Quick Answer: Israel taxes foreign trusts when there is an Israeli connection — typically when a settlor or beneficiary is an Israeli tax resident. If all parties are non-residents, Israeli tax generally does not apply to the trust's income, but significant reporting obligations may still arise, especially under rules that took effect on January 1, 2026. New immigrants (Olim) who made Aliyah from 2026 onward must now report their foreign trusts to the Israel Tax Authority, even if the income remains exempt.

A UK national sets up a discretionary trust before making aliyah. His Israeli accountant tells him the trust assets are not taxable in Israel during the 10-year new immigrant exemption period. Three years later, the Israeli Tax Authority sends an assessment for NIS 2,000,000 — the entire trust corpus — because one of the trust's Israeli-resident beneficiaries failed to report their beneficial interest. Under Sections 75G–75N of the Income Tax Ordinance, the reporting obligation and the tax liability are separate from the settlor's exemption, and they attach to beneficiaries independently. This is one of the most expensive misunderstandings in Israeli tax planning for new immigrants.

This guide explains how Israel classifies and taxes foreign trusts, who bears the tax liability, and what the sweeping changes introduced in 2026 mean for new immigrants, returning residents, and trustees based in Israel. The rules are genuinely complex, but understanding the basics will tell you whether you need urgent professional advice — and in most cases, you do.

1. Overview: How Israel Approaches Trust Taxation

Israel does not have a standalone Trust Act. Trusts established under foreign law are recognised as legal arrangements, but their tax treatment is governed entirely by Chapter 4B of the Income Tax Ordinance (New Version), 1961 (*Pekudat Mas Hakhnasa*), which was inserted by Amendment 147 in 2008 and has been amended several times since. This chapter is detailed, and the definitions matter enormously.

Under Chapter 4B, the key parties to a trust are:

  • Settlor (*yotzer*): The person who established the trust and transferred assets into it.
  • Trustee (*na'aman*): The person or institution holding and managing the trust assets.
  • Beneficiary (*nehene*): The person entitled to receive distributions or benefit from the trust.

Israel's approach is not to treat the trust itself as a separate taxpayer in the way that, say, a company is taxed. Instead, Israeli tax law "looks through" the trust and attributes income to the settlor or beneficiary depending on the trust type. This look-through approach is the source of most of the complexity: the same trust can produce very different tax outcomes depending on who is resident in Israel at any given time.

One more foundational point: the mere fact that a trust holds Israeli assets — such as an apartment in Tel Aviv or shares in an Israeli company — does not automatically make the trust subject to Chapter 4B. Asset location and party residency are separate questions. Income derived from Israeli assets may still be taxable in Israel on ordinary principles (as Israeli-source income), even if the trust itself is outside the Chapter 4B framework.

2. The Four Trust Classifications Under Israeli Law

Chapter 4B divides trusts into four categories. Which category a trust falls into determines how — and whether — Israel taxes it.

Category 1: Israeli Resident Trust

A trust is an Israeli Resident Trust if the settlor is an Israeli tax resident and at least one trustee is also an Israeli tax resident. This trust is taxed in full in Israel on its worldwide income, in the same way an Israeli resident individual is taxed. The trustee files an annual tax return and pays Israeli income tax on investment returns, rental income, capital gains, and other trust income regardless of where in the world the assets are held.

Category 2: Foreign Resident Trust

A Foreign Resident Trust has a settlor who is a foreign tax resident. If all beneficiaries are also foreign residents, and the trust does not hold Israeli-sourced assets, it generally falls outside the scope of Israeli income tax. This is the "clean" case — no Israeli tax applies. However, if even one beneficiary becomes an Israeli resident at any point, the classification can shift, which we address below.

Category 3: Israeli Resident Beneficiary Trust (IRBT)

This is the category that most commonly catches foreign families by surprise. An Israeli Resident Beneficiary Trust arises when:

  • The settlor is a foreign resident, and
  • At least one beneficiary is an Israeli tax resident.

In this case, distributions made to the Israeli-resident beneficiary are treated as taxable income in Israel. The tax is assessed on the distribution, not on the trust's underlying income as it accrues. The Israeli-resident beneficiary must report distributions received and pay tax at the applicable marginal rate. The trust itself does not file an Israeli return, but the beneficiary does.

Importantly, an IRBT can come into existence gradually. If a trust was originally a Foreign Resident Trust but a beneficiary later moves to Israel — whether through Aliyah, marriage, or work — the trust's status changes from that point forward without any formal restructuring.

Category 4: Relatives Trust

The Relatives Trust is a specific subcategory of the IRBT where the Israeli-resident beneficiary is a relative of the foreign settlor (defined broadly to include spouses, children, parents, siblings, and their spouses). The Israeli tax authorities created this category partly to address situations where parents establish trusts abroad and name Israeli-resident children as beneficiaries. The tax treatment largely mirrors the IRBT, but there are specific anti-avoidance provisions that apply when the arrangement is seen as a mechanism for shifting income to Israel without declaring it.

3. When Israel Taxes a Foreign Trust: Practical Scenarios

Theory aside, here are the scenarios that most commonly arise for foreign nationals dealing with Israeli tax:

Scenario A: American family trust, no Israeli connections

A US citizen living in New York creates a revocable living trust and names their children (also US residents) as beneficiaries. The trust holds US stocks, a US property, and a bank account in Switzerland. Result: No Israeli tax liability. No Israeli reporting obligation under ordinary rules (though see Section 5 regarding trustee residency).

Scenario B: British discretionary trust — child makes Aliyah

UK parents create a discretionary trust. One of three beneficiaries — their daughter — makes Aliyah and becomes an Israeli tax resident. From that date, distributions she receives from the trust are taxable in Israel as income. The trust itself does not owe Israeli tax, but the daughter must report each distribution on her Israeli annual tax return and pay income tax on it at her marginal rate. The two non-Israeli siblings are unaffected.

Scenario C: Offshore trust holds an Israeli apartment

A New Zealand citizen holds a BVI trust that owns an Israeli apartment. Neither the settlor nor any beneficiary is an Israeli resident. The trust is outside Chapter 4B. However: rental income from the Israeli apartment is Israeli-source income and is taxable in Israel regardless. The trustee should be registered with the Israel Tax Authority and file annual returns for the rental income. Capital gains on the eventual sale of the apartment will also be subject to Israeli betterment tax or capital gains tax. See our guide on renting out Israeli property for details.

Scenario D: Israeli resident as trustee of a foreign trust

An Israeli attorney acts as trustee for a discretionary trust established by a Swiss settlor for the benefit of three Swiss beneficiaries. The trust holds no Israeli assets. Under the pre-2026 rules, this arrangement had minimal Israeli implications. Under the 2026 rules (discussed below), the Israeli trustee is now required to report the trust's controlling individuals to the Israel Tax Authority, regardless of the residency of the settlor and beneficiaries.

In Practice: Scenario B — the British trust where a child makes Aliyah — is the scenario we encounter most often in practice, and the family is almost never aware it has created an Israeli tax issue. The child arrives in Israel, joins the Israeli tax system, and starts receiving occasional distributions from the family trust for a home purchase or living expenses. These distributions should be declared on Israeli tax returns as income, but because neither the child nor the UK family knows about Chapter 4B, they are not reported. The statute of limitations for Israeli tax assessments is four years (extending to seven where concealment is found), so undisclosed trust distributions from even four or five years ago can create significant back-tax exposure. Regularizing the position before the Israel Tax Authority identifies it is strongly advisable.

4. The 10-Year Exemption for New Immigrants and How Trusts Fit In

One of the most generous features of the Israeli tax system is the 10-year exemption available to new immigrants (*olim chadashim*) and veteran returning residents (*toshavim vatikkim*). Under section 14(a) of the Income Tax Ordinance, these individuals are exempt from Israeli income tax on all foreign-sourced income and gains for 10 years from the date they become Israeli residents.

This exemption has direct consequences for trust beneficiaries. If a new immigrant receives a distribution from a foreign trust, that distribution is foreign-sourced income and falls within the exemption — no Israeli tax is due on it during the 10-year window. This has historically made Israel a very attractive destination for high-net-worth individuals with foreign trust structures.

However, two important limitations apply:

  • The exemption covers income, not Israeli assets. If the trust holds Israeli property or Israeli company shares, income from those assets is Israeli-source and is taxable from day one, exemption notwithstanding.
  • Reporting is now required even during the exemption period. This is the major change introduced in 2026 (see Section 5 below).

For new immigrants who became Israeli residents before January 1, 2026, the old rules still apply for the duration of their 10-year window: they were not required to report foreign assets and trusts to the Israel Tax Authority, and they are not retroactively brought into the new reporting regime mid-window. Consult a tax advisor to confirm how the transitional provisions apply to your specific date of Aliyah.

For new immigrants who became Israeli residents on or after January 1, 2026, the tax exemption continues to apply, but the reporting exemption has been abolished. You must disclose foreign trusts and assets. The tax benefit remains; the secrecy does not.

5. New 2026 Reporting Requirements: What Changed and Who Is Affected

The most significant recent development in Israeli trust taxation is Amendment 277 to the Income Tax Ordinance, passed by the Knesset and effective from January 1, 2026. This amendment makes sweeping changes to the reporting obligations of three groups: new immigrants, returning residents, and Israeli-resident trustees.

New immigrants and returning residents (Olim and Toshavim Chozrim)

Before 2026, new immigrants and veteran returning residents had a complete reporting exemption: they did not have to file annual tax returns at all for their first 10 years, nor did they have to disclose foreign assets, income, or trusts to the Israel Tax Authority. This made Israel an easy jurisdiction for high-net-worth Olim — they could simply enjoy their Israeli life without the administrative burden of offshore reporting.

From January 1, 2026, this reporting exemption is abolished for anyone who becomes an Israeli resident on or after that date. Newly arrived Olim must:

  • File an annual Israeli income tax return from their first year of residency;
  • Report all foreign assets, income, and trust interests (even those that are tax-exempt under the 10-year rule);
  • Disclose any trust in which they are a settlor or beneficiary, including the trust's structure, assets, and jurisdiction.

The underlying tax exemption is preserved — reporting a foreign trust does not mean paying Israeli tax on it during the 10-year window. But the Tax Authority now has visibility into these structures from day one.

Israeli-resident trustees

Amendment 277 also introduces new obligations for Israeli residents who serve as trustees, regardless of whether the trust has any other Israeli connection. Any Israeli-resident trustee must now:

  • File a trustee report with the Israel Tax Authority within 90 days of the trust being created (or, for trusts that existed before the amendment, by the deadline specified in transitional provisions);
  • Disclose the identity and country of residence of all settlors and primary beneficiaries;
  • Update the report if any of these details change.

This obligation applies even if neither the settlor nor the beneficiaries are Israeli residents. The Israel Tax Authority's rationale is that Israeli-based trustees are a point of control through which the authority can obtain information about offshore structures for exchange-of-information purposes.

Why this matters internationally

Israel participates in the OECD's Common Reporting Standard (CRS) and has bilateral tax information exchange agreements (TIEAs) with dozens of countries. Information disclosed to the Israel Tax Authority about foreign trusts and their controlling individuals can, in principle, be shared with the tax authorities of other countries where those individuals reside. This has direct implications for settlors and beneficiaries living in the US, UK, France, Germany, Australia, and many other jurisdictions.

In Practice: Under Amendment 277, an Israeli-resident trustee who fails to file the required trustee report within 90 days faces civil penalties — but more importantly, the delay creates a standing gap in the trust's Israeli compliance record that can be used by the ITA to argue that the trust's management was conducted in Israel from a point earlier than the formal appointment. This "Israeli management and control" argument could, in extreme cases, pull the entire trust income into Israeli tax. Israeli attorneys who serve as trustees of offshore structures should treat the 90-day filing deadline as a hard deadline requiring a firm reminder system, not a bureaucratic formality.

6. Practical Steps for Trustees and Beneficiaries

If any of the situations described in this guide apply to you, the following steps are a sensible starting point:

If you are a foreign settlor with an Israeli-resident beneficiary

  • Identify which distributions have been made to the Israeli-resident beneficiary in recent years and whether they have been reported on Israeli tax returns.
  • Review the trust deed to understand whether the Israeli beneficiary has vested or discretionary entitlements — this affects how Israeli tax applies.
  • Consider whether the trust structure needs to be reviewed given the beneficiary's Israeli residency. In some cases, a restructuring or a family loan arrangement is more tax-efficient than a trust distribution.
  • Engage an Israeli tax attorney to assess your exposure and regularise any past under-reporting before the Tax Authority raises the issue first.

If you are a new immigrant (Olim) with a foreign trust

  • Determine your date of Israeli residency and whether you are subject to the old regime (pre-2026 Aliyah) or the new reporting rules (2026 and later Aliyah).
  • If you made Aliyah in 2026 or later, obtain a list of all trusts in which you are a settlor or beneficiary and prepare to include these in your first Israeli annual tax return.
  • Remember: reporting is mandatory even if no Israeli tax is due. Failure to report is a separate violation from failure to pay tax.
  • Consult an Israeli tax professional who specialises in oleh taxation — the interaction between the 10-year exemption and the new reporting rules requires careful navigation. See our guide on Oleh tax benefits and breaks for background.

If you are an Israeli-resident trustee

  • Review all trusts for which you currently serve as trustee, regardless of whether any settlor or beneficiary is Israeli.
  • File trustee reports with the Israel Tax Authority for each trust within the required timeframe — for existing trusts, check the transitional deadlines in Amendment 277 carefully.
  • Keep records of all settlors, beneficiaries, and trust assets, as you may be required to update your report if details change.
  • Consider whether acting as trustee for foreign structures creates compliance risks for your professional indemnity position.

General tax planning considerations

Trusts can still be highly effective wealth-planning tools even with Israeli connections, but the planning must be done with Israeli tax law in mind from the outset. Some options worth discussing with an advisor:

  • Timing of distributions: If an Israeli-resident beneficiary is within their 10-year exemption window, distributions received during that period are tax-free — making this the optimal time to make larger trust distributions before the exemption expires.
  • Asset location within the trust: Holding Israeli assets directly in a foreign trust creates unnecessary complexity. Israeli real estate, in particular, is often better held directly by individuals or through an Israeli company.
  • Reviewing trust classifications: If a trust currently falls into the Israeli Resident Beneficiary Trust category, there may be restructuring options that reduce the Israeli tax burden — for example, changing the nature or timing of distributions, or reviewing whether certain beneficiaries retain Israeli residency.

A South African family established a discretionary trust in the Cayman Islands in 2010 holding a diversified portfolio worth approximately USD 4.2 million. In 2018, their son made aliyah and became an Israeli tax resident. Between 2019 and 2023, the trust made distributions of approximately USD 180,000 to the son for apartment purchase costs and living expenses — none of which were reported on his Israeli annual tax returns, because he believed trust distributions from his parents were "gifts." In 2024, the Israel Tax Authority's offshore enforcement unit contacted him following a CRS data exchange with the Cayman financial institution. Because he was within his 10-year Section 14(a) exemption window until 2028, the distributions themselves were exempt from Israeli income tax — but the ITA assessed administrative penalties of NIS 42,000 for five years of non-disclosure of foreign income on Form 1301. His Israeli tax advisor filed corrected returns for 2019–2023, paid the penalties (reduced to NIS 28,000 on appeal), and established a prospective reporting arrangement with the ITA for future distributions. The lesson: the exemption from tax is not an exemption from disclosure — and foreign trust distributions received during the exempt period must still appear on Israeli annual returns, even when the tax liability is zero.