Neemanoute taxation in Israel


Neemanoute: Taxation of Israeli trusts

To understand how a Neemanoute works, we need to understand what a trust is and why people need one?

In the rest of this article, we'll look at the taxation of Neemanoute in the Israeli tax system.

Neemanoute is called "trust" in English and "fiducie" in French.

A trust is a legal entity in which assets are held by one person for the benefit of another. It's a kind of "protective envelope".

A trust is created by a "settlor/creator" who transfers his or her assets to a "trustee".

The trustee then holds these assets on behalf of the "beneficiaries".

Why do people set up Neemanoute trusts in Israel?

There are several reasons for this. 

First and foremost, legal protection. For example, the establishment of a trust may be the result of a desire to protect an asset from creditors.

There is also a desire to benefit from a certain anonymity. Neemanoute allows the creator to remain totally anonymous. Only the trustee (Neemane) is aware of his or her identity.

No one else can know who's behind the trust, and this often avoids potential problems.

Imagine a person who owns several properties. He doesn't necessarily want everyone to know his identity from a simple search on the Israeli land registry (Tabo). So, in this type of situation, a Neemanoute ensures anonymity while retaining the benefits (usufruct) of the property.

Neemanoute is also the perfect tool for succession planning in the best possible way.

Finally, the Neemanoute in Israel is a tool for tax planning and optimization which ensures great flexibility in many situations.

A Neemanoute will always have the following three parts:

  1. Constituent / Creator / יוצר - the person who has directly or indirectly given property to a trustee.
  2. Fiduciary / Neeman / נאמן - a person who holds the assets of a trust. Usually a lawyer.
  3. Beneficiary / Neene / נהנה - a person who benefits, directly or indirectly, from the Trust's assets or income. Often, the identity of the beneficiary is crucial in tax planning, particularly in the case of inheritance / transmission and in everything to do with real estate.

Neemanoute - An example to help you understand

Joseph owns a house that he wants to give to his son. However, his son is unable to look after the house.

So Joseph turns to his good friend Sarah (who is loyal and trustworthy) and gives her the house to keep for her son's benefit.

However, to ensure that his intentions are carried out, Joseph draws up a contract. The contract stipulates that Sarah is responsible for ensuring that the property is well maintained, and that she will hold the house for the benefit of Joseph's son.

Now Joseph has created a trust, with himself as settlor, Sarah as trustee and his son as beneficiary.

What is an Israeli trust - Neemanoute?

As of January 2014, the Israeli tax authorities reformed the tax laws for trusts in Israel. This reform effectively broadened the criteria of conditions required to consider a trust an Israeli tax resident.

In short, today, almost all trusts that have at least one beneficiary who is an Israeli tax resident are taxable in Israel.

However, there are exceptions, such as trusts of an Oleh hadash or returning residents.ALSO READ: Ole Hadash income taxed in Israel

Watch out!

When creating a trust, it's important to pay close attention to the identity of the creator and beneficiary, to avoid a tax mishap.

Taxation of Israeli trusts?

There are five categories of trust defined in Israeli tax law.

Once a trust has been correctly categorized, the relevant tax treatment can then be applied.

What are the different types of Israeli trusts?

  1. Non-resident trust.
  2. Non-resident beneficiary trust.
  3. Israeli resident trust.
  4. Beneficial trust resident in Israel.
  5. Trust by will.

1) Non-resident trust (נאמנות תושבי חוץ)

A non-resident trust meets all of the following criteria:

  1. The shareholders are foreign tax residents.
  2. All beneficiaries are either public bodies or foreign tax residents.
  3. The trust has never had an Israeli tax-resident beneficiary since its creation.

Tax treatment

This trust will be tax-exempt on income generated outside Israel. However, income generated in Israel will still be taxable.

This type of trust will retain its status on the death of the settlor, provided the settlor is considered a foreign tax resident at the time of death and the beneficiaries continue to be foreign tax residents.

2) Non-resident beneficiary trusts (נאמנות נהנה תושב חוץ)

A non-resident beneficiary trust is a trust that meets all of the following conditions:

  1. At least one constituent is a tax resident of Israel.
  2. All beneficiaries are foreign tax residents and their identities are known.
  3. The trust is irrevocable (as defined by the Israeli Tax Ordinance).
  4. The Trust specifically excludes beneficiaries who are Israeli tax residents.

Tax treatment

This trust will be tax-exempt on income generated outside Israel's borders. However, income generated in Israel will be taxable.

The trustee of a non-resident beneficiary trust must submit an annual report to the Israeli tax authorities.

The trust will retain its status after the death of the settlors, provided that all beneficiaries continue to be foreign tax residents.

3) Israeli resident trust (נאמנות תושבי ישראל)

An Israeli resident trust is a trust that meets all of the following conditions:

  1. At the time of the Trust's creation, at least one settlor and one beneficiary were considered tax residents of Israel.
  2. During the current tax year, at least one settlor and one beneficiary are tax residents of Israel.

Tax treatment

In this Trust, the Trust's worldwide income will be subject to Israeli tax at normal trust tax rates (see below).

