אריה ליבוביץ ושות'

A Dual Tax Exposure — Israel vs. the United States

An American citizen who immigrates to Israel or returns after years abroad becomes a dual-system taxpayer.
On one hand, he enters Israel’s global taxation regime upon becoming an Israeli resident; on the other, he remains fully liable for U.S. tax and reporting under the Internal Revenue Code, because the United States taxes its citizens based on citizenship rather than residency.

This overlap creates a complex matrix of tax obligations that requires careful coordination before immigration.

• The new immigrant remains subject to reporting and taxation by the IRS, including on income earned entirely within Israel.
• Israel, in turn, regards him as an Israeli resident taxable on worldwide income (after the ten-year exemption under Section 14 of the Income Tax Ordinance), and may still assert taxation where it believes there is a permanent establishment or management and control in Israel.
• This raises practical questions: Where should one report first? How should foreign tax credits be utilized? And what happens when both countries claim that the income was “sourced” in their jurisdiction?
• While the Israel–U.S. Tax Treaty mitigates some double-taxation scenarios, it does not provide a complete solution.
• In addition, Israeli banks and financial institutions automatically report accounts held by U.S. citizens under FATCA, further tightening disclosure obligations.

The Trust Dimension — When Estate Planning Meets Cross-Border Taxation

Unlike most Israelis, many U.S. citizens are settlors or beneficiaries of trusts established for estate and gift-tax planning.
Even minors may be named beneficiaries of Crummey Trusts, while families frequently hold Grantor, Non-Grantor, or Inter Vivos Trusts created years before their immigration.

Once the family relocates to Israel, these same structures can trigger unforeseen consequences:

• The trust may be classified in Israel as an “Israeli Resident Trust” under Sections 75Z–75IZ of the Income Tax Ordinance, even if it was formed and administered entirely in the U.S.
• At the same time, the trust remains a reportable entity for U.S. purposes (Forms 3520 and 3520-A).
• A single misstep can result in double taxation, duplicate reporting, and retroactive assessments by one or both tax authorities.

Compounding the challenge is the unfortunate reality that many self-described “international tax experts” or "trusts experts" in Israel — even those practicing cross-border taxation — lack sufficient familiarity with the intricacies of trust taxation, both locally and internationally and even with the general aspects of trust law in Israel.
This gap often becomes apparent years later, when the Israeli Tax Authority contacts beneficiaries, settlors, or even heirs of deceased trust creators, seeking clarification or retroactive assessments.

Planning Ahead — Professional Coordination Is Essential

For U.S. citizens or returning residents planning to relocate to Israel, advance tax and trust planning is critical.
A coordinated approach between U.S. and Israeli advisers ensures:

• accurate classification of trusts and corporate structures;
• prevention of double reporting and overlapping tax liability;
• compliance with both FATCA and Israeli disclosure requirements; and
• preservation of available exemptions under Israel’s ten-year new-immigrant regime.

If you are considering Aliyah or a return to Israel — particularly if you or your family are involved in existing U.S. trust or estate-planning structures — we invite you to schedule a consultation with our international tax and trust experts.
Early planning can prevent years of unnecessary complexity, protect your global assets, and ensure a smooth, compliant transition under both U.S. and Israeli tax regimes.