Key Israel Trust Tax Updates
On 17 August 2016, the Israel Tax Authority (ITA) published a circular in relation to the taxation of trusts in Israel (the Circular). The Circular provides guidance and clarifies the ITA’s legal position and interpretations with respect to the original law (enacted in 2006) and the amendments (enacted in 2013). We summarise some of the most important aspects of the Circular below.
- Distributions: The Circular states that certain loans that are not repaid within 2 years may be deemed to be distributions from the trust, even if the loans are granted at market value.
- Beneficiaries Deemed Settlors: The Circular takes the view that any changes in the trust documents that are made after the death of the last settlor will cause the beneficiaries to be treated as settlors. The Circular also lists other scenarios as being indicative of a beneficiary being treated as a settlor.
- Transfer of assets to a Trust: Where an asset is transferred to a trust for consideration, the transfer may be treated as a taxable sale. However, where a transfer of an asset to a trust is made for no consideration, it can be treated as an exempt grant of an asset upon which no tax is payable. The Circular allows for mixed treatment of transfers made for partial consideration; with part of the transfer able to be treated as a taxable sale and the other part treated as an exempt grant of an asset.
- Definition of Beneficiary: The Circular confirms that a person will be considered a beneficiary even if they benefit from the trust indirectly through another beneficiary. This is aimed at preventing situations in which a beneficiary is removed from the trust in order to prevent it from being classified as an Israeli trust.
- Foreign Tax Credits: The Circular clarifies that foreign taxes paid with respect to the trust’s foreign source income are creditable against the trustee’s tax liability, even if these foreign taxed were not paid by the trustee. For example, if a non-Israeli settlor of an Israeli trust pays foreign taxes on rental income of the trust, these foreign taxes would be able to be offset against the trustee’s Israeli tax liability.
- Tax Exemptions for New Immigrants’ and Returning Residents’ Trusts: New immigrants of Israel and “senior returning residents” (Israeli citizens who have resided outside of Israel for at least 10 consecutive years) are eligible for a 10-year exemption period with respect to their non-Israeli source income. The Circular clarifies that the exemption period will be calculated as the exemption period of the settlor or the shortest exemption period amongst the eligible beneficiaries, whichever is shorter. The Circular also suggests that these tax exemptions are not available to a trust that is an “Israeli Beneficiary Trust” which is not a “Relatives Trust”.
The tax treatment of trusts in Israel is a complex area and mistakes can be costly. Our Moisson team in Israel have the requisite knowledge and expertise to guide you through the complex nature of the Israeli trust tax law system. Click here to get in touch with our Israel-based team today for all your trust and tax advice needs.