Tax Reporting Updates

Cancellation of Reporting Exemptions for New Immigrants and Veteran Returning Residents, and Expansion of Reporting Obligations in Israel 

On April 1, 2024, the Knesset approved a new amendment of the Israeli Income Tax Ordinance, aiming to increase transparency in tax law and align with international information exchange standards.

The amendment is intended to implement recommendations published in 2022 by The Global Forum, the leading international body of the OECD working on the implementation of global transparency and exchange of information standards around the world, which indicated that Israel's reporting obligations do not comply with international standards. The amendment seeks to avoid potential EU blacklisting and imposition of economic sanctions by amending certain provisions of the income tax ordinance, revoking provisions granting reporting exemptions, and adding reporting obligations. It introduces the following key amendments:

1. Cancellation of Reporting Exemptions for New Immigrants and Veteran Returning Residents in Israel

Currently, new immigrants and veteran returning residents in Israel are entitled to tax and reporting exemptions with respect to their foreign income and assets earned outside of Israel, for a period of 10 years commencing on the date they became Israeli tax residents. The amendment limiting reporting exemptions in three significant ways:

• The new immigrants and veteran returning residents in Israel will have to report their worldwide income and assets, despite tax exemptions.
• The amendment enables the Israeli tax authority to require foreign entities that are effectively managed by a new immigrant or veteran returning residents to report to Israel and to maintain financial statements and accounting records according to Israeli GAAP (although they are not considered Israeli-resident companies).
• Removing the reporting exemptions for trusts with new immigrants or veteran returning residents as settlors or beneficiaries. The settlor, and in certain cases, the trustee, will be required to report on the trust's establishment and the contribution of assets to the trust.

The amendment cancels reporting exemptions yet clarifies that tax exemptions on foreign-sourced assets and income for new immigrants and veteran returning residents will remain intact.

2. Expansion of Reporting Obligations: Beneficial Ownership Reporting Obligations for Israeli Companies and Trusts

The amendment introduces the following key amendments in connection with the reporting of the beneficial ownership of Israeli companies and trusts:

• Reporting the Beneficial Ownership in the Annual Tax Return
  Israeli companies and trusts will be required, as part of their annual tax returns, to report the identity of their "controlling person" up to the level of individuals and to specify their tax residency.
• The term "controlling person" refers to an individual who has the ability to direct the entity's activities, alone, together, or through others. In general, with respect to companies, it includes those individuals who have the ability to direct the activity of the company as well as those who hold 25% of the controlling interest in the company. The chairman of the board of directors, CEO, or an equivalent position with effective control over the entity will be considered a "controlling person" for the sake of the required reporting if no individual meets one of the criteria above. With respect to trusts, the settlors, the trustee, the protectors, or the beneficiaries of the trust would be considered "controlling persons" for the purpose of the report.
• Reporting Obligations by Israeli Resident Trustees
  An Israeli resident trustee will be required to report the existence of the trust and its "controlling person" up to the level of the individuals and to specify their tax residency, even if the trustee is not obligated to submit an annual tax return (e.g., the trust is a non-Israeli resident trust).

Entry into Force of the Amendment

1. The reporting obligation for new immigrants and veteran returning residents will apply to individuals becoming Israeli residents as of January 1, 2026.
2. The reporting obligation for "controlling persons" will apply to the tax return for the tax year of 2025.
3. Trustees who are Israeli residents will be required to report on the "controlling persons" of the trust and their residency within 90 days from the trust's creation date. In trusts that existed prior to the publication of the amendment to the law, the trustees will be required to report such details within 120 days from January 1, 2026.

Adv. Assaf Hasson is a Tax and Private Client Lawyer, and Private Wealth Advisor.

He is a board member of the ESRA Executive and of the Financial Committee.

Tel: +972-(0)508780535

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