Draft Bill: Increasing Transparency in Israeli Tax Law

A draft bill to amend the Income Tax Ordinance was published in early March 2024.

The objective of the draft bill is to increase transparency in the Israeli tax system. That is in order to combat unreported capital and to avoid a negative assessment of the State of Israel by the Global Forum for Transparency and Exchange of Information for Tax Purposes. The bill seeks to increase Israeli taxpayers’ reporting obligations to the Israel Tax Authority (ITA) in relation to various matters.

The proposed additions to various reporting obligations to the ITA include the following:

Trusts

• The bill proposes that any trustee, including any person who held property registered under his name for the benefit of another person, must report to the tax assessor. This report pertains to the formation of the trust under which he held the assets. Thus, trustees not currently obligated to report the formation of trusts according to the existing provisions of the ordinance will now have to submit such a report.
• In relation to Israeli trustees who need to file annual tax reports to the ITA, the bill proposes adding an obligation that trustees must attach to their annual tax reports a report of the individuals who are the final controlling shareholders of the trust’s assets.
• The bill proposes expanding reporting obligations to trusts not currently required to do so. These include trustees of nonresident trusts, trustees of foreign resident beneficiary trusts, and trustees of will trusts in which there is no Israeli-resident beneficiary without property or income in Israel. The proposed amendment does not obligate these trusts to file full tax reports, but rather only basic reports. According to the bill, this reporting obligation will commence within 120 days of the promulgation of the law.

2. New immigrant or “veteran returning resident” individuals

• According to the current provisions of the Income Tax Ordinance, new immigrants and “veteran returning residents” (whoever left Israel and resided abroad for at least ten years before returning to Israel) are exempt from reporting all of their income generated outside of Israel. This exemption is granted for ten years after they immigrate or return to Israel. The bill proposes canceling new immigrants’ and veteran returning residents’ exemption. Instead, it suggests imposing reporting obligations similar to those of “regular” Israeli residents.
• The bill proposes enabling tax assessors to demand a report from a specific company, partnership, etc., whose owner is a new immigrant or veteran returning resident, or from the new immigrant or from the veteran returning resident himself, if that legal entity did not file the report. We clarify that this bill does not obligate such legal entities to pay taxes on their foreign income or to file annual tax reports.
• According to the bill, even new immigrants and veteran returning residents holding trusts in which all assets are located outside of Israel must report the trust to the ITA as of the date of their immigration or return to Israel.
• The bill does not cancel or reduce the tax exemption granted to new immigrants and to veteran returning residents for ten years as of the date of their immigration or return to Israel for all income generated outside of Israel, but merely changes the reporting obligations.
• New immigrants and veteran returning residents are currently entitled to choose the “acclimation year” during which they will not be considered Israeli residents for tax purposes for one year as of the date they immigrated or returned to Israel. Therefore, in practice, even subsequent to the proposed amendment, they will still be entitled not to report income generated outside of Israel during the acclimation year.
• According to the bill’s explanatory notes, the ITA will agree to make do with receiving tax reports filed by taxpayers in the foreign country (even if filed in a foreign language).
• The bill proposes applying such reporting obligations to new immigrants and to veteran returning residents who become residents of Israel for tax purposes as of June 1, 2025.

3. Controlling shareholders of companies

• In relation to details that companies, partnerships, etc. must disclose in their annual tax reports, the bill proposes obligating them to also report the details of the controlling shareholders of the reporting legal entity, including their tax residency. The bill proposes a similar obligation whereby trustees obligated to file annual tax reports must also report the trusts’ controlling shareholders.
•  The bill proposes applying the obligation to report about controlling shareholders as of the  2024 tax reports.

4. Information transfers from Israeli financial institutions to foreign tax authorities

• The bill proposes prescribing the possibility of transferring identification details of service recipients from financial institutions to foreign tax authorities. That includs details of the controlling shareholders of the account. This action would be pursuant to Chapter C of the Prohibition of Money Laundering Law, even when the ITA may not demand this information for the purposes of preparing tax assessments and enforcing Israeli tax laws.
• The bill proposes stipulating that an ITA manager must not use information about a service recipient’s identification details, pursuant to Chapter C of the Prohibition of Money Laundering Law. This limitation aims to ensure compliance with international information exchange agreements.
• At the same time, the bill proposes an indirect amendment to the Prohibition of Money Laundering Law so that financial entities subject to the obligations under that law may transfer service recipients’ identification details to an ITA manager for the purpose of transferring them to foreign tax authorities in conformity with such international agreement.

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