Proposed bill to cancel reporting exemptions for new immigrants and mandate reporting of beneficial owners

Dear Clients, Friends, and Colleagues,   On February 21, 2024, the Ministry of Finance released a proposed bill aimed at enhancing transparency in tax law and aligning with international information exchange standards. This bill, currently open for public comment, has not yet been ratified by the Israeli government or Knesset. It’s crucial to note that changes may occur before its final enactment. Prompted by an OECD audit finding Israel non-compliant with international transparency standards, the bill seeks to avoid potential EU blacklisting and economic sanctions. It introduces two key amendments:

(1) Cancellation of Reporting Exemptions for New Immigrants and Veteran Returning Residents

Currently, new immigrants and veteran returning residents enjoy exemptions from reporting non-Israeli source income and assets. The bill proposes limiting these exemptions in three significant ways:

• Mandating reporting of non-Israeli income and assets, despite tax exemptions. The scope of the reporting obligation is not clear at this stage.
• Authorizing the assessing officer to demand financial statements from non-Israeli companies managed by new immigrants or veteran returning residents. These companies will be required to annually prepare financial statements under Israeli GAAP.
• Removing the reporting exemptions for trusts with new immigrants or veteran returning residents as settlors or beneficiaries.

  Despite these changes, the bill clarifies that tax exemptions (but not reporting exemptions) on foreign-sourced assets and income for new immigrants and veteran returning residents will remain intact. The amendment will apply to individuals becoming Israeli residents from June 1, 2025.  

(2) Introduction of Beneficial Owner Reporting for Israeli Companies and Trusts

The bill introduces two key amendments in connection with reporting of beneficial owners of Israeli companies and trusts: 1.Reporting the Beneficial Owner in the Annual Tax Return

• Israeli companies and trusts will be required, as part of their annual tax return, to report the identity of their “controlling owners” up to the level of individuals and to specify the tax residence of each of them.
• This information will be submitted to the Israeli Tax Authority but will not be included in any public register.
• For this purpose, the term “Controlling Owners” is defined in the Money Laundering Prohibition Law, 5760-2000.  In general, with respect to companies, it includes those individuals who have the ability to direct the activity of the company as well as those who hold at least 25% of the interest in the company.  With respect to trusts, this term includes the settlors, the beneficiaries, the trustees and the protectors.

2.Reporting by Israeli Resident Trustees

• An Israeli resident trustee will be required to report the identity of the “controlling owners” of the trust up to the level of the individuals and to specify their tax residences, even if the trustee is not obligated to submit an annual tax return (e.g., the trust is a non-Israeli resident trust).

For this purpose, the term “Controlling Owners” includes the settlors, the beneficiaries, the trustees, and the protectors.     Our tax department is actively engaged in the legislative process and ready to advise on the implications of these proposed obligations. We will keep you informed on legislative developments to ensure readiness for the new requirements.     Sincerely, The Tax Department Herzog Fox & Neeman