Israel increases scrutiny of offshore assets of olim

South African olim can breathe a sigh of relief as the Knesset has agreed to maintain the generous Israeli tax incentives available for aliya. Speculation had been rife that they would be curtailed to help pay for the mounting costs of the ongoing war in Gaza. However, there’s a nasty sting in the tail. In the future, olim will be subject to scrutiny of their non-Israeli income and financial structures such as foreign trusts and companies.

Understanding the 10-year tax holiday

Since 2008, Israel has successfully leveraged tax incentives for new olim and returning residents to strengthen its economy and attract global Jewish talent, fostering a vibrant ecosystem for entrepreneurs, investors, and professionals.

According to research by Andrew Amoils of New World Wealth, over the past decade, Israel has, in spite of its small population, consistently been in the top-10 emigration destinations for global dollar millionaires, with more than 1 100 making aliya in 2022. Since the war in Ukraine, there has been a dramatic increase in wealthy Eastern Europeans – some on the European Union sanctions list – seeking “safe haven” in Israel, with Forbes magazine estimating that at least 10% of Russian-born dollar billionaires now have Israeli passports.

At the heart of these aliya incentives is a 10-year tax holiday on income and capital gains made outside of Israel. This means that olim don’t have to pay taxes on things like rental income from properties they own abroad or income they receive from foreign investments for the first 10 years after moving to Israel. Perhaps even more appealing, beyond simply exempting foreign income, the 10-year tax holiday also waived the requirements to disclose offshore assets to the Israeli Tax Authority (ITA). So, olim with foreign trusts or companies – often in tax havens – continue to amass wealth in these structures completely under the radar.

Israel cracks under international pressure

The success of Israel’s liberal tax policies towards olim has also been its undoing. The secrecy provisions are out of step with the global financial push for increased transparency and sharing of information, and have attracted increased international condemnation.

As a member of the Organisation for Economic Co-operation and Development (OECD), Israel is subject to peer review by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes. In 2022, it issued a damning draft report rating Israel only partially compliant, and threatening blacklisting if changes weren’t made within 12 months. The Financial Action Task Force, which recently greylisted South Africa, also warned Israel that the 10-year tax holiday was being abused to evade international sanctions and facilitate money laundering.

The Israelis didn’t take these threats lying down. As Shmuel Abramson, chief economist at the finance ministry, warned a few months ago, blacklisting would be “an unprecedented event for Israel. No developed Western country is blacklisted. If you enter the blacklist, you’re a player that no-one wants to play with. There would be an impact on foreign investment. The total at stake may amount to billions of shekels.”

Bye bye secrecy; hello openness

Just before the Pesach recess, the Knesset passed amendment 272 to the Israeli Income Tax Ordinance, bringing Israel’s reporting standards for olim in line with international requirements.

Olim will now be required to submit tax returns to the ITA disclosing their foreign income and assets. The good news is the amendment is prospective. It applies only to new olim and returning Israeli residents who make aliya after 1 January 2026. Those that made aliya before this date will continuing to escape scrutiny on their offshore financial activities until their 10-year tax holiday ends.

Foreign trusts and companies associated with Israeli individuals, going forward, will also be under the ITA’s microscope. Israel takes an extremely harsh approach towards trusts, and casts a wide tax net around them. Consequently, foreign trusts with even one Israeli beneficiary or one Israeli trustee can have Israeli reporting obligations.

Trustees of these affected foreign trusts will under the new rules be required to submit information regarding all the people, including non-Israelis, who are the final “controlling individuals” of the trust. This would include the settlors, the trustees, the protectors, as well as the beneficiaries of the trust. If one of them is a company, the “controlling individuals” of that company will need to be submitted.

The new law also gives the ITA enhanced powers to monitor foreign companies which are effectively controlled and managed by Israeli residents. These companies can now be required to provide information on their ultimate owners, including non-Israelis, and their tax residency and may even request the filing of tax returns in Israel. Many South African olim retain companies in South Africa after making aliya, and need to be aware of these additional reporting obligations.

So what will the ITA do with all this new information? The recent amendment also significantly broadened the range of information that the ITA can now exchange with other tax authorities. As a result, it’s probable that they will not only employ it to identify and pursue tax-avoidance schemes by olim exploiting Israel’s 10-year tax holiday, but may also share details about the foreign entities and individuals associated with these companies or trusts with their respective countries’ tax departments.

Avoid costly mistakes: seek professional tax guidance before emigrating

These recent amendments make pre-aliya tax planning essential. Olim no longer have the luxury of a 10-year grace period to organise their financial affairs before disclosure becomes mandatory.

Additionally, these new disclosure requirements will undoubtedly pose additional challenges for new olim in their dealings with the Israeli tax man. It’s crucial to engage an Israeli accountant with international tax expertise who understands the nuances of what needs to be disclosed, particularly in cases involving foreign trusts and companies.

Though there are still numerous tax advantages to immigrating to Israel, it does introduce complexities into your financial affairs. You may now find yourself with tax reporting obligations in multiple countries, necessitating careful navigation of any international agreements to mitigate potential double taxation.

South African olim are strongly urged to seek guidance from experienced tax professionals before making the move. By thoroughly assessing their financial situation and future plans, they can devise a tax strategy that minimises their tax burden while leveraging the benefits provided by Israel’s generous 10-year tax holiday.

• Michael Kransdorff is chief executive of the Institute for International Tax and Finance, and Vanessa Grasslin is a senior international tax consultant of the Institute for International Tax and Finance.