We have touched on how investments are taxed in Israel and the tax benefits available but once the decision to invest has been made, what is the tax planning strategy?
As previously mentioned, the tax laws of Israel offer excellent tax planning strategies for foreign investors, allowing them to use Israeli companies as the owners of global investments and providing full exemptions from Israeli tax and reporting.
A new law effecting the taxation of trusts called the Foreign Residents' Settlor Trust, enables foreign investors to appoint a trustee from Israel to manage their assets, rather than a trustee from abroad (such as Gibraltar or the BVI).
A Foreign Residents' Settlor Trust requires the individual, or settlor, be a non-resident of Israel at the time the trust is established and throughout the whole tax year, or the settlor and the beneficiaries must be non-residents of Israel during the entire tax year.
The Foreign Residents' Settlor Trust is viewed by Israeli tax law as belonging to a foreigner and the assets held by the trustee are viewed as being held by a resident who is foreign. As a result, the income of the trust is viewed as income belonging to foreign residents and should therefore not be taxed in Israel.
Additionally, certain gains and income from certain sources within Israel, for example, gains from the sale of Israeli interest income on traded bonds, Israeli securities and interest income from Israeli bank deposits, are also not taxable in Israel.
Once a Foreign Residents' Settlor Trust has been setup, you can begin tax planning and structuring a primary company, also referred to as an "underlying company". The trust law allows the formation of an underlying company of a trust in Israel or abroad so legal separation can be made between the trust’s assets and the trustee’s assets. The primary or underlying company can be a legal entity such as foundation, company or a partnership.
The underlying company is known as the flow through entity and the Israeli tax authorities view the income received and the assets of the company as though they were directly held by the trustee. As the income of such a trust is regarded as the income of a foreigner or foreign resident, the trusts profit (arising from sources out of Israel) should not be taxable in Israel either.
In other words, the Israeli "underlying company" held by a Residents' Foreign Settlor Trust can be used as an offshore trust in Israel, since it is exempt from taxes in Israel.
All the new legislation and possible tax planning strategies available for foreign investors have been brought in as a way of helping attract new investors to Israel who are seen as instrumental in growing the economy.