Once tax is paid at the trust level, distributions to beneficiaries are not subject to tax.

4) Israeli resident beneficiary trust (נאמנות נהנה תושב ישראל)

An Israeli resident beneficiary trust is a trust that has at least one Israeli tax resident beneficiary and all settlors are foreign tax residents (and have been since they created the trust).

This type of trust comprises two sub-categories.

A) Regular trust for Israeli resident beneficiaries

This type of trust does not have a close relationship between all its settlors and beneficiaries.

Tax treatment

In this Trust, the Trust's worldwide income will be subject to Israeli tax at normal trust tax rates (see below).

Once tax is paid at the trust level, distributions to beneficiaries are not subject to tax.

B) Immediate family trust

This type of trust maintains a close relationship between all its constituents and all the beneficiaries of the Israeli residents who are part of it, in one of two ways:

The settlor of the Trust is the child, grandchild, spouse or parent of the beneficiary.

Tax treatment

25% income tax
The portion of income intended for distribution to a beneficiary who is an Israeli tax resident will be taxed in the current year at the flat rate of 25 %.

In such a case, taxable income will be exempt from tax at the date of effective distribution.

To be eligible for this tax route, you must submit a choice to the tax authorities. If you have chosen the 25 % tax route, you will not be able to change your decision in future years.

30 % tax on distributions
The Trust's income would not be subject to tax in the year in which the income accrues. However, distributions to an Israeli resident beneficiary will be taxed at the rate of 30 %. Capital distributions will be tax-exempt.

5) Trust by will (נאמנות לפי צוואה)

A trust that was created following a provision in a will and whose creators who, at the time of their death, were considered residents of Israel.

In a trust of this type, the income of the trustee will be considered the income of the beneficiary, and the assets of the trustee will be considered the assets of the beneficiary.

Tax treatment

In this Trust, the Trust's worldwide income will be subject to Israeli tax at normal trust tax rates (see below).

Once tax is paid at the trust level, distributions to beneficiaries are not subject to tax.

Tax rates on Israeli trusts ?

If a trust's income is taxable in Israel, the tax rates are generally the same as for an individual.

However, a trust in Israel is not eligible to benefit from the lower tax rates of the marginal tax brackets.

Thus, if income is taxed at marginal tax rates, the tax rate would be the highest tax rate, starting from the first shekel (2022 - 47%). There are various incomes that have special tax rates (generally between 10 % and 30 %), such as dividends, interest, rents, capital gains, etc.

In fact, most passive income can be taxed using special tax rates.Find out more about tax rates for individuals

Allocation of Israeli trust income to be taxed to the settlor or beneficiary.

In certain specific scenarios, the trustee may choose to transfer the trust income to the settlor or beneficiary to be taxed as his or her personal income.

However, the trustees must ensure that the Trust complies with the relevant requirements and that the correct notices are submitted on time.

Trust asset holding companies

Many trustees prefer to hold trust assets through a trust asset holding company. This separates their personal assets from those of the trust.

The Israeli tax authorities will treat a trust asset holding company as transparent for Israeli tax purposes.

The company must meet the following conditions:

Be established solely for the purpose of holding the trust's assets.

All shares must be held by the trustee.
The appropriate notice was submitted to the Israeli tax authorities within 90 days of incorporation.

The Form 153 notice can be downloaded from the website of the Israeli tax authorities here.

Does the appointment of an Israeli trustee make the trust taxable in Israel?

As a general rule, the appointment of an Israeli trustee per se has no impact on the tax residency of the trust.

However, it should be noted that if the trust holds shares in a foreign company and by appointing an Israeli trustee, the control and management of this company will be carried out from Israel, this may consider the company to be Israeli tax resident and therefore taxable in Israel.

Late reporting for Israeli trusts?

Trusts established before 2014 can be considered Israeli tax residents as of 2006.

The tax treatment of these trusts can be complex, and often requires dialogue with the tax authorities to clarify a tax position.

In any case, if a trustee has only recently become aware of a reporting obligation in Israel, it is advisable to seek professional advice before proceeding.

Late-filing penalties for Israeli trusts may be appealed if there is a justifiable reason for the late filing.

In a nutshell:

If a trust has an Israeli tax resident beneficiary, it is most likely subject to Israeli tax.

Income tax rates will be subject to Israeli tax at a rate determined by the source of income. Income taxed at marginal tax rates will be taxed at the highest rate (2022 - 47%).

Professional advice should be taken when setting up the trust and ongoing management to ensure that tax efficiency is maintained.

The Israeli tax authorities also provide various forms and information in English on their official website.

The foregoing should not be construed as a recommendation and/or opinion. Personal professional advice is recommended.

We will be happy to answer any questions you may have on this subject and in general.

Your questions - our advice

  • Is an Ole Hadash concerned if the trust was created before his Aliyah?
  • What happens from a tax point of view when the trust is created?
  • How can a foreign tax resident set up a trust in Israel?
  • Can a bank account be transferred to a Trust?
  • Is it possible to place a financial portfolio under the protection of a Neemanoute?



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