Taxation of Inherited Money Coming to Israel from Abroad
Isn’t taxation of inheritance in Israel a long-forgotten practice? The answer is complicated. Inheritance tax was cancelled in Israel many years ago, but such a tax still exists in many countries. What does this mean for inheritance funds that Israelis received from relatives and acquaintances abroad? Does this money need to be reported to the Income Tax Authority before being transferred to Israel? In what cases, if any, will inheritance from abroad be taxed? All this and more will be discussed below by attorney Michael Decker, a partner in our firm and expert in inheritance law.
Our offices, in Jerusalem and Tel Aviv, specialize in inheritance law. Attorneys from our office regularly provide clients with a comprehensive, professional legal response to matters such as implementing wills, inheritance orders, notary services, transferring inherited money from abroad to Israel, and representing inheritors in proceedings before the Inheritance Registrar and all the courts.
Inheritance tax – it all depends on the circumstances
Many Israelis have relatives and acquaintances abroad who bequeath money and assets to relatives and friends in Israel. This situation raises a number of questions concerning how the inheritance should be transferred to Israel. But many inheritors also wonder if they have to pay taxes on the money that was transferred to them, or even report the money to the Israeli tax authorities. Although this is a complex issue, with many nuances that depend on the individual circumstances of each case, we will try to provide guidelines that can help you figure out if and when you must pay taxes on the transfer of these funds to Israel.
Transferring inheritance moneys from abroad to Israel – a short explanation
Transferring large sums of money between countries is a legally complex operation, and this is also true of inheritance. In light of the money laundering that takes place on an international scale these days, every transfer of funds raises suspicion with the authorities. This is also true of banks, who serve as gatekeepers whose role is to make sure that the funds are coming from a legitimate source. On this background, banks in Israel, as well as the authorities, are likely to place various restrictions on receipt of the inheritance, such that the involvement of a court is often required to instruct the bank to accept the money. We have explained these legal difficulties in detail in another article published on our website.
Taxation of inheritance money from abroad to Israel
For several decades the State of Israel levied an inheritance tax, but this tax was cancelled in the early 1980s. Although the opinion is sometimes voiced that the inheritance tax should be renewed, no serious steps have yet been taken to restore it. It is important to know that nevertheless, money transferred from abroad is likely to be taxed in the country where it originated. This is because many countries still levy an inheritance tax, including the U.S., Britain, France and Japan. Moreoever, the State of Israel currently requires reporting of bank accounts abroad. Accordingly, profits accrued from interest on inheritance money remaining in foreign bank accounts are likely to be taxed, given that they are profits which are not part of the inheritance itself.
Early reporting to the tax authorities may solve the problem
As noted, even though inherited money itself is not taxed in Israel, reporting and paying of tax may be required on profits accrued from foreign bank accounts where the money is located. Non-reporting of this money is likely to constitute a violation of the Income Tax Code. This problem arises in particular when someone wants to transfer the money to Israel.
A solution that can prevent criminal proceedings and various sanctions for non-reporting is to conduct voluntary disclosure and capital import agreement proceedings. As part of these proceedings, the inheritors report on the funds that they will inherit and on the foreign bank accounts that they possess. If the reporting is done late, the authorities may be willing to recognize the money and commit to not initiating collection proceedings or filing criminal charges, subject to a tax payment agreed on by both sides.
How is the agreed-upon amount of tax decided?
It is important to understand that taxation is not uniform in the framework of voluntary disclosure proceedings and proceedings for agreements on capital import to Israel. There are various parameters that affect the amount, and it depends on the individual circumstances of each case. Parameters that may be taken into account include the amount of money in the foreign bank accounts, the source of the money, the time that passed between receipt of the inheritance and the date of the application to import the money to Israel, and the character of the connection between the testator of the money and the inheritors.
Contact our experts in inheritance law and probating wills
As you can see, taxation of inheritance coming from abroad to Israel is a complex issue, involving a lot of legal uncertainty. If you have any question or if you need individual help on this issue, you can contact an attorney from our office who will be happy to assist you. Our offices specialize in inheritance and estate law, and provide a comprehensive solution regarding transfer of and taxation on inheritance money from abroad to Israel, as well as many other legal issues in inheritance law.