ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
regardless of other foreign laws that may govern the establishment and taxation of the same trust. The Israeli tax outcome can vary significantly depend - ing on a number of factors, including the settlor’s resi - dence at the time the structure is established, whether any beneficiaries are already Israeli tax residents or are expected to become Israeli tax residents in the near future, and the extent of powers retained by the settlor. In some cases, careful advance planning ‒ par - ticularly in relation to the identity of the beneficiaries, the timing of settlements and distributions, and the drafting of the trust deed – may improve the overall tax position. However, these planning opportunities are closely tied to disclosure and compliance consid - erations, and any foreign trust, foundation or similar structure involving an Israeli tax resident trustee, sett - lor and/or beneficiary should be reviewed on a case- by-case basis. It should be noted that although the appointment of an Israeli tax resident as trustee does not, in itself, deter - mine the tax residence of the trust, it may give rise to a claim by the Israeli Tax Authorities that a foreign entity held by the trust is effectively managed and controlled from Israel and is therefore subject to Israeli tax and reporting obligations. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles Where a trust’s settlor, who is an Israeli tax resident, serves as the trustee and/or the protector of that same trust, the trust shall be deemed a revocable trust for purpose of the Israeli Income Tax Ordinance and shall therefore be subject to full Israeli taxation, even if all its beneficiaries are foreign tax residents. A trust shall also be deemed a revocable trust for purposes of the Israeli Income Tax Ordinance if the settlor is also a beneficiary.
holders/limited partners from the risks related to the underlying business or asset. Protecting the ownership of businesses from credi - tors’ risks can also be achieved using irrevocable and discretionary trusts, preferably under non-Israeli jurisdiction. If the owner of the business is reluctant to hand over control to an independent trustee, it is common to use offshore holding structures that make it difficult (although not impossible in today’s transpar - ent legal environment) for creditors to locate and track the assets and link them to the ultimate owner. 4.2 Succession Planning As Israel does not impose estate taxes, inheritance taxes or even a gift tax (other than a partial purchase tax on gifts of real estate, and unless the donee is a non-Israeli tax resident), straightforward gifts are the most common means of transferring wealth and control to younger generations. The second most common approach is to transfer assets only upon death, by way of a well-planned and structured will accompanied by a family constitution. A family con - stitution is a valid contract that governs the family’s younger generations’ decision-making process when they gain control over the family business and requires the resolution of disputes outside the courts. A family constitution can be drawn up during the lifetime of the founding generation, or alternatively, be added as an appendix to the will, thereby making the receipt of the inheritance conditional upon execution of the family constitution. Many wealthy families use a combination of both methods, thereby allowing the younger generation to train as shareholders or as directors, while maintaining the control of the family business within the older and more experienced generation. As an intermediate step, some families choose to separate voting rights from property rights, thereby transferring wealth to the younger generation with - out burdening them with the responsibility of manag - ing a business, with the aim of passing on control and responsibility at a later point, after having gone through the necessary business training and mentor - ing. More sophisticated families use trusts as a means for executing a measured and regulated transfer of
4. Family Business Planning 4.1 Asset Protection
Israeli businesses’ main asset protection method is the use of a corporate shield, namely, limited compa - nies and limited partnerships that protect the share -
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