law may be utilised in many countries worldwide. Recent legislative changes have created a more advantageous environment for the management of investments from Israel via the use of trusts established in Israel and in foreign jurisdictions and governed by foreign laws.

Israel has a fully developed system of banks and investment companies, professional communities (nearly 50,000 attorneys and more than 13,000 accountants), a respected corpus of indigenous law – often drawn on Anglo-American models – and a judicial system that recognises the common law trust.

With a population of about eight million, Israel is culturally European with a democratically elected government and a legal system based on Anglo-American traditions. The country is a republic with a prime minister, a cabinet and a unicameral parliament (Knesset) whose members are elected proportionately by all citizens. The Knesset enacts laws; cabinet ministers issue regulations. Israel’s appointed president holds a largely ceremonial position and the seat of government is Jerusalem, while Tel Aviv is the financial, economic and cultural capital.

Israel has a modern, independent legal system influenced by English common law and the precedent system, with vestiges of Ottoman law and traces of traditional Jewish law. An independent judiciary rules in all civil and criminal matters save personal status, which is left to religious courts.

Israel’s tax system has undergone a major reform in recent years, commencing with the taxation reform of 2003 pursuant to which an Israeli resident is taxed on worldwide income, and continuing with the Taxation of Trusts Law 2005 that became effective on 1 January 2006. This law has great relevance for Israeli residents with respect to the taxation of trusts and may be similarly advantageous to foreign residents.

An Israeli trust company may establish and act as a trustee or co-trustee of trusts governed by the laws of foreign jurisdictions. The trustee may use an underlying company, which may enjoy tax free status and the possibility of maintaining private bank accounts and holding investments in Israel or abroad. The trust company may also establish and manage real estate trusts in accordance with Israeli property laws. If the real estate is located in Israel, Israeli tax will apply. Such a trust company may administer assets held by Israeli or foreign settlor trusts as well as cooperate with asset management and trust companies locally and abroad. In addition, the trust company may act as a protector of trusts and may provide services to foreign residents relating to the management and/or administration of estates.

The economy

The Israeli economy is resilient, globally oriented and based heavily on foreign trade, especially in such high added-value areas as information technology, biotechnology, aerospace and defence. The country’s gross domestic product is about $200 billion, per capita GDP (purchasing power parity) is just under $30,000 and exports are close to $60 billion. The economy was almost unaffected by the US sub-prime mortgage collapse. Though exports declined somewhat during that period, they have substantially recovered.

The economy, also fuelled by much direct foreign investment, is larger than those of all its immediate neighbours combined. The number of Israeli companies traded on the NASDAQ ranks only behind the US, Canada and China. Israeli companies may be dual-listed on the NASDAQ and the Tel Aviv Stock Exchange.

Recent large discoveries of offshore oil and gas will diminish reliance on fuel imports and likely lead to sizeable exports. Many multinational technology firms maintain R&D or manufacturing facilities in Israel, including Intel, Google, Microsoft, Motorola and Apple. It is noteworthy that Israel spends 20 per cent more than the US and 50 per cent more than other OECD countries on civilian R&D.

Israel is an OECD member, and maintains free trade agreements with the EU, EFTA, NAFTA, Mercosur and regional partners. Free trade negotiations are underway with India, China, South Korea and Chile. Israel has also signed double-taxation treaties with more than 50 countries, including all the EU countries, Singapore, Russia, the US and Canada.

Most banks provide private banking services and maintain special centres for tourists and foreign investors. The five largest Israeli banks have branches in Europe and the US and representative offices in other countries. Global accounting firms, advertising agencies and retail chains are active locally.

