The Israeli Underlying Company
The Israeli new Taxation of Trusts Law provides an exceptional tax planning strategy for foreign investors. Such investors can use an Israeli company as the owner of their global investments and have full exemption from Israeli tax and tax reporting requirements. This structure is often called a TOV (Trust Owned Vehicles). In addition, foreign investors may in principle gain potential benefits by accessing Israel‘s tax treaties with almost 50 countries.
The Taxation of Trusts Law created a special category relevant to foreign investors - the Foreign Resident Settlor Trust.
This trust is can be utilizes by foreign investors who wish to appoint an Israeli trustee, rather than trustees in various offshore jurisdictions, to manage family wealth.
To be classified as a Foreign Resident Settlor Trust:
(1) the settlor must be a non-resident of Israel at the time of formation of the trust and during the tax year; or
(2) the settlor and the beneficiaries must be non residents of Israel during the tax year.
A Foreign Resident Settlor Trust is viewed, according to the Israeli tax law, as a foreign resident and the assets held by the trustee are viewed as held by a foreign resident. Consequentially, the income of the trust is regarded as the income of a foreign resident, and therefore the trust profits (arising from sources out of Israel) should not be taxable in Israel.
In addition, certain income and gains from sources within Israeli, such as gains from the sale of Israeli securities, interest income on traded bonds and interest income from Israeli bank deposits, are not taxable in Israel.
Once you set a Foreign Resident Settlor Trust, you may go ahead with the tax planning and structure an "underlying company."
The Taxation of Trusts Law allows the formation of an underlying company of a trust within Israel or abroad in order to make a legal separation between the trustee’s assets and the trust’s assets. The underlying company can be a legal entity such as a company, foundation or partnership.
The underlying company is regarded as a ‘flow through entity’ and the ‘management and control’ test is not relevant. The Israeli tax authority will look through the company and treat the assets and the income derived from the company as if they were held directly by the trustee. As the income of such trust is regarded as the income of a foreign resident, the trust profits (arising from sources out of Israel) should not be taxable in Israel.
Thus, the Israeli underlying company held by a Foreign Resident Settlor Trust (TOV) can be used as an "offshore” trust in Israel, since it is exempt, in principle, from taxes in Israel.
A TOV is a trust that owns an "underlying company", which in turn does business and/or holds investments around the world.
A TOV may enjoy a complete exemption from Israeli tax on:
1. Non-Israeli source income and gains: if the TOV is established by or for the benefit of non-Israeli residents. Furthermore, there is no Israeli tax reporting requirement.
2. Israeli source income and gains: interest on foreign currency deposits at an Israeli bank (PATACH) and certain capital gains (from a home; or from securities of listed Israeli companies, R&D, intensive private companies; and sales by venture capital funds with a special tax ruling).
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Most other types of Israeli source income will be taxable in Israel at rates ranging from 20% to 48%.
The TOV first became possible when an amendment to the Income Tax Ordinance was Implemented in Israel on January 1, 2006.
Israel recognizes the trust concept and the Trust Law, 1979, largely applies common law principles.
The trustee may be Israeli resident without affecting the Israeli tax exemptions available to the TOV.
There are no Israeli exchange control restrictions as Israel abolished exchange control in 1998.
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Who Does a Trust Owned Vehicle (TOV) benefit? A Trust Owned Vehicle (TOV) may be beneficial to almost anyone, wherever they reside.
Non-Israeli residents may benefit from a TOV as follows:
• No tax on non-Israeli source income
• No tax on most Israeli source investment income
• No estate/inheritance tax on investments in the US, UK, etc.
• No need to report foreign source income
• Israeli resident underlying company - potential access to Israel's tax treaties with over 40 countries
• Not on blacklists
• No Israeli exchange control
• Anti-money laundering rules usually not intrusive
• Confidentiality
• Asset protection
• Orderly framework for personal finances
• Facilitates gradual transfer of wealth to the next generation in Israel or elsewhere Israeli residents may benefit from a TOV as follows:
• No tax on non-Israeli source income
• No estate/inheritance tax on investments in the US, UK, etc.
• Improved foreign tax credit eligibility
• confidentiality
• Asset protection
• Orderly framework for personal finances
• Facilitates gradual transfer of wealth to the next generation in Israel or elsewhere.
