ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
or parents’ siblings – the assessing officer is to check and confirm that the trust and any contribu - tions thereto were made in good faith and that no beneficiary has paid any consideration in order to be entitled to the trust’s assets); and • the settlor of the trust is still alive in the relevant tax year. A Relatives Trust is subject to tax in Israel, at the trus - tee’s irrevocable election, of either: • 30% of all distributions sourced from income gen - erated and produced outside Israel and distributed to Israeli beneficiaries, unless the distribution origi - nates from the principal funds of the trust – which distribution is tax exempt; or • 25% of all the trust’s income generated or pro - duced outside Israel; in such a case, any distribu - tions made therefrom are tax exempt. Nonetheless, income generated or produced in Israel is subject to full taxation in Israel. Foreign Resident Beneficiary Trust A trust qualifies as a Foreign Resident Beneficiary Trust if: • it is not an Israeli Resident Trust or a Testamentary Trust; • it is deemed an irrevocable trust under the Israeli Income Tax Ordinance; • all its beneficiaries are identified as non-Israeli tax residents (in this respect, a yet-to-be-born benefi - ciary is deemed to be so identified); • at least one of its settlors is an Israeli tax resident (including a settlor who was an Israeli tax resident upon passing away); and • its terms specifically state that an Israeli beneficiary cannot be added to the class of beneficiaries. A Foreign Resident Beneficiary Trust is tax exempt in Israel, except for income generated or produced in Israel. Testamentary Trust A trust qualifies as a Testamentary Trust if: • it was settled under a deceased’s valid will; and
• all of the deceased settlors were Israeli tax resi - dents when they passed away. A Testamentary Trust is subject to Israeli taxation depending on the beneficiaries’ tax residency. Hence, if at least one beneficiary is an Israeli tax resident, the trust is subject to tax in Israel on its worldwide income; otherwise, it is tax exempt in Israel, except for income generated or produced in Israel. Foreign Residents Trust A trust qualifies as a Foreign Residents Trust if: • all its settlors and beneficiaries are non-Israeli tax residents, and there were no Israeli tax resident beneficiaries since the settlement of the trust; or • all its settlors have passed away and there were no (and currently there are no) Israeli tax resident beneficiaries since the settlement of the trust. A Foreign Settlor Trust is tax exempt in Israel, except for income generated or produced in Israel. Tax rates The tax rates applicable to all the above types of trusts are those applicable to individual taxpayers, as detailed above. Taxation of distributions Distributions from an Israeli Resident Trust, Israeli Ben - eficiary Trust and Foreign Residents Trust are subject to Israeli taxation in the same manner as if the assets or funds were gifted directly from the settlor to the beneficiaries (currently, except for real estate trans - fers, there is no gift tax on bona fide gifts, provided the donee is an Israeli tax resident). However, distributions from a Foreign Resident Beneficiary Trust, as well as from a Testamentary Trust, are tax exempt in Israel. 1.2 Exemptions As of July 2025, there are no estate, inheritance or generation-skipping taxes in Israel. In fact, a transfer of any asset by way of inheritance, including by will, is not a tax event in Israel. Moreover, except for real estate transfers, currently there is also no gift tax on bona fide gifts, provided the donee is an Israeli tax resident. Real estate gifts are only subject to a fraction
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