In 2003, Israel completely overhauled its national taxation program for individual and corporate residents. As a result of that major tax reform, Israel no longer taxes on a territorial basis but rather on a residential basis. That means that as of January 1, 2003, Israel changed from only taxing its residents on what was earned within its borders, to taxing them on their worldwide income. For many immigrants, the reform marked the end of an era where one could "have his cake and eat it too." The reaction was predictable; many are incensed with the changes. Some have even threatened to leave. But, in reality, Israel's new tax reform is simply the transition to tax laws prevalent in any Western country. New anti-avoidance rules have been introduced such as the Controlled Foreign Corporation (CFC) and Foreign Occupational Companies (FOC) rules. The new CFC rules apply to foreign companies controlled by Israeli residents and impose a deemed dividend tax on undistributed profits from passive income of the CFC. In the case of an FOC, if it is controlled by an Israeli resident (controlled 75 percent or more) and if its main business is rendering services which are similar to the services rendered by the Israeli controlling members for the FOC, then the FOC shall be taxed. There are many more examples that illustrate how the reform is reaching out to tax Israeli residents in places it wouldn't before 2003. To add more bite to the tax reforms, as of 2006 Israel has introduced provisions that deal with the taxation of trusts. The rules are far reaching and designed to curb the typical tax avoidance structures using trusts. Having said all that, Israel continues to be committed to the goal of encouraging Diaspora Jews to come to Israel or bring back returning residents. To support this political goal, Israeli legislators have provided significant tax benefits for new and returning residents. Such tax benefits may be achieved through appropriate tax planning, and open an enormous gate of opportunity for new residents to establish their lives in the Holy Land - in a very tax friendly environment. The tax benefits include: (1) a five-year tax exemption on passive income (interest, dividends, royalties, pension payments and rental payments), originated from assets abroad, owned by the new resident prior to becoming an Israeli resident (establishing his center of life in Israel); (2) a 20-year exemption on interest accrued on foreign exchange deposit in an Israeli bank account, under certain circumstances; (3) a 10-year exemption on capital gains on the sale of assets, including shares, acquired abroad before becoming an Israeli resident and a further linear exemption if the asset is disposed after the 10-year period; (4) a four-year exemption on foreign business income, if the new resident had the business at least five years before becoming an Israeli resident; (5) there are other benefits regarding foreign pensions and securities that open up interesting opportunities for tax planning. Imagine a new resident planning his tax before becoming an Israeli tax resident (in this regard coming into Israel does not make you an Israeli tax resident if your life is still centered outside of Israel). Proper structuring could introduce a vehicle that would allow the new resident to distribute passive income for five years, tax free. Furthermore, the new resident could then dispose of the vehicle on a tax-free basis. More benefits are available for the new resident who is the beneficiary of a trust. The 2006 tax reform on taxation of trusts includes favorable tax treatment to trusts that fall within the definition of a "Foreign Settlor Trust." Under certain circumstances and subject to appropriate tax planning, a trust settled by a foreign resident for Israeli beneficiaries shall be exempt from Israeli tax for eternity with respect to any income (business or passive) accrued within the trust. Furthermore, the beneficiaries of such a trust may be fully exempt of any Israeli tax on the receipt of distributions from the trust. To emphasize it, even after the settlor of the trust passes away, the Israeli beneficiaries shall enjoy the aforementioned exemptions. Proper and early tax planning is necessary to avoid turning the trust from a tax incentive opportunity to a "tax trap." It appears that the Israeli legislator has, knowingly, created fantastic opportunities for new residents. With appropriate tax planning, new residents have the opportunity to gain a lot of weight while "having their cake and eating it too." Leor Nouman is a tax partner and head of the tax department at S. Horowitz & Co. Advocates, Tel Aviv. Chaim Wigoda is a senior adviser at Hallmark Capital Corp. in Toronto, which specializes in estate & tax planning.