As part of the effort to reduce the usage of black capital and tax evasion by taking advantage of the international system, the Israeli Tax Authorities recently signed agreements with various countries for the exchange of financial information. According to these agreements, each member is supposed to receive automatic information regarding the financial assets of foreign citizens - information it will transmit to the relevant countries and in return, will receive financial information about its own citizens.
Towards the end of 2016, a voluntary disclosure procedure in Israel was applied, the purpose of this was to encourage reporting on income and assets outside Israel to the tax authorities, by granting improved tax liabilities and allowing an anonymous reporting. According to publications, a voluntary disclosure procedure may be reinstituted again this year.
Until 2003, Israel used a system of territorial taxation. As a result, a large part of the income generated abroad by Israeli residents were not taxable in Israel. Pursuant to Amendment 132 of the Income Tax Ordinance, which was applied in 2003, the tax system in Israel has become a hybrid method so that an "Israeli resident" (individual or corporation) in accordance with the Income Tax Ordinance, is taxed personally on his income from both local and international origins while foreign (non-Israeli) residents are taxed in Israel for their income generated in Israel and assets located in Israel.
As a result, Israeli’s who held productive foreign assets prior to Amendment 132 to the Ordinance, and were not aware of the change in the legal situation, actually became liable to pay tax on their income and property without knowing they should do so. In order to assist Israeli residents to reveal foreign assets for tax purposes, a formal voluntary disclosure procedure was formulated.
The voluntary disclosure procedure in Israel was formulated by the Israel tax authority ("ITA") in order to encourage taxpayers, dealers, individuals and functionaries in corporations that violated tax laws, to correct their reports and to report real data.
In order to carry out this programme, the ITA was prepared to ensure that criminal proceedings would not be instituted against an applicant who performed the voluntary disclosure.
Voluntary disclosure programme
According to the voluntary disclosure procedure that was published in April 2005, the applicant for voluntary disclosure must have met certain primary conditions, ie the voluntary disclosure must have been an honest request. The ITA would have had no prior information regarding the account and the ITA had not commenced a civil examination of the files relating to the taxpayers or the corporations or the partners who are involved in the voluntary disclosure.
As part of the process, immunity was granted against criminal proceedings, provided that the taxpayer met the conditions of the procedure, provided information and paid the tax in accordance with the procedure.
The anonymous route
In 2011, the ITA published a temporary provision whereby in certain cases residents of Israel who hold foreign assets, property, capital, etc. ("foreign assets"), whose income had not been reported in Israel, would be allowed to carry out a "voluntary disclosure" which in those cases would be granted immunity from a criminal proceeding (on the level of the tax law only) and would grant improved tax liabilities regarding interest, linkage and fines.
As part of the temporary order, for the first time it was possible to submit anonymous requests for the purpose of clarifying the tax liability, even before the application was submitted.
The new programme
In 2014, the ITA published a new programme regarding voluntary disclosure procedure concurrently with the temporary provision mentioned above. The terms of the new programme were inferior to those in previous years. For example, criminal immunity was limited and applied only to information provided in the course of the disclosure process. Furthermore, the disclosure would not apply when it did not generate a significant "tax payment" in respect of the relevant tax years (except for inheritance funds), etc. The new programme was applied until 31 December 2016.
On addition to the new program a temporary provision was issued according to which applications could be filed anonymously by the end of 2016. In this provision the ITA went a step further and allowed the applicants to reveal their names only after the agreement was signed.
Within the framework of this provision, it was possible to submit an application on an "abbreviated track" where the total capital in the request did not exceed NIS 2 million. Anonymous requests were not allowed on this "abbreviated track”.
Over the years the ITA has preferred to be approached by taxpayers rather than contact them. This approach of the ITA is still valid today even though currently there is no "active" voluntary disclosure procedure, although lately it has been made public that a new disclosure procedure will be activated towards the end of 2017.
Therefore it is advisable to seek voluntary disclosure according to the new program mostly in view of the exchange of information between countries and the breaches in the bank secrecy.
To the best of our knowledge, even today, in certain cases, the ITA allows anonymous applications for voluntary disclosure outside the framework of the new programme.
Taxation of trusts
In accordance with the ordinance a trust is taxable in Israel if it’s defined as an Israeli Resident Trust (IRT).
- An IRT is a trust revocable or irrevocable, that at the time it was created had at least one settlor and one beneficiary who are Israeli resident and during the tax year at least one settlor or one beneficiary who is an Israeli resident.
- An IRT in which all settlors died and during the tax year at least one beneficiary is an Israeli resident shall be an Israeli Resident Trust as well.
- An IRT shall remain as such, even if the settlor ceases to be an Israeli resident.
- A Foreign Resident Trust (FRT) is a trust, revocable or irrevocable, in which all settlors and beneficiaries are not Israeli residents during the tax year and no Israeli resident was a beneficiary since it was created.
- A Foreign Resident Beneficiary Trust (FRBT) is an irrevocable trust in which all beneficiaries are individuals who are not residents of Israel and at least one settlor is an Israeli resident. Another condition is that the trust's documents do not allow the joining of Israeli resident beneficiaries.
- A FRT and a FRBT shall be taxable in Israel on income and assets located in Israel.
Further information about this can be obtained by contacting Baker Tilly in Israel.
Arik Cohen, firstname.lastname@example.org
Hadas Sharim, Hadass.email@example.com
Irit Sa’ar, Irit.firstname.lastname@example.org
Daniel Lilienthal, Daniel@bakertilly.co.il