Infrastructure

Israel boasts modern transportation facilities, with Mediterranean ports at Haifa and Ashdod offering fast container service to Europe, the Americas and beyond. The port at Eilat, on the Red Sea, provides a convenient route to Asia. High value products can be shipped via Ben-Gurion International Airport, with most major cities in Europe served by multiple daily flights. Direct flights to North America and Asia contribute to the 12 million passengers flown annually by some 60 carriers. A modern highway system is complemented by a rapidly expanding rail network, interurban buses and internal flights. Advanced telecommunications, a lively press, abundant historical sites and breathtaking scenery make visits easy and memorable.

The great majority of Israelis are either immigrants or the children of immigrants who established a new and flourishing business community. New legislation encourages immigrants and expatriates to come to Israel. The law provides for a 10-year tax holiday from the day of arrival with special incentives for importing capital and business activities to Israel. 

Tax burden

The maximum income tax in Israel is 44 per cent of gross income, roughly the OECD average. This rate is scheduled to drop over a number of years to 39 per cent which – at current figures – puts Israel near the bottom of income tax rates in the developed world. The current corporate tax rate puts Israel in the bottom third of the developed world. The government plans to cut corporate taxes in 2016 which will place Israel deep inside the bottom 20 per cent.

Creation of a trust under Israeli law

The law defines four types of trust: a) a foreign settlor trust; b) an Israeli resident trust; c) a foreign beneficiary trust; and d) a testamentary trust.

Trusts are created by contract or deed. In a contractual trust, the rights of the parties, the trustee and the beneficiaries are determined in an agreement, which may or may not be written. A trust created by deed must be in writing and must express the intent of the settlor to establish a trust and must outline the purposes, assets, and conditions. It can be signed before a notary or constitute a will that is not oral. The trust is established upon the receipt and control by the trustee of the trust assets. Where there are trust assets but no deed is found, the court may declare the existence of a trust and define its purposes and conditions. If it is intended that the trust be executed during the life of the settlor, it must be signed before a notary. A trust created by contract usually needs no formality but is limited as an inter vivos trust.

Law of Inheritance and Law of Trust

The Law of Inheritance provides for succession under law. Proper succession planning requires that a testament/will be prepared. There are no forced heirship rules for Israeli residents. Private international law applies where the testator is a non-resident.

The Law of Trust provides that a trust created by deed may continue after death of the settlor as long as certain conditions are upheld. Death of the settlor will impose a probate procedure for a trust created by contract. A testamentary trust must be approved by a probate procedure.

Taxation of Israeli trusts

The taxation of Israeli trusts is governed by the Taxation of Trusts Law 2005, which became effective on 1 January 2006. The law obliges trustees to file tax reports concerning trusts. Failure to report will cause a heavy punitive tax burden at the time of distribution. Trustees must ensure that they fulfill their duties as it is possible for beneficiaries to sue them for damage they may have caused due to the failure to file tax returns.  

The Israeli underlying company

Of great importance, the law permits the creation of an Israeli underlying company in Israel or abroad, which is regarded as a flow-through entity as long as is acting for a specific trust. The underlying company is used for the legal separation of the trustee’s personal assets and the trust’s assets. It is a separate legal entity holding the trust’s assets for the trustee. The Israel Tax Authority will “ignore” the financial activity of the company and treat the assets and income derived therefrom as if they were held directly by the trustee.

The trustee of a foreign settlor trust is not subject to tax or reporting and may utilise the underlying company to hold the trust’s assets with no tax burden. Neither the trustee nor the underlying company is subject to tax or reporting on income derived from sources outside Israel. Where the underlying company derives income from sources within Israel such income is considered income earned in Israel and may be taxed accordingly.

The Israeli underlying company confers significant benefits. Simple to construct, it enables efficient trust administration. Place of residence of the trustees will not affect the taxation of the trust. It is the tax status of the beneficiary and the settlor that will determine Israeli tax liability.

Conclusion

Israel offers a modern, western economy buttressed by an institutional and legal framework that provides stability and protects individuals and companies. If the law is utilised correctly by foreign individuals, a major international business and financial centre may be created in Israel for the benefit of Israelis and non-residents alike.