Alon
Kaplan, a senior legal advocate in Israel, senior STEP member and
chairman of MMG Kaplex Trust Company (1978), and who is also a partner
at Morgan & Morgan Group, is upbeat about the country's prospects as
a hub for high net worth individuals. As always, this publication
stresses that the views of the author are not necessarily endorsed by
this publication's editors.

For many years and for many individuals residing worldwide, Israel
has been a preferred jurisdiction in which to invest and hold assets.
Many foreign residents invest in Israeli real estate and in public and
private companies, and hold funds in Israeli banks.

Israel is a country of immigration with a special tax environment
that has developed since the establishment of the state in 1948. The tax
system caters to foreign investors who enjoy generous tax benefits,
while new immigrants and returning expatriates enjoy a 10-year tax
holiday on foreign-source income. This explains why many high net worth
individuals take advantage of these favorable conditions and choose to
invest in Israel or settle in the country with their families.

Corporate structures formed under Israeli law may be utilised in many
countries worldwide. Recent legislative changes have created a more
advantageous environment for the management of investments from Israel
via the use of trusts established in Israel and in foreign jurisdictions
and governed by foreign laws.

Israel has a fully developed system of banks and investment
companies, professional communities (nearly 50,000 attorneys and more
than 13,000 accountants), a respected corpus of indigenous law – often
drawn on Anglo-American models – and a judicial system that recognises
the common law trust.

With a population of about eight million, Israel is culturally
European with a democratically elected government and a legal system
based on Anglo-American traditions. The country is a republic with a
prime minister, a cabinet and a unicameral parliament (Knesset) whose
members are elected proportionately by all citizens. The Knesset enacts
laws; cabinet ministers issue regulations. Israel’s appointed president
holds a largely ceremonial position and the seat of government is
Jerusalem, while Tel Aviv is the financial, economic and cultural
capital.

Israel has a modern, independent legal system influenced by English
common law and the precedent system, with vestiges of Ottoman law and
traces of traditional Jewish law. An independent judiciary rules in all
civil and criminal matters save personal status, which is left to
religious courts.

Israel’s tax system has undergone a major reform in recent years,
commencing with the taxation reform of 2003 pursuant to which an Israeli
resident is taxed on worldwide income, and continuing with the Taxation
of Trusts Law 2005 that became effective on 1 January 2006. This law
has great relevance for Israeli residents with respect to the taxation
of trusts and may be similarly advantageous to foreign residents.

An Israeli trust company may establish and act as a trustee or
co-trustee of trusts governed by the laws of foreign jurisdictions. The
trustee may use an underlying company, which may enjoy tax free status
and the possibility of maintaining private bank accounts and holding
investments in Israel or abroad. The trust company may also establish
and manage real estate trusts in accordance with Israeli property laws.
If the real estate is located in Israel, Israeli tax will apply. Such a
trust company may administer assets held by Israeli or foreign settlor
trusts as well as cooperate with asset management and trust companies
locally and abroad. In addition, the trust company may act as a
protector of trusts and may provide services to foreign residents
relating to the management and/or administration of estates.

The economy

The Israeli economy is resilient, globally oriented and based heavily
on foreign trade, especially in such high added-value areas as
information technology, biotechnology, aerospace and defence. The
country’s gross domestic product is about $200 billion, per capita GDP
(purchasing power parity) is just under $30,000 and exports are close to
$60 billion. The economy was almost unaffected by the US sub-prime
mortgage collapse. Though exports declined somewhat during that period,
they have substantially recovered.

The economy, also fuelled by much direct foreign investment, is
larger than those of all its immediate neighbours combined. The number
of Israeli companies traded on the NASDAQ ranks only behind the US,
Canada and China. Israeli companies may be dual-listed on the NASDAQ and
the Tel Aviv Stock Exchange.

Recent large discoveries of offshore oil and gas will diminish
reliance on fuel imports and likely lead to sizeable exports. Many
multinational technology firms maintain R&D or manufacturing
facilities in Israel, including Intel, Google, Microsoft, Motorola and
Apple. It is noteworthy that Israel spends 20 per cent more than the US
and 50 per cent more than other OECD countries on civilian R&D.

Israel is an OECD member, and maintains free trade agreements with
the EU, EFTA, NAFTA, Mercosur and regional partners. Free trade
negotiations are underway with India, China, South Korea and Chile.
Israel has also signed double-taxation treaties with more than 50
countries, including all the EU countries, Singapore, Russia, the US and
Canada.

