Israel: Israel - On-Shore - Offshore Country

Last Updated: 1 November 2000
Article by Alon Kaplan


Israel is a relatively small country, of approximately 6 million people. It is in the heart of the Middle East and has excellent access to Europe, Africa, Asia and North America. As the Middle East peace process becomes a reality, Israel's strategic position and human resources will make the country one of the economic and financial centers of the Middle East. Israel's population growth has been quite phenomenal and there is a continuing immigration from around the world. In 1990, Israel's population was 4.8 million residents. By 1999 its population had grown to 6 million.

Israel is considered to be a part of the Western world and its legal and taxation arrangements are based on Anglo-American foundations. Many people do not realize that, although its own residents bear a heavy tax burden, in certain respects, it may be referred to as a tax haven for both foreign residents and for segments of its permanent population. Probably one of the most notable characteristics of the Israeli economy over the last number of years is its globalization, evidenced in particular by the involvement of foreign investors in Israel. The government saw fit to construct an intricate system of benefits and incentives to encourage foreign residents to invest in Israel and enjoy the fruits of their initiative by way of reduced taxation. In addition, the government has adopted a number of rules easing the tax burden of immigrants.

The history of Israeli law reflects the history of the country in modern times, from the end of the nineteenth century until the present. The two powers ruling over the land during the pre-state period, the Turks and the British, both left their mark on the law. The State of Israel, founded in 1948, continues to add its own contribution, creating what has become known as a multi-layered system of law.

Israel: An Offshore Country?

To answer this question, it is necessary to look at some of the characteristics of Israeli law and taxation. In Israel, foreign currency was regulated by the Currency Control Law 1977. Recently, there has been a dramatic change in this law and now most of these regulations have been abolished. Foreigners have always enjoyed special concessions under the regulations, since they applied primarily to Israelis. A foreign resident or company may hold a bank account in Israel with freely transferable currency, either foreign or Israeli. Foreign currency can be converted into New Israeli Shekels (NIS) for investing in Israeli assets, with the investment capable of being reconverted into foreign currency and transferred abroad (including capital and interest).

With regard to government incentives for foreign investors, Israel falls into the category of those countries that are sound industrialized countries, with generally high rates of tax, but that provide tax shelters to encourage the development of specific economic sectors and to attract capital investment in certain preferred geographical zones. The Encouragement of Capital Investments Law grants benefits to approved enterprises, within certain development zones, for example, development towns, Jerusalem and the Eilat Free Trade Zone, and to preferred economic sectors.

With regard to real estate, generous tax exemptions are available to foreign investors. For example, under the Land Appreciation Tax Law, a foreign investor who buys a residential apartment may sell it free of capital gains tax in the same way that an Israel resident is exempt from capital gains tax on the sale of a privately owned apartment. Tax concessions are also granted to the owner of a residential property leased to tenants. Under the Income Tax Law (Tax Exemptions for Leasing Residential Property), an owner of residential property receiving rental of approximately US$1400 per month is exempt from paying income tax on this income. There are various additional tax concessions granted to non-residents, such as upon interest received on loans granted to an Israeli corporate body and interest collected in a non-resident bank account, both cases being subject to certain exceptions.

Stable and continuing concessions for non-residents have existed since the foundation of Israel. The rights of foreign investors to repatriate their money and most of the other concessions have never been detrimentally changed. Israel may, therefore, be considered an offshore country in some respects, particularly for sophisticated foreign investors taking advantage of the favorable legal and tax-free opportunities afforded to them.

Law Of Agency

It is standard practice for foreign business persons and companies to employ an Israeli individual or company as their representative in Israel. The Israeli representative will be largely responsible for the foreign investor's business, including purchasing and/or selling of real property. This agent and principal relationship between the foreign investor and the Israeli representative is governed by the Agency Law 1965.

Law Of Trust

The trust institution has been recognized under the Israeli legal system since the 1920s. The enactment in 1923 of the Charitable Trusts Ordinance set out the rules for a public trust. The private trust, on the other hand, was not regulated by statute until 1979, when the Trust Law was enacted. Nevertheless, the Supreme Court held that the concept of trust existed in Israel even prior to that date. After the enactment of the Trust Law, the courts no longer needed to rely on foreign laws, which formed the basis for the recognition of the trust before 1979. However, there remains a strong connection between the Israeli and Anglo-American systems in this field and a great resemblance between the trust institutions of these legal systems.

An Israeli trust has several specific features. The trustee is endowed with control over the assets, although there are no particular conditions as to the manner of control. A common means of control is acquired through title to the trust assets passing to the trustee. The trustee may, however, be vested with control over the assets by being empowered to deal with them, whether as an agent or otherwise. A trustee is deemed to have control if he can, by his acts, affect the way the trust assets will be dealt with, whether they are distributed, invested, or exchanged for other assets. The trustee must exercise his control over the assets for the attainment of the purpose of the trust. A trust will be valid and enforceable where there is a definite beneficiary. It will also be valid where there is no definite beneficiary, as long as there is some purpose to the trust.

Israeli law also provides for the establishment of a public endowment whose "objective or one of the objectives of which is the furtherance of a public purpose …" This applies mainly in the fields of education, culture, religion, scholarship, science, art, social welfare, health and sports.

Law Of Inheritance

Israeli inheritance law is generally governed by the Succession Law of 1965. It is the intent of this Law that matters of succession be governed, as far as possible, by the deceased's last will and testament. There is no limitation upon the right to bequeath and the Law does not mandate a specific portion to family members. It does, however, protect the surviving spouse (as long as he or she remains single), children and dependent parents by providing for maintenance payments from the estate. Israeli courts have jurisdiction over people who, at the time of death, were domiciled or left assets in Israel. A person can inherit either under a will or by law.

Where no will exists, the law provides for the property to be divided among the surviving relatives. A common law spouse, who was living with the deceased as husband or wife, is considered as "married" under this law. Under the law, provision is also made for surviving relatives to share proportionately in the estate. Illegal, immoral or impossible provisions in a will, as well as agreements to make or refrain from making a will, are void. In addition, a vague will may be declared invalid.


Israel maintains a modern computerized banking system. Most banks provide private banking services and keep special centers for tourists and foreign investors. The five large Israeli banks have branches and subsidiaries in Europe and the United States and representative offices in various other countries.


The subject of taxation in Israel is very complex. The following describes a few aspects of taxation which are relevant to foreign investors.

Tax System

Companies in Israel are generally subject to company tax on their profits at the rate of thirty-six percent on taxable income. Distributed profits after company tax are subject to dividend withholding tax at rates of up to 25% in the case of individual and non-resident shareholders. Interest and royalties are also generally liable to withholding tax of 25% unless reduced by a tax treaty. Lower tax rates and other benefits are applicable under Israel's investment incentive legislation.

Regarding personal taxation, Israel, in general, imposes tax on Israel source income, that is, income accruing in or derived from Israel or received in Israel from abroad (the "territorial basis"). This general principle is applicable to both resident and non-resident persons, with certain modifications in the case of residents, and subject to the provisions of any applicable tax treaty. Currently individuals are taxable at rates of up to 50%.

Other Taxes

Value Added Tax (VAT) is generally imposed on transactions conducted in Israel, as well as on transactions relating to assets or activities in Israel and imports. The standard rate of VAT in Israel is currently 17%, but exports are generally zero-rated. Special provisions apply to financial institutions and not-for-profit bodies.

Israel has no inheritance or gift tax. However, on the subsequent sale by the recipient of an asset which is assessable for capital gains tax, the asset cost (net of depreciation where applicable) and acquisition date of the testator or donor are taken into account in the computation of tax due.

Proposed International Tax Reform In Israel

On July 20, 1998, an international tax reform bill was sent to the Israeli Knesset (Parliament). The bill proposed to amend certain international tax provisions in the Income Tax Ordinance from January 1, 1999. Detailed regulations are expected on certain aspects.

The bill aims to complement the repeal of virtually all exchange control restrictions in Israel on May 14, 1998.

It is proposed to tax Israeli residents on their full worldwide income ("personal" or "residency" basis of tax) instead of the 'territorial basis" mentioned above. Under the proposals, foreign residents will continue to be subject to Israeli tax on Israeli source income.

Double Taxation Relief

Israel is a party to 25 double taxation treaties. The foreign investor who takes advantage of double taxation treaties can often withdraw profits earned in Israel under favorable tax treatment. Where a taxpayer is taxable both in Israel and abroad in respect of the same income, double taxation relief may be available either in accordance with a bilateral tax treaty (convention) or, in certain cases, unilaterally. In general, double taxation relief may take the form of a credit for overseas taxes (the credit method). Many of Israel's tax treaties allow investors to take a full foreign tax credit even if the rate has been reduced in Israel as an investment incentive under the Encouragement of Capital Investments Law. This is known as "tax sparing" relief.

Alternatively, double tax relief may take the form of an exemption in the source country where income or gains arise, or in the taxpayer's country of fiscal residency (the "exemption method" of double tax relief). In all cases, reference should be made to individual treaties (where applicable) and to local legislation to ascertain the exact details of the double taxation relief afforded and the conditions attaching thereto.


Israel's favorable legal and tax environment has attracted many international investors. It was recently reported that more than 50% of the holdings of the twenty largest companies in Israel ($19 billion out of a total of $37 billion) are held by overseas investors. Israel ranks as the third country (after the United States and Canada) in the number of companies whose shares are traded on the Nasdaq Stock Market. In 1998 the foreign currency reserves of the Bank of Israel exceeded $20 billion. These figures illustrate the confidence of foreign investors in the Israeli economy.

About the Author

Alon Kaplan, LL.M. (Jerusalem), was admitted to the Israel Bar in 1970 and was appointed a notary in 1989. He was admitted to the New York Bar in 1990 and was licensed in Germany as a Rechtsbeistand in 1991. He has been a Teaching Assistant in the Law Faculty of Tel Aviv University, has published articles in journals in Israel and Germany, and is the editor of the book "Israeli Business Law: an Essential Guide". He is also Chairman of the Israel Branch of the British-based Society of Trust and Estate Practitioners. Alon Kaplan wrote his Masters thesis on distributors and lectures on commercial law subjects to European business audiences. He practices law in Israel, Germany and New York.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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