Foreign Gifts — A possible undesireable tax event

When Olim (or other Israeli residents) receive financial gifts or inheritance bequests from family members living abroad, it is usually expected that any tax associated with the gift will be paid by the grantor and not by the beneficiary. However, this may not be the case.

According to Section 89 of the Israeli Income Tax Ordinance (“the ITO”), an Israeli resident is taxed on capital gains derived by him/her from his/her worldwide assets. Thus, when an Israeli resident acquires rights to an asset located outside of Israel (whether in the form of stocks, bonds, real estate property or the like—regardless of how the asset was acquired), he/she will be taxed on the capital gain earned from this asset at the time that it is sold.

According to Section 88 of the ITO, the figure used to determine the “cost base” of the asset is the original cost of purchasing the asset. That means that capital gain tax is calculated based on the difference between the original purchase price and the amount for which the asset was sold. Accordingly, where an asset is received in the form of a gift or by means of inheritance, the principal rule (with certain exceptions) is that the current seller will be regarded as having “stepped into the shoes” of the grantor or testator (as applicable). As a result, the Israeli resident will be liable to pay tax on a gain which had accrued during a period when he/she was not the owner of the asset.

What is seemingly even more unjust is the potential for double taxation. When the grantor gifts the asset, disposition/gift/estate tax has usually already been paid by the grantor. For example, if an Israeli resident receives a gift of stock from his/her Canadian parent, the parent (or the parent’s estate) will have been deemed to have disposed of the property for tax purposes, and be required to pay the Canadian tax authorities tax on the gain accrued. If the grantor is a US Person, the gift is subject to US gift tax or US estate tax rules. Yet, for the Israeli resident, none of these taxes paid are taken into account.

The bottom line is that the Israel tax legislation does not provide a tax credit for gift, disposition or inheritance tax paid by the grantor. In order to prevent the possibility of double taxation, Israeli residents have only one practical solution —  to apply to the Israeli tax authorities for a pre-ruling. The pre-ruling will enable Israeli residents to, inter alia, enjoy a “step up” in the value of the relevant asset and when selling the asset, be taxed only on the gain accrued from the date the gift was received.

In recent years, several pre-rulings have been issued by the Israeli tax authorities in matters similar to the aforementioned scenarios, i.e., where an Israeli resident inherits an asset which is located outside of Israel and where inheritance tax is imposed on the estate in the country of residence of the testator. In such pre-rulings, the Israeli tax authorities have agreed that for Israeli capital gains purposes:

  • The date of acquisition of the relevant asset will be deemed to be the date of death of the testator and;
  • The cost of the asset will be deemed to be the same value used to determine the inheritance tax imposed on the testator in his/her the country of residence.

It’s important to be aware that the Israeli tax authorities demand that certain conditions be met prior to issuing a pre-ruling, for example:

  • If a capital loss arises from the sale of the asset, it will not be set-off against the capital gain derived in Israel and;
  • When calculating the capital gain, no foreign expenses (e.g., expenses associated with management of the bequest, amortization, etc.) will be deducted.

In the past, the pre-ruling solution was ambiguous and vague, and the conditions and demands in order to obtain such a ruling were uncertain.  Lately the Israeli tax authorities have introduced an improved solution to such cases which is called the “green light approach”. According to the “green light approach” the conditions which must be met in order to obtain such a pre-ruling are clearly publicized. Furthermore, the green light approach defines exactly what information must be submitted by the applicant.

But what about gifts or bequests that did not attract gift/inheritance taxes?  The green light approach allows for the possibility of obtaining such a pre-ruling even if no such taxes were paid.  An asset market valuation will be required in these cases.

If you are expecting to receive a gift or inheritance from someone abroad, it is recommended that you contact a tax practitioner to examine:

  • the likelihood of any possible capital gains tax exposure and;
  • if needed, prepare an application to the Israeli tax authorities for the purpose of obtaining a pre-ruling in the green line approach on the basis outlined above.

It is advisable to initiate an examination when the asset is being received, since it will be simplest time to verify the asset’s value for tax purposes.

For more information, please contact:

Chaim Wigoda, Managing Director, HCC International Services Ltd.


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Leor Nouman & Uri Antman, Tax Department, S. Horowitz & Co. or

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