Most banks provide private banking services and maintain special
centres for tourists and foreign investors. The five largest Israeli
banks have branches in Europe and the US and representative offices in
other countries. Global accounting firms, advertising agencies and
retail chains are active locally.

Infrastructure

Israel boasts modern transportation facilities, with Mediterranean
ports at Haifa and Ashdod offering fast container service to Europe, the
Americas and beyond. The port at Eilat, on the Red Sea, provides a
convenient route to Asia. High value products can be shipped via
Ben-Gurion International Airport, with most major cities in Europe
served by multiple daily flights. Direct flights to North America and
Asia contribute to the 12 million passengers flown annually by some 60
carriers. A modern highway system is complemented by a rapidly expanding
rail network, interurban buses and internal flights. Advanced
telecommunications, a lively press, abundant historical sites and
breathtaking scenery make visits easy and memorable.

The great majority of Israelis are either immigrants or the children
of immigrants who established a new and flourishing business community.
New legislation encourages immigrants and expatriates to come to Israel.
The law provides for a 10-year tax holiday from the day of arrival with
special incentives for importing capital and business activities to
Israel. 

Tax burden

The maximum income tax in Israel is 44 per cent of gross income,
roughly the OECD average. This rate is scheduled to drop over a number
of years to 39 per cent which – at current figures – puts Israel near
the bottom of income tax rates in the developed world. The current
corporate tax rate puts Israel in the bottom third of the developed
world. The government plans to cut corporate taxes in 2016 which will
place Israel deep inside the bottom 20 per cent.

Creation of a trust under Israeli law

The law defines four types of trust: a) a foreign settlor trust; b)
an Israeli resident trust; c) a foreign beneficiary trust; and d) a
testamentary trust.

Trusts are created by contract or deed. In a contractual trust, the
rights of the parties, the trustee and the beneficiaries are determined
in an agreement, which may or may not be written. A trust created by
deed must be in writing and must express the intent of the settlor to
establish a trust and must outline the purposes, assets, and conditions.
It can be signed before a notary or constitute a will that is not oral.
The trust is established upon the receipt and control by the trustee of
the trust assets. Where there are trust assets but no deed is found,
the court may declare the existence of a trust and define its purposes
and conditions. If it is intended that the trust be executed during the
life of the settlor, it must be signed before a notary. A trust created
by contract usually needs no formality but is limited as an inter vivos trust.

Law of Inheritance and Law of Trust

The Law of Inheritance provides for succession under law. Proper
succession planning requires that a testament/will be prepared. There
are no forced heirship rules for Israeli residents. Private
international law applies where the testator is a non-resident.

The Law of Trust provides that a trust created by deed may continue
after death of the settlor as long as certain conditions are upheld.
Death of the settlor will impose a probate procedure for a trust created
by contract. A testamentary trust must be approved by a probate
procedure.

Taxation of Israeli trusts

The taxation of Israeli trusts is governed by the Taxation of Trusts
Law 2005, which became effective on 1 January 2006. The law obliges
trustees to file tax reports concerning trusts. Failure to report will
cause a heavy punitive tax burden at the time of distribution. Trustees
must ensure that they fulfill their duties as it is possible for
beneficiaries to sue them for damage they may have caused due to the
failure to file tax returns.  

The Israeli underlying company

Of great importance, the law permits the creation of an Israeli
underlying company in Israel or abroad, which is regarded as a
flow-through entity as long as is acting for a specific trust. The
underlying company is used for the legal separation of the trustee’s
personal assets and the trust’s assets. It is a separate legal entity
holding the trust’s assets for the trustee. The Israel Tax Authority
will “ignore” the financial activity of the company and treat the assets
and income derived therefrom as if they were held directly by the
trustee.

The trustee of a foreign settlor trust is not subject to tax or
reporting and may utilise the underlying company to hold the trust’s
assets with no tax burden. Neither the trustee nor the underlying
company is subject to tax or reporting on income derived from sources
outside Israel. Where the underlying company derives income from sources
within Israel such income is considered income earned in Israel and may
be taxed accordingly.

The Israeli underlying company confers significant benefits. Simple
to construct, it enables efficient trust administration. Place of
residence of the trustees will not affect the taxation of the trust. It
is the tax status of the beneficiary and the settlor that will determine
Israeli tax liability.

Conclusion

Israel offers a modern, western economy buttressed by an
institutional and legal framework that provides stability and protects
individuals and companies. If the law is utilised correctly by foreign
individuals, a major international business and financial centre may be
created in Israel for the benefit of Israelis and non-residents alike.