preface

BDO Israel
DOING BUSINESS IN ISRAEL
♦ “Foreign Resident Beneficiary” Trust - If a trust was
established, inter alia, by an Israeli resident as irrevocable,
and all the beneficiaries during the relevant tax year are
identified foreign residents, the trust will be considered a
foreign resident beneficiary trust.
♦ The tax implications - Assets transferred to the trust will be
considered as if transferred directly to the beneficiaries and
taxed accordingly. There will be no capital gains tax when
the trust’s assets are transferred to the beneficiaries. The
trust’s income will be taxable whether or not transferred to
the beneficiaries, as if it were the foreign beneficiaries’
income. As such, income generated outside Israel would not
be taxable nor would it need to be reported in Israel. Should
there be no locally generated income, the trustee will be
required to sign a declaration to this effect for the tax
authorities.
8.5.5. Underlying Companies
As mentioned above, the reforms allow for an Israeli trustee to manage
a foreign trust, without creating any tax liabilities in Israel or even the
need to report the trust’s income to the tax authorities. In addition, to
broaden the opportunities available to the trustee in regard to the trust
assets and their management, underlying companies will be considered
as holding and managing the assets of the trust for the trustee. Within
this classification an Israeli underlying corporation of a foreign resident
trust will neither have to declare nor will it be taxable for foreign
sourced income.
8.6. PARTICIPATION EXEMPTION FOR ISRAELI
HOLDING COMPANY
The tax reform includes a participation-exemption regime for Israeli holding
companies, under specific conditions. Israeli holding companies will be exempt
from tax on dividends received from foreign subsidiaries and from capital gains
tax upon sale of such subsidiaries. Furthermore, Israeli holding companies will
be exempt, inter alia, from tax on interest received on bank deposits in Israel
and on income (interest, dividend and capital gains) from traded securities.
Foreign shareholders will benefit from a reduced withholding tax on dividends
of merely 5%.
129