04 June 2014 Issue 5 Benjamin Grunberg

Israel’s foundation

Benjamin Grunberg looks at the hekdesh, Israel’s take on foundations.

Trusts have been recognised in Israel since the 1920s. The Charitable Trusts Ordinance of 1923 set out the rules applicable to public trusts. In 1979, the Israeli Trust Law was enacted, which provided for the formation of private trusts.

As long as neither the settlor nor the beneficiaries are resident in Israel for tax purposes, the hekdesh is an excellent vehicle for tax and estate planning, given that its assets and those of its underlying companies are tax-free in Israel

Section 2 Trust Law provides that a private trust may be created by a deed of hekdesh. The word ‘hekdesh’ in Hebrew has a very similar meaning to the word ‘trust’ in English, and a hekdesh is formed and operates on similar principles to that of a European foundation. The hekdesh is a legal entity and arises out of the relationship between a settlor, trustees and beneficiaries. Chapter 1, s1 Trust Law provides that a trust exists where a trustee holds and deals with the assets of the hekdesh for the benefit of the beneficiaries. Protectors are also recognised by Israeli law under s75(c) of the Israeli Tax Ordinance.

Uses

According to s26 Trust Law, only a public hekdesh needs to be registered; a private hekdesh does not require registration. This lends a great degree of confidentiality to the entire structure within which a hekdesh is used and, as such, like a trust or a foundation, the hekdesh serves as an effective asset-protection vehicle for physical and cash assets.

Moreover, under s75(i) Tax Ordinance, as long as neither the settlor nor the beneficiaries are resident in Israel for tax purposes, the hekdesh is an excellent vehicle for tax and estate planning, given that its assets and those of its underlying companies are tax-free in Israel. The only exception to this is in the case of Israeli-sourced income that is ordinarily taxable in Israel in any event.

The hekdesh may be used for everyday commercial activities by using an underlying company that is owned by the hekdesh. Section 75(p) Tax Ordinance considers the underlying company to be a ‘pass-through’ entity for Israeli tax purposes and, as such, the activities of these underlying companies remain tax-free. Furthermore, these companies are exempt from filing any tax returns under s131 Tax Ordinance. The underlying company of a hekdesh can be located in a jurisdiction other than Israel but Israeli companies work well for this purpose too.

Section 17(b) Trust Law provides that there are no minimum capital requirements to settle a hekdesh, and the relationship of hekdesh only commences once an asset has been transferred to the trustee. Assets can be added to or distributed from the hekdesh at any time.

Having regard to the fact that a hekdesh under s18(b) Trust Law is an irrevocable relationship of trust, and because the trustees of the hekdesh have complete and absolute discretion in relation to the trust assets, the hekdesh is considered by banks and financial institutions as a compliant entity through which to hold bank accounts and financial instruments.

Authors

Benjamin Grunberg