The Israel Tax Authority (ITA) published more reportable tax positions on December 30 that are similar to reportable tax shelters in the US and the UK. But the ITA also uses them to impose its interpretation of the tax law in non-tax-shelter cases.
The latest batch relates to the 2025 tax year onward and takes aim at US Tax Form K-1 among other things. This could affect many Israelis who invest in the US.
What are reportable tax positions?
A reportable income-tax position is a position contrary to a position published by the ITA if the tax advantage exceeds NIS 5 million in the tax year or NIS 10m. over four years.
No reporting is needed from certain Israeli charities, nor from individuals or companies with income below NIS 3m. or capital gains below NIS 1.5m. in the tax year.
Reportable income-tax positions must be reported within 60 days after filing the main annual income-tax return.
If your tax planning is at odds with an ITA position, you must tell them on Form 146, so they know where to start a tax audit. If you don’t manage to reach agreement with the ITA regarding such a position, you decide whether to accept theirs or go to court.
Here are some 2025 positions:
Foreign income amounts and US Form K-1
Reportable Position 116/2025 requires foreign income of an Israeli resident to be computed according to the provisions of the Israeli Income Tax Ordinance (ITO). This applies to income derived abroad directly or via a transparent, i.e., flow-through, entity in which the taxpayer holds 25% at the year-end.
A transparent entity is one where the income is allocated to investors for Israeli tax purposes, including partnerships and US limited-liability companies (LLCs) where Israeli Tax Circular 5/2004 was elected.
This ITA position may affect, among others, Israelis who invest in US real estate directly or hold more than 25% at the year-end in an LLC or limited partnership, because each country’s tax laws have different depreciation rates.
In the US, Form K-1 tells investors what their share of income or loss from a partnership or LLC is, but it doesn’t say how much US depreciation was deducted. Israelis holding more than 25% will now need to find out the US depreciation deducted and substitute Israeli depreciation for Israeli tax purposes.
This is bureaucratic. Depreciation differences are only timing differences. There are several alternative Israeli tax depreciation rates. The LLC or partnership may have borrowed to invest more, and foreign tax-credit calculations may be affected.
An example: Avi, an Israeli resident, invests $20m. for a 100% interest in a US LLC, which in turn invests in US residential properties. The LLC borrows another $180m., for a total real-estate investment of $200m.
Suppose US depreciation is 3.636% (27.5 years) and Israeli depreciation is 2%. In both countries, the land element is not depreciable, say one-third for Israeli purposes. In such a case, the depreciation difference could be 1.636% of two-thirds of $200m, i.e., $3.272m. of “excess” US depreciation.
The resulting tax advantage could be $1.636m., assuming a 50% Israeli tax rate. This tax advantage is more than NIS 5m., assuming the dollar/shekel exchange rate exceeds 3.056. Avi should consider applying Israeli depreciation on his Israeli tax return or report a reportable position to the ITA.
Comments: The new reporting position is clearly complex and will not catch all Form K-1 recipients. But it will need checking out by investors with a direct investment in the US or more than 25% via an entity in any sector, not just real estate.
Other new reporting positions: In a tainted “relatives’ trust” where one or more beneficiaries has resided in Israel more than 10 years, the aliyah 10-year tax holiday cannot be claimed by making the settlor (grantor) the assessable taxpayer (Position 114/2025).
Israeli resident parent companies that receive a dividend from a 25%-or-more foreign company can claim an underlying foreign tax credit for its foreign corporate income tax. But the foreign credit can only be offset against Israeli tax on the same dividend and not dividends from other companies. (Position 117/2025)
If dividends and interest amount to business income, they cannot be offset against capital losses (Position 120/2025). It is unclear why capital losses must be business losses in such cases.
Comments: The ITA uses reportable positions to exploit tax loopholes in their favor. The US Form K-1 saga seems to achieve little